Solarfun Power Holdings Co., Ltd.
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As filed with the Securities and Exchange Commission on December 11, 2006
Registration No. 333-                    
 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form F-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 
Solarfun Power Holdings Co., Ltd.
(Exact name of registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
         
Cayman Islands
(State or other jurisdiction of
incorporation or organization)
  3674
(Primary Standard Industrial
Classification Code Number)
  Not Applicable
(I.R.S. Employer
Identification Number)
666 Linyang Road
Qidong, Jiangsu Province 226200
People’s Republic of China
(86-513) 8330-7688
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-8940
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
     
Alan Seem
Shearman & Sterling LLP
12th Floor East Tower, Twin Towers
B-12 Jianguomenwai Dajie
Beijing 100022, People’s Republic of China
(86-10) 5922-8000
  William Y. Chua
Sullivan & Cromwell LLP
28th Floor
Nine Queen’s Road Central
Hong Kong
(852) 2826-8688
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering.    o
CALCULATION OF REGISTRATION FEE
             
             
             
      Proposed Maximum Aggregate     Amount of
Title of Each Class of Securities to Be Registered     Offering Price(1)     Registration Fee
             
Ordinary shares, par value US$0.0001 per share(2)(3)
    US$186,300,000     US$19,934
             
             
(1)  Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933.
(2)  Includes ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes ordinary shares that may be purchased by the underwriters pursuant to an option to purchase additional ADSs. The ordinary shares are not being registered for the purpose of sales outside the United States.
(3)  American depositary shares issuable upon deposit of the ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333-          ). Each American depositary share represents five ordinary shares.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.
 
 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion. Dated December 11, 2006.
(SOLARFUN LOGO)
Solarfun Power Holdings Co., Ltd.
12,000,000 American Depositary Shares
Representing
60,000,000 Ordinary Shares
 
       Solarfun Power Holdings Co., Ltd., or Solarfun, is offering 12,000,000 American depositary shares, or ADSs. Each ADS represents five ordinary shares, par value US$0.0001 per share, of Solarfun. The ADSs are evidenced by American depositary receipts, or ADRs.
       Prior to this offering, there has been no public market for our ADSs or our ordinary shares. It is currently estimated that the initial public offering price per ADS will be between US$11.50 and US$13.50. An application has been made to have our ADSs quoted on the Nasdaq Global Market under the symbol “SOLF.”
       See “Risk Factors” beginning on page 13 to read about risks you should consider before buying our ADSs.
 
       Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
 
                 
    Per ADS   Total
         
Initial public offering price
    US$       US$  
Underwriting discount
    US$       US$  
Proceeds, before expenses, to Solarfun
    US$       US$  
Proceeds, before expenses, to the selling shareholders
    US$       US$  
       To the extent that the underwriters sell more than 12,000,000 ADSs, the underwriters have an option to purchase up to an additional 1,800,000 ADSs from the selling shareholders at the initial public offering price less the underwriting discount.
 
       The underwriters expect to deliver the ADSs evidenced by the ADRs against payment in U.S. dollars in New York, New York on                     , 2006.
Goldman Sachs (Asia) L.L.C.
 
CIBC World Markets
 
Prospectus dated                     , 2006


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(PICTURE)

 


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PROSPECTUS SUMMARY
       The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to buy our ADSs.  
Our Business
       We are an established manufacturer of both photovoltaic, or PV, cells and PV modules in China. We manufacture and sell a variety of PV cells and PV modules using advanced manufacturing process technologies that have helped us to rapidly increase our operational efficiency. All of our PV modules are currently produced using PV cells manufactured at our own facilities. We sell our products both directly to system integrators and through third party distributors. We also provide PV cell processing services for some of our silicon suppliers. We conduct our business in China through our operating subsidiary, Jiangsu Linyang Solarfun Co., Ltd., or Linyang China. In addition, we recently incorporated Shanghai Linyang Solar Technology Co., Ltd., or Shanghai Linyang, to provide system integration services in China whereby we tailor our PV products for specific customers’ needs and link them with the end-use devices that require solar power. In November 2006, Shanghai Linyang won a competitive bid to provide a substantial majority of the PV modules to be used in a 1 MW solar power plant in Shanghai. Shanghai Linyang is still in the process of negotiating the final agreement relating to this project.  
 
       Since our first PV cell production line became operational in November 2005, we have increased the average daily output of each of our monocrystalline PV cell production lines to 26,000 cells for the month ended September 30, 2006, improved the conversion efficiency of our monocrystalline PV cells to 16.8%, and reduced monocrystalline PV cell thickness to 200 microns and the average cell breakage rate to 2.7%.  
 
       We currently operate two PV cell production lines, each with 30 MW of annual manufacturing capacity. We commenced commercial production on these lines in November 2005 and September 2006, respectively. In order to meet the fast-growing market demands for solar products, we plan to significantly expand our PV cell manufacturing capacity over the next several years. We expect that, by the end of 2006, the aggregate annual manufacturing capacity of our PV cell production lines that are completed or under construction will reach 120 MW. In addition, we plan to achieve an aggregate annual manufacturing capacity of 240 MW by the end of 2007 and 360 MW by the end of 2008.  
 
       We increased our annual PV module manufacturing capacity to 60 MW in October 2006, and plan to achieve an aggregate annual manufacturing capacity of 80 MW by the end of 2006, 180 MW by the end of 2007 and 300 MW by the end of 2008. In addition, we established Sichuan Leshan Jiayang New Energy Co., Ltd., or Sichuan Jiayang, in April 2006, to increase our PV module production capacity and capture potential system integration opportunities in western China. Sichuan Jiayang’s 10 MW of PV module assembly capacity became operational in June 2006 and we expect to increase this capacity to 20 MW by the end of 2007 and 60 MW by the end of 2008. As part of our expansion plans, we also ordered the equipment for a new 15 MW automatic “building integrated” PV production line in May 2006, which is expected to become operational by early 2007. A “building integrated” PV system integrates PV modules into the core structure of a building’s roof or facade.  
 
       We have experienced significant revenue and earnings growth since our establishment in August 2004. Our net revenue and net income were RMB166.2 million (US$21.0 million) and RMB14.4 million (US$1.8 million), respectively, in 2005. Our net revenue was RMB386.2 million (US$48.9 million) in the first nine months of 2006, compared to RMB86.5 million in the first nine months of 2005. We had net income of RMB72.9 million (US$9.2 million) in the nine months ended September 30, 2006, compared to RMB4.2 million in the same period in 2005.  

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Industry Background
       The PV industry has experienced significant growth since the beginning of this decade. According to Solarbuzz, an independent solar energy research firm, the global PV market increased from 345 MW in 2001 to 1,460 MW in 2005 in terms of total annual PV installations, representing a compound annual growth rate of 43.4%. The PV industry revenue increased from US$7 billion in 2004 to US$9.8 billion in 2005. Moreover, cumulative installed PV electricity generating capacity expanded by 39% in 2005 and currently exceeds 5 GW worldwide, while investment in new plants to manufacture PV cells exceeded US$1 billion in 2005. According to Solarbuzz, annual PV installations are expected to increase to 3.9 GW, and PV industry revenue is expected to increase to US$23.1 billion, in 2010.
       The PV cell production industry is currently dominated by a small number of manufacturers. According to Solarbuzz, the top ten PV cell manufacturers accounted for 74% of the total PV cells produced worldwide in 2005.
       We believe that rising energy demand, the increasing scarcity of traditional energy resources coupled with rising prices, the growing adoption of government incentives for solar energy due to increasing environmental awareness, and the decreasing production costs of solar energy will continue to drive the growth of the solar industry.
Our Competitive Strengths
       We believe the following strengths enable us to capture opportunities in the rapidly growing PV industry and compete effectively in the PV market in China and internationally:
  •  strong execution capability demonstrated by significant and rapid operational and financial achievements in a competitive market;
 
  •  extensive industry relationships and scalable manufacturing capacity to support our manufacturing expansion plans;
 
  •  operational cost advantages achieved through efficient utilization of management, engineering, labor and manufacturing resources in China;
 
  •  industry experience to support our development of downstream business opportunities in China;
 
  •  research and development capabilities that leverage both third party collaborations and internal resources; and
 
  •  entrepreneurial management with extensive industry contacts and strong track record of successful execution.
Our Strategies
       Our long-term goal is to become a leading global PV cell and module manufacturer and to leverage our core strengths to become an innovator and an important player in the downstream PV markets, particularly in China. To achieve this goal, we plan to implement the following specific strategies:
  •  continue to expand manufacturing capacity and reduce operational costs to achieve greater economies of scale;
 
  •  increase investments for research and development activities, enhance production process technologies and develop next generation products through continuous innovation;
 
  •  diversify our product and service offerings and expand our business in downstream markets;

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  •  secure long-term supplies of silicon;
 
  •  broaden our geographical revenue base, and build and enhance brand recognition both domestically and internationally; and
 
  •  strengthen and grow our management and research and development teams through training and professional development and recruitment of personnel with international experience.
Our Challenges
       We believe that the following are some of the major risks and uncertainties that may materially affect our business, financial condition, results of operations and prospects:
  •  our inability to significantly increase our manufacturing capacity and output, to make strategic investments or acquisitions or to establish strategic alliances;
 
  •  our failure to obtain silicon wafers, our primary raw material, in sufficient quantities or at acceptable prices;
 
  •  intense competition from both conventional and alternative energy sources and technologies;
 
  •  the reduction or elimination of government subsidies and economic incentives for on-grid solar energy applications;
 
  •  our inability to further refine our technology and develop and introduce new products; and
 
  •  limited adoption of PV technology and insufficient demand for PV products.
Corporate Structure
       We commenced operations through Linyang China in August 2004. Linyang China was a 68%-owned subsidiary of Jiangsu Linyang Electronics Co., Ltd., or Linyang Electronics, at the time of its establishment on August 27, 2004. Linyang Electronics is one of the leading electricity-measuring instrument manufacturers in China. In anticipation of our initial public offering, we incorporated Solarfun Power Holdings Co., Ltd., or Solarfun, in the Cayman Islands on May 12, 2006 as our listing vehicle. To enable us to raise equity capital from investors outside of China, we established a holding company structure by incorporating Linyang Solar Power Investment Holding Ltd., or Linyang BVI, in the British Virgin Islands on May 17, 2006. Linyang BVI is wholly owned by Solarfun. Linyang BVI purchased all of the equity interests in Linyang China on June 2, 2006. In March and April 2006, we established two majority-owned subsidiaries in China, Shanghai Linyang and Sichuan Jiayang, respectively, to expand our business into new markets and sectors.
       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 Limited and two individual investors. The proceeds we received from this transaction, before deduction of transaction expenses, were US$53 million.

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       The diagram below sets forth the entities directly or indirectly controlled by us following our restructuring, which was completed on June 27, 2006:
(FLOWCHART)
 
(1)  The other shareholders of Shanghai Linyang Solar Technology Co., Ltd. are three individuals: Mr. Yongliang Gu, Mr. Rongqiang Cui, and Mr. Cui’s spouse. Mr. Gu and Mr. Cui are our shareholders.
 
(2)  The other shareholders of Sichuan Leshan Jiayang New Energy Co., Ltd., or Sichuan Jiayang, are Sichuan Jianengjia Electric Power Co., Ltd., or Sichuan Jianengjia, which holds a 30% equity interest, and a member of Sichuan Jiayang’s management team, Mr. Wei Gu, who holds a 15% equity interest on behalf of Mr. Yonghua Lu, our chairman and chief executive officer, pursuant to an entrustment agreement entered into in November 2006. Under this entrustment agreement, Mr. Lu provided RMB3.0 million (US$0.4 million) to Mr. Gu to acquire the 15% equity interest in Sichuan Jiayang. Under the entrustment agreement, all the rights enjoyed by Mr. Gu as the holder of record of the 15% equity interest in Sichuan Jiayang, including economic rights, belong to Mr. Lu. Mr. Gu may only exercise rights relating to this equity interest in Sichuan Jiayang, such as voting and transfer rights, pursuant to written instructions from Mr. Lu. Mr. Lu also has the right to transfer all or a portion of the 15% equity interest to the management of Sichuan Jiayang or other third parties. This entrustment arrangement was originally contemplated at the time of establishment of Sichuan Jiayang, but was not formalized in writing until November 2006, and was meant to serve as a transitional step in advance of potentially fully transferring these equity interests to Mr. Gu and other members of Sichuan Jiayang’s management team as performance incentives.
Corporate Information
       Our principal executive offices are located at 666 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 M&C Corporate Services Limited, PO Box 309GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands.
       Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is www.solarfun.com.cn. The information contained on our website does not constitute a part of this prospectus. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.

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CONVENTIONS THAT APPLY TO THIS PROSPECTUS
       Unless otherwise indicated, references in this prospectus to:
  •  “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 W and 3.7 W of power, respectively, and that each PV module contains 72 PV cells;
 
  •  “off-grid system” are to the PV system that operates on a stand-alone basis to provide electricity independent of an electricity transmission grid;
 
  •  “on-grid system” are to the PV system that is connected to an electricity transmission grid and feeds electricity into the electricity transmission grid;
 
  •  “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;
 
  •  “thin film technology” are to the PV technology that involves depositing several thin layers of silicon or more complex materials on a substrate such as glass to make a PV cell; and
 
  •  “US$” and “U.S. dollars” are to the legal currency of the United States.
       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.

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       Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their option to purchase additional ADSs.
       This prospectus contains translations of certain Renminbi amounts into U.S. dollars at specified rates. All translations from Renminbi to U.S. dollars were made at the noon buying rate in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, the translation of Renminbi into U.S. dollars has been made at the noon buying rate in effect on September 29, 2006, which was RMB7.9040 to US$1.00. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. See “Risk Factors — Risks Related to Our Company and Our Industry — Fluctuations in exchange rates could adversely affect our business as well as result in foreign currency exchange losses.” On December 11, 2006, the noon buying rate was RMB7.8340 to US$1.00.

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THE OFFERING
Price per ADS We currently estimate that the initial public offering price will be between US$11.50 and US$13.50 per ADS.
 
This offering:
 
     ADSs offered by us 12,000,000 ADSs
 
          Total 12,000,000 ADSs
 
                          
 
ADSs outstanding immediately after this offering 12,000,000 ADSs (or 13,800,000 ADSs if the underwriters exercise the option to purchase additional ADSs in full).
 
Ordinary shares outstanding immediately after this offering 239,994,754 ordinary shares, after giving effect to the conversion of our series A convertible preference shares, but excluding 8,012,998 ordinary shares issuable upon the exercise of outstanding share options and an additional 2,786,687 ordinary shares reserved for issuance under our 2006 equity incentive plan.
 
Option to purchase
additional ADSs
The selling shareholders have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of                     additional ADSs at the initial public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions.
 
ADSs Each ADS represents five ordinary shares, par value US$0.0001 per ordinary share. All non-Direct Registration System ADSs will be evidenced by American depositary receipts.
 
The depositary will be the holder of the ordinary shares underlying the ADSs and you will have the rights of an ADR holder as provided in the deposit agreement among us, the depositary and owners and holders of ADSs from time to time.
 
You may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange.
 
We may amend or terminate the deposit agreement for any reason without your consent. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs.
 
To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus.

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Timing and settlement for ADSs The ADSs are expected to be delivered against payment on                     , 2006. The ordinary shares underlying the ADSs will be deposited with The Bank of New York’s custodian and will be registered in the name of The Bank of New York or its nominee. The Depository Trust Company, or DTC, and its direct and indirect participants, will maintain records that will show the beneficial interests in the ADSs and facilitate any transfer of the beneficial interests.
 
Use of proceeds We estimate that we will receive net proceeds of approximately US$134.8 million from this offering, after deducting the underwriter discounts, commissions and estimated offering expenses payable by us. We intend to use the net proceeds we will receive from this offering primarily for the following purposes:
 
• approximately US$50 million to purchase or prepay for raw materials;
 
• approximately US$40 million to expand our manufacturing capacity; and
 
• approximately US$10 million to invest in our research and development activities.
 
We intend to use the remaining proceeds for other general corporate purposes and for the potential acquisition of, or investments in, businesses and technologies that we believe will complement our current operations and our expansion strategies. See “Use of Proceeds” for additional information.
 
We will not receive any of the proceeds from the sale of the ADSs by the selling shareholders.
 
Risk factors See “Risk Factors” and other information included in this prospectus for a discussion of the risks you should carefully consider before deciding to invest in our ADSs.
 
Listing We have applied to have the ADSs quoted on the Nasdaq Global Market. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system.
 
Nasdaq Global Market symbol “SOLF”
 
Depositary The Bank of New York.
 
Lock-up We, our directors and executive officers and all of our shareholders, including the selling shareholders, have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus. See “Underwriting.” Under the registration rights agreement entered into in connection with our placement of series A convertible preference shares, each of our shareholders other than the holders of the series A

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convertible preference shares has agreed, for a period of 12 months after completion of this offering, not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities. In addition, Mr. Yonghua Lu, our chairman and chief executive officer, and Mr. Hanfei Wang, our chief operating officer, have agreed with us not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a lock-up period of three years after completion of this offering. Other ordinary shareholders have agreed not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of one year after completion of this offering, and are subject to further restrictions on sales, transfers, or dispositions of such securities for a period of either two or three years following the initial one-year lock-up period.

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
       The following summary consolidated financial data have been derived from our consolidated financial statements included elsewhere in this prospectus. Our consolidated statements of operations for the period from August 27, 2004 (inception) to December 31, 2004, the year ended December 31, 2005 and the nine months ended September 30, 2006 and our consolidated balance sheets as of December 31, 2004, 2005 and September 30, 2006 have been audited by Ernst & Young Hua Ming, an independent registered public accounting firm. The report of Ernst & Young Hua Ming on those consolidated financial statements is included elsewhere in this prospectus, and the summary consolidated financial information for those periods and as of those dates are qualified by reference to those financial statements and that report, and should be read in conjunction with them and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The summary consolidated statement of operations data for the nine months ended September 30, 2005 has been derived from our unaudited consolidated financial statements included elsewhere in this prospectus, which have been prepared on the same basis as our audited consolidated financial statements and contain normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for such unaudited periods. Our consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods.
                                                   
    Period From                    
    August 27, 2004            
    (Inception) to       Nine Months Ended September 30,
    December 31,   Year Ended    
    2004   December 31, 2005   2005   2006   2006
                     
    (RMB)   (RMB)   (US$)   (RMB)   (RMB)   (US$)
                (unaudited)        
    (in thousands, except share and per share data)
Consolidated Statement of Operations Data
                                               
Net revenue
          166,178       21,024       86,484       386,239       48,866  
Cost of revenue
          (139,903 )     (17,700 )     (75,627 )     (267,429 )     (33,834 )
Gross profit
          26,275       3,324       10,857       118,810       15,032  
Operating expenses
    (629 )     (10,120 )     (1,280 )     (5,779 )     (40,331 ) (1)     (5,102 )
Operating profit (loss)
    (629 )     16,155       2,044       5,078       78,479       9,930  
Net income (loss)
    (607 )     14,410       1,823       4,227       72,871       9,220  
                                     
Net income (loss) attributable to ordinary shares
    (607 )     14,410       1,823       4,227       69,195       8,754  
                                     
Earnings per share — basic and diluted
                                               
 
— Basic
    (0.01 )     0.26       0.03       0.08       0.69       0.09  
 
— Diluted
    (0.01 )     0.22       0.03       0.07       0.55       0.07  
Share used in computation
                                               
 
— Basic earnings (loss) per share
    51,994,399       54,511,540       54,511,540       51,994,399       100,350,000       100,350,000  
 
— Diluted earnings (loss) per share
    51,994,399       66,366,469       66,366,469       58,178,291       131,624,178       131,624,178  
Pro forma net income per share
                                               
 
— Basic
            0.11       0.01               0.40       0.05  
 
— Diluted
            0.09       0.01               0.37       0.05  
Shares used in computation
                                               
 
— Basic
            134,156,294       134,156,294               179,994,754       179,994,754  
 
— Diluted
            160,296,813       160,296,813               195,923,705       195,923,705  
 
(1)  In the nine months ended September 30, 2006, we recorded a share compensation charge of RMB10.3 million (US$1.3 million), which related to a sale of our ordinary shares to Linyang Electronics, a company controlled by our chairman and chief executive officer, at less than fair market value by other shareholders of our company and a

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share compensation charge of RMB12.1 million (US$1.5 million) as a result of the issuance of series A convertible preference shares to Good Energies Investments Limited.
                                                     
    Period From            
    August 27, 2004       Nine Months Ended September 30,
    (Inception) to   Year Ended    
    December 31, 2004   December 31, 2005   2005   2006   2006
                     
    (RMB)   (RMB)   (US$)   (RMB)   (RMB)   (US$)
                (unaudited)        
    (in thousands, except margin and other operating data)
Other Financial Data
                                               
 
Gross margin
          15.8 %             12.6 %     30.8 %        
 
Operating margin
          9.7 %             5.9 %     20.3 % (1)        
 
Net margin
          8.7 %             4.9 %     18.9 % (1)        
 
Net cash from (used in)
                                               
   
operating activities
    (8,180 )     (76,582 )     (9,688)       (76,194 )     (414,929 )     (52,497 )
 
Capital expenditures
    (295 )     (37,464 )     (4,740)       (19,167 )     (95,355 )     (12,064 )
Other Operating Data
                                               
 
Amount of PV cells produced (including PV cell processing) (in MW)
          1.0 (2)                   16.2 (3)        
 
Amount of PV modules produced (in MW):
          5.5               3.1       11.3          
 
Average selling price (in US$/W):
                                               
   
PV cells(4)
          3.00                     3.05          
   
PV modules(5)
          3.93               3.91       4.02          
 
(1)  Inclusive of the share compensation charge of RMB10.3 million (US$1.3 million) related to a sale of our ordinary shares to Linyang Electronics by other shareholders of our company and the share compensation charge of RMB12.1 million (US$1.5 million) as a result of the issuance of series A convertible preference shares to Good Energies Investments Limited.
 
(2)  Of which 0.9 MW was used in our PV module production.
 
(3)  Of which 11.5 MW was used in our PV module production and 3.3 MW represented output from our PV cell processing services that we delivered to our customers in the form of PV cells.
 
(4)  All sales contracts for PV cells are denominated in Renminbi. Translations of Renminbi into U.S. dollars have been made at period end exchange rates.
 
(5)  Represents the average unit selling price in U.S. dollars specified in the sales contracts for PV modules.
       The following table represents a summary of our consolidated balance sheet data as of December 31, 2004, and 2005, and September 30, 2006.
                                           
        As of    
    As of   December 31,   As of
    December 31, 2004   2005   September 30, 2006
             
    (RMB)   (RMB)   (US$)   (RMB)   (US$)
    (in thousands)
Consolidated Balance Sheet Data
                                       
 
Cash and cash equivalents
    3,525       7,054       892       68,946       8,723  
 
Restricted cash
          22,229       2,812       25,376       3,210  
 
Accounts receivable
                      13,798       1,746  
 
Inventories
    4,511       76,819       9,719       221,608       28,037  
 
Advance to suppliers
    4,850       61,312       7,757       388,123       49,105  
 
Other current assets
    762       20,705       2,620       30,864       3,905  
 
Amounts due from related parties
    18,000                   153       20  
 
Fixed assets, net
    292       55,146       6,977       135,564       17,151  
 
Deferred initial public offering cost
                      25,506       3,227  
 
Total assets
    31,940       243,361       30,789       917,946       116,137  

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        As of    
    As of   December 31,   As of
    December 31, 2004   2005   September 30, 2006
             
    (RMB)   (RMB)   (US$)   (RMB)   (US$)
    (in thousands)
Short-term bank borrowings
          20,000       2,530       184,746       23,374  
Long-term bank borrowings, current portion
                      8,000       1,012  
Accounts payable
    2,221       18,794       2,378       19,905       2,518  
Notes payable
          20,000       2,530              
Accrued expenses and other liabilities
    301       22,920       2,900       50,271       6,360  
Customer deposits
          55,319       6,999       32,577       4,122  
Amount due to related parties
    25       32,658       4,132       336       43  
Long-term bank borrowings, non-current portion
                      23,000       2,910  
Total liabilities
    2,547       169,691       21,469       318,835       40,339  
Minority interests
                      10,117       1,280  
Series A redeemable convertible preference shares
                      423,704       53,606  
Total shareholders’ equity
    29,393       73,670       9,320       165,290       20,912  
Total liabilities, preference shares and shareholders’ equity
    31,940       243,361       30,789       917,946       116,137  

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RISK FACTORS
       An investment in our ADSs involves significant risks. You should carefully consider the risks described below as well as information in this prospectus, including our consolidated financial statements and related notes, before you decide to buy our ADSs. If any of the following risks actually occurs, our business, financial condition, results of operations and prospects could be materially harmed, the trading price of our ADSs could decline and you could lose all or part of your investment.
Risks Related to Our Company and Our Industry
Evaluating our business and prospects may be difficult because of our limited operating history, and our past results may not be indicative of our future performance.
       There is limited historical information available about our company upon which you can base your evaluation of our business and prospects. We began operations in August 2004 and shipped our first PV modules and our first PV cells in February 2005 and November 2005, respectively. Our business has grown and evolved at a rapid rate since we started our operations. As a result, our historical operating results may not provide a meaningful basis for evaluating our business, financial performance and prospects and we may not be able to achieve a similar growth rate in future periods. In particular, our future success will require us to continue to increase the manufacturing capacity of our facilities significantly beyond their current capacities. Moreover, our business model, technology and ability to achieve satisfactory manufacturing yields at higher volumes are unproven. Therefore, you should consider our business and prospects in light of the risks, expenses and challenges that we will face as a company with a relatively short operating history in a competitive industry seeking to develop and manufacture new products in a rapidly growing market, and you should not rely on our past results or our historic rate of growth as an indication of our future performance.
Our future success substantially depends on our ability to significantly expand both our manufacturing capacity and output, which is subject to significant risks and uncertainties. If we fail to achieve this expansion, we may be unable to grow our business and revenue, reduce our costs per watt, maintain our competitive position or improve our profitability.
       Our future success depends on our ability to significantly increase both our manufacturing capacity and output. We plan to expand our business to address growth in demand for our products, as well as to capture new market opportunities. Our ability to establish additional manufacturing capacity and increase output is subject to significant risks and uncertainties, including:
  •  the need for additional funding to purchase and prepay for raw materials or to build manufacturing facilities, which we may be unable to obtain on reasonable terms or at all;
 
  •  delays and cost overruns as a result of a number of factors, many of which may be beyond our control, such as increases in raw materials prices and problems with equipment vendors;
 
  •  the inability to obtain or delays in obtaining required approvals by relevant government authorities;
 
  •  diversion of significant management attention and other resources; and
 
  •  failure to execute our expansion plan effectively.
       In order to manage the potential growth of our operations, we will be required to improve our operational and financial systems, procedures and controls, increase manufacturing capacity and output, and expand, train and manage our growing employee base. Furthermore, our management will be required to maintain and expand our relationships with our customers,

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suppliers and other third parties. We cannot assure you that our current and planned operations, personnel, systems and internal procedures and controls will be adequate to support our future growth.
       If we encounter any of the risks described above, or are otherwise unable to establish or successfully operate additional manufacturing capacity or to increase manufacturing output, we may be unable to grow our business and revenue, reduce our costs per watt, maintain our competitiveness or improve our profitability, and our business, financial condition, results of operations and prospects will be adversely affected.
We depend on a limited number of customers for a high percentage of our revenue and the loss of, or a significant reduction in orders from, any of these customers, if not immediately replaced, would significantly reduce our revenue and decrease our profitability.
       We currently sell a substantial portion of our PV products to a limited number of customers. Customers accounting for more than 10% of our net revenue accounted for an aggregate of 50.8% and 76.4% of our net revenue in 2005 and the nine months ended September 30, 2006, respectively. Most of our large customers are located in Europe, particularly Germany, Italy and Spain. The loss of sales to any one of these customers would have a significant negative impact on our business. Sales to our customers are mostly made through non-exclusive, short-term arrangements. Due to our dependence on a limited number of customers, any one of the following events may cause material fluctuations or declines in our revenue and have a material adverse effect on our financial condition and results of operations:
  •  reduction, delay or cancellation of orders from one or more of our significant customers;
 
  •  selection by one or more of our significant distributor customers of our competitors’ products;
 
  •  loss of one or more of our significant customers and our failure to identify additional or replacement customers;
 
  •  any adverse change in the bilateral or multilateral trade relationships between China and European countries, particularly Germany; and
 
  •  failure of any of our significant customers to make timely payment for our products.
       We expect our operating results to continue to depend on sales to a relatively small number of customers for the foreseeable future, as well as the ability of these customers to sell solar power products that incorporate our PV products. Our customer relationships have been developed over a short period of time and are generally in preliminary stages. We cannot be certain that these customers will generate significant revenue for us in the future or if these customer relationships will continue to develop. If our relationships with customers do not continue to develop, we may not be able to expand our customer base or maintain or increase our customers and revenue. Moreover, our business, financial condition, results of operations and prospects are affected by competition in the market for the end products manufactured by our customers, and any decline in their business could materially harm our revenue and profitability.
We are currently experiencing an industry-wide shortage of silicon wafers. The prices that we pay for silicon wafers have increased in the past and we expect prices may continue to increase in the future, which may materially and adversely affect our revenue growth and decrease our gross profit margins and profitability.
       Silicon wafers are an essential raw material in our production of PV products. Silicon is created by refining quartz or sand, and is melted and grown into crystalline ingots or other forms. Some of our suppliers procure silicon ingots from companies that specialize in ingot growth and

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then slice these ingots into wafers. We depend on our suppliers for timely delivery of silicon wafers in sufficient quantities and satisfactory quality, and any disruption in supply or inability to obtain silicon wafers at an acceptable cost or at all, will materially and adversely affect our business and operations.
       There is currently an industry-wide shortage of silicon and silicon wafers, which has resulted in significant price increases. Based on our experience, the average prices of silicon and silicon wafers may continue to increase. Moreover, we expect the shortages of silicon and silicon wafers to continue as the solar power industry continues to grow and as additional manufacturing capacity is added. Silicon wafers are also used in the semiconductor industry generally and any increase in demand from that sector will exacerbate the current shortage. The production of silicon and silicon wafers is capital intensive and adding manufacturing capacity requires significant lead time. While we are aware that several new facilities for the manufacture of silicon and silicon wafers are under construction, we do not believe that the supply shortage will be remedied in the near term. We expect that the demand for silicon and silicon wafers will continue to outstrip supply for the foreseeable future.
       We have attempted to ease our supply shortages by prepaying for silicon and silicon wafers and establishing strategic relationships with certain suppliers. However, we cannot assure you that we will be able to obtain supplies from them or any other suppliers in sufficient quantities or at acceptable prices. In particular, since some of our suppliers do not themselves manufacture silicon but instead purchase their requirements from other vendors, it is possible that these suppliers will not be able to obtain sufficient silicon to satisfy their contractual obligations to us. In addition, we, like other companies in the PV industry, compete with companies in the semiconductor industry for silicon wafers, and companies in that sector typically have greater purchasing power and market influence than companies in the PV industry. We acquire silicon wafers from our suppliers mostly through short-term supply arrangements for periods ranging from several months to two years. This subjects us to the risk that our suppliers may cease supplying silicon wafers to us for any reason, including due to uncertainties in their financial viability. These suppliers could also choose not to honor such contracts. If either of these circumstances occurs, our supply of critical raw materials at reasonable costs and our basic ability to conduct our business could be severely restricted. Moreover, since some of our supply contracts may require prepayment of a substantial portion of the contract price, we may not be able to recover such prepayments and we would suffer losses should such suppliers fail to fulfill their delivery obligations under the contracts. Furthermore, we have not fixed the price for some of the silicon wafers supply contracts for 2007 with some of our suppliers. As a result, the price we will need to pay may need to be adjusted to reflect the prevailing market price around the time of delivery, which may be higher than we expect. Increases in the prices of silicon and silicon wafers have in the past increased our production costs and may materially and adversely impact our cost of revenue, gross margins and profitability.
       There are a limited number of silicon wafer suppliers, and many of our competitors also purchase silicon wafers from these suppliers. Since we have only been purchasing silicon wafers in bulk for approximately two years, our competitors may have longer and stronger relationships with these suppliers than we do. As we intend to significantly increase our manufacturing output, an inadequate allocation of silicon wafers would have a material adverse effect on our expansion plans. Moreover, the inability to obtain silicon wafers at commercially reasonable prices or at all would harm our ability to meet existing and future customer demand for our products, and could cause us to make fewer shipments, lose customers and market share and generate lower than anticipated revenue, thereby materially and adversely affecting our business, financial condition, results of operations and prospects.

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Our dependence on a limited number of suppliers for a substantial majority of silicon and silicon wafers could prevent us from delivering our products in a timely manner to our customers in the required quantities, which could result in order cancellations, decreased revenue and loss of market share.
       In 2005 and the nine months ended September 30, 2006, our five largest suppliers supplied in the aggregate 71.3% and 54.6%, respectively, of our total silicon and silicon wafer purchases. If we fail to develop or maintain our relationships with these or our other suppliers, we may be unable to manufacture our products, our products may only be available at a higher cost or after a long delay, or we could be prevented from delivering our products to our customers in the required quantities, at competitive prices and on acceptable terms of delivery. Problems of this kind could cause us to experience order cancellations, decreased revenue and loss of market share. In general, the failure of a supplier to supply materials and components that meet our quality, quantity and cost requirements in a timely manner due to lack of supplies or other reasons could impair our ability to manufacture our products or could increase our costs, particularly if we are unable to obtain these materials and components from alternative sources in a timely manner or on commercially reasonable terms. Some of our suppliers have a limited operating history and limited financial resources, and the contracts we entered into with these suppliers do not clearly provide for remedies to us in the event any of these suppliers is not able to, or otherwise does not, deliver, in a timely manner or at all, any materials it is contractually obligated to deliver. In particular, due to a shortage of raw materials for the production of silicon wafers, increased market demand for silicon wafers, a failure by some silicon suppliers to achieve expected production volumes and other factors, some of our major silicon wafer suppliers failed to fully perform during 2006 on their silicon wafer supply commitments to us, and we consequently did not receive all of the contractually agreed quantities of silicon wafers from these suppliers. We subsequently cancelled or renegotiated these silicon supply contracts, resulting in an aggregate decrease in the delivered or committed supply under these contracts from approximately 142 MW to approximately 71 MW for the period from June 2006 to June 2008. We cannot assure you that we will not experience similar or additional shortfalls of silicon or silicon wafers from our suppliers in the future or that, in the event of such shortfalls, we will be able to find other silicon suppliers to satisfy our production needs. Any disruption in the supply of silicon wafers to us may adversely affect our business, financial condition and results of operations.
Our ability to adjust our materials costs may be limited as a result of entering into prepaid, fix-priced arrangements with our suppliers, and it therefore may be difficult for us to respond appropriately in a timely manner to market conditions, which could materially and adversely affect our revenue and profitability.
       We have in the past secured, and plan to continue to secure, our supply of silicon and silicon wafers through prepaid supply arrangements with overseas and domestic suppliers. In 2006, we entered into supply contracts with some of our suppliers, under which these suppliers agreed to provide us with specified quantities of silicon wafers and we have made prepayments to these suppliers in accordance with the supply contracts. The prices of the supply contracts we entered into with some of our suppliers are fixed. If the prices of silicon or silicon wafers were to decrease in the future and we are locked into prepaid, fixed-price arrangements, we may not be able to adjust our materials costs, and our cost of revenue would be materially and adversely affected. In addition, if demand for our PV products decreases, we may incur costs associated with carrying excess materials, which may have a material adverse effect on our operating expenses. To the extent we are not able to pass these increased costs and expenses to our customers, our revenue and profitability may be materially reduced.

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We require a significant amount of cash to fund our operations as well as meet future capital requirements. If we cannot obtain additional capital when we need it, our growth prospects and future profitability may be materially and adversely affected.
       We typically require a significant amount of cash to fund our operations, especially prepayments to suppliers to secure our silicon wafer requirements. We also require cash generally to meet future capital requirements, which are difficult to plan in the rapidly changing PV industry. In particular, we will need capital to fund the expansion of our facilities as well as research and development activities in order to remain competitive. We believe that our current cash and cash equivalents, cash flow from operations and the proceeds from this offering will be sufficient to meet our anticipated needs for at least 12 months following this offering, including for working capital and capital expenditure requirements. However, future acquisitions, expansions, or market changes or other developments may cause us to require additional funds. Our ability to obtain external financing in the future is subject to a variety of uncertainties, including:
  •  our future financial condition, results of operations and cash flows;
 
  •  general market conditions for financing activities by manufacturers of PV and related products; and
 
  •  economic, political and other conditions in the PRC and elsewhere.
       If we are unable to obtain funding in a timely manner or on commercially acceptable terms, or at all, our growth prospects and future profitability may decrease materially.
We face risks associated with the marketing, distribution and sale of our PV products internationally, and if we are unable to effectively manage these risks, they could impair our ability to expand our business abroad.
       In 2005 and the nine months ended September 30, 2006, a substantial majority of our revenue was generated by sales to customers outside of China. The marketing, distribution and sale of our PV products overseas expose us to a number of risks, including:
  •  fluctuations in currency exchange rates of the U.S. dollar, Euro and other foreign currencies against the Renminbi;
 
  •  difficulty in engaging and retaining distributors and agents who are knowledgeable about, and can function effectively in, overseas markets;
 
  •  increased costs associated with maintaining marketing and sales activities in various countries;
 
  •  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.

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If we are unable to compete in the highly competitive solar energy market, our revenue and profits may decrease.
       The solar energy market is very competitive. We face competition from a number of sources, including domestic, foreign and multinational corporations. We believe that the principal competitive factors in the markets for our products are:
  •  manufacturing capacity;
 
  •  power efficiency;
 
  •  range and quality of products;
 
  •  price;
 
  •  strength of supply chain and distribution network;
 
  •  after-sales services; and
 
  •  brand image.
       Many of our current and potential competitors have longer operating histories, greater name recognition, access to larger customer bases and resources and significantly greater economies of scale, and financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. In particular, many of our competitors are developing and manufacturing solar energy products based on new technologies that may ultimately have costs similar to, or lower than, our projected costs. In addition, our competitors may have stronger relationships or have or may enter into exclusive relationships with key suppliers, distributors or system integrators to whom we sell our products. As a result, they may be able to respond more quickly to changing customer demands or devote greater resources to the development, promotion and sales of their products than we can. Furthermore, competitors with more diversified product offerings may be better positioned to withstand a decline in the demand for solar power products. Some of our competitors have also become vertically integrated, with businesses ranging from upstream silicon wafer manufacturing to solar power system integration, and we may also face competition from semiconductor manufacturers, several of which have already announced their intention to commence production of PV cells and PV modules. It is possible that new competitors or alliances among existing competitors could emerge and rapidly acquire significant market share, which would harm our business. If we fail to compete successfully, our business would suffer and we may lose or be unable to gain market share and our financial condition and results of operations would be materially and adversely affected.
       In the immediate future, we believe that the competitive arena will increasingly center around securing silicon supply and forming strategic relationships to secure supply of key components and technologies. Many of our competitors have greater access to silicon supply or have upstream silicon wafer manufacturing capabilities. We believe that as the supply of silicon stabilizes over time, competition will become increasingly based upon more traditional marketing and sales activities. Since we have conducted limited advertising in the past, the greater sales and marketing resources, experience and name recognition of some of our competitors may make it difficult for us to compete if and when this transition occurs.
       In addition, the solar power market in general competes with other sources of renewable energy as well as conventional power generation. If prices for conventional and other renewable energy resources decline, or if these resources enjoy greater policy support than solar power, the solar power market and our business and prospects could suffer.

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Our profitability depends on our ability to respond to rapid market changes in the solar energy industry, including by developing new technologies and offering additional products and services.
       The solar energy industry is characterized by rapid increases in the diversity and complexity of technologies, products and services. In particular, the ongoing evolution of technological standards requires products with improved features, such as more efficient and higher power output and improved aesthetics. As a result, we expect that we will need to constantly offer more sophisticated products and services in order to respond to competitive industry conditions and customer demands. If we fail to develop, or obtain access to, advances in technologies, or if we are not able to offer more sophisticated products and services, we may become less competitive and less profitable. In addition, advances in technology typically lead to declining average selling prices for products using older technologies. As a result, if we are not able to reduce the costs associated with our products, the profitability of any given product, and our overall profitability, may decrease over time. Furthermore, technologies developed by our competitors may provide more advantages than ours for the commercialization of PV products, and to the extent we are not able to refine our technology and develop new PV products, our existing products may become uncompetitive and obsolete.
       In addition, we will need to invest significant financial resources in research and development to maintain our competitiveness and keep pace with technological advances in the solar energy industry. However, commercial acceptance by customers of new products we offer may not occur at the rate or level expected, and we may not be able to successfully adapt existing products to effectively and economically meet customer demands, thus impairing the return from our investments. We may also be required under the applicable accounting standards to recognize a charge for the impairment of assets to the extent our existing products become uncompetitive or obsolete, or if any new products fail to achieve commercial acceptance. Any such charge may have a material adverse effect on our financial condition and results of operations.
       Moreover, in response to the rapidly evolving conditions in the solar energy industry, we plan to expand our business downstream to provide system integration products and services. This expansion requires significant investment and management attention from us, and we are likely to face intense competition from companies that have extensive experience and well-established businesses and customer bases in the system integration sector. We cannot assure you that we will succeed in expanding our business downstream. If we are not able to bring quality products and services to market in a timely and cost-effective manner and successfully market and sell these products and services, our ability to continue penetrating the solar energy market, as well as our revenue growth and profitability, will be materially and adversely affected.
Our future success depends in part on our ability to make strategic acquisitions and investments and to establish and maintain strategic alliances, and failure to do so could have a material adverse effect on our market penetration, 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 downstream system integration services through our subsidiary, Shanghai Linyang, and we are considering pursuing upstream silicon feedstock sourcing through strategic partnerships and investments. We intend to continue to establish and maintain strategic alliances with third parties in the PV industry, particularly with silicon suppliers. In addition, we intend to make strategic acquisitions and investments in the future. These types of transactions could require that our management develop expertise in new areas, manage new business relationships and attract new types of customers and may require significant attention from our management, and the diversion of our management’s attention could have a material adverse effect on our ability to manage our business. We may also experience difficulties integrating acquisitions and investments into our existing business and operations. Furthermore,

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we may not be able to successfully make such strategic acquisitions and investments or to establish strategic alliances with third parties that will prove to be effective or beneficial for our business. Any difficulty we face in this regard could have a material adverse effect on our market penetration, our revenue growth and our profitability.
       Strategic acquisitions, investments and alliances with third parties could subject us to a number of risks, including risks associated with sharing proprietary information and loss of control of operations that are material to our business. Moreover, strategic acquisitions, investments and alliances may be expensive to implement and subject us to the risk of non-performance by a counterparty, which may in turn lead to monetary losses that materially and adversely affect our business. In addition, changes in government policies, both domestically and internationally, that are not favorable to the development of the solar energy industry, may also have a material adverse effect on the success of our strategic acquisitions, investments and alliances.
Problems with product quality or product performance could result in a decrease in customers and revenue, unexpected expenses and loss of market share. In addition, product liability claims against us could result in adverse publicity and potentially significant monetary damages.
       Our PV modules are typically sold with a two-year unlimited warranty for technical defects, a 10-year warranty against declines greater than 10%, and a 20 or 25-year warranty against declines of greater than 20%, in their initial power generation capacity. As a result, we bear the risk of extensive warranty claims for an extended period after we have sold our products and recognized revenue. As we began selling PV modules only since February 2005, none of our PV modules has been in use for more than two years. Since our products have been in use for only a relatively short period, our assumptions regarding the durability and reliability of our products may not be accurate. We consider various factors when determining the likelihood of product defects, including an evaluation of our quality controls, technical analysis, industry information on comparable companies and our own experience. As of December 31, 2005 and September 30, 2006, our accrued warranty costs totaled RMB1.5 million (US$0.2 million) and RMB5.1 million (US$0.6 million), respectively.
       In addition, as we purchase the silicon and silicon wafers and other components that we use in our products from third parties, we have limited control over the quality of these raw materials and components. Unlike PV modules, which are subject to certain uniform international standards, silicon and silicon wafers generally do not have uniform international standards, and it is often difficult to determine whether product defects are a result of the silicon or silicon wafers or other components or reasons. Furthermore, the silicon and silicon wafers and other components that we purchase from third-party suppliers are typically sold to us with no or only limited warranties. The possibility of future product failures could cause us to incur substantial expense to repair or replace defective products, provide refunds or resolve disputes with regard to warranty claims through litigation, arbitration or other means. Product failures and related adverse publicity may also damage our market reputation and cause our sales to decline.
       As with other solar power product manufacturers, we are exposed to risks associated with product liability claims if the use of the solar power products we sell results in injury, death or damage to property. We cannot predict at this time whether product liability claims will be brought against us in the future or the effect of any resulting negative publicity on our business. In addition, we have not made provisions for potential product liability claims and we may not have adequate resources to satisfy a judgment if a successful claim is brought against us. Moreover, the successful assertion of product liability claims against us could result in potentially significant monetary damages and require us to make significant payments and incur substantial legal expenses. Even if a product liability claim is not successfully pursued to judgment by a claimant, we may still incur substantial legal expenses defending against such a claim.

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If PV technology is not suitable for widespread adoption, or sufficient demand for PV products does not develop or takes longer to develop than we anticipated, our sales may not continue to increase or may even decline, and our revenue and profitability would be reduced.
       The PV market is at a relatively early stage of development and the extent to which PV products will be widely adopted is uncertain. Furthermore, market data in the PV industry are not as readily available as those in other more established industries, where trends can be assessed more reliably from data gathered over a longer period of time. If PV technology proves unsuitable for widespread adoption or if demand for PV products fails to develop sufficiently, we may not be able to grow our business or generate sufficient revenue to sustain our profitability. In addition, demand for PV products in our targeted markets, including China, may not develop or may develop to a lesser extent 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.
Existing regulations and policies governing the electricity utility industry, as well as changes to these regulations and policies, may adversely affect demand for our products and materially reduce our revenue and profits.
       The electric utility industry is subject to extensive regulation, and the market for solar energy products, including PV products, is heavily influenced by these regulations as well as the policies promulgated by electric utilities. These regulations and policies often affect electricity pricing and technical interconnection of end user-power generation. As the market for solar and other alternative energy sources continue to evolve, these regulations and policies are being modified and may continue to be modified. Customer purchases of, or further investment in research and development of, solar and other alternative energy sources may be significantly affected by these regulations and policies, which could significantly reduce demand for our products and materially reduce our revenue and profits.
       Moreover, we expect that our PV products and their installation will be subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering and related matters in various countries. We also have to comply with the requirements of individual localities and design equipment to comply with varying standards applicable in the jurisdictions where we conduct business. For example, failure to obtain UL certification would adversely affect our ability to sell our products into the United States. Any new government regulations or utility policies pertaining to our PV products may result in significant additional expenses to us, our distributors and end

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users and, as a result, could cause a significant reduction in demand for our PV products, as well as materially and adversely affect our financial condition and results of operations.
The reduction or elimination of government subsidies and economic incentives for on-grid solar energy applications could have a materially adverse effect on our business and prospects.
       We believe that the near-term growth of the market for “on-grid” applications, where solar energy is used to supplement a 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 substantially exceeds the cost of power furnished by the electric utility grid in many locations. As a result, federal, state and local governmental bodies in many countries, most notably Germany, Italy, Spain and the United States, have provided subsidies and economic incentives in the form of rebates, tax credits and other incentives to end users, distributors, system integrators and manufacturers of solar power products to promote the use of solar energy in on-grid applications and to reduce dependency on other forms of energy. These government economic incentives could be reduced or eliminated altogether. In particular, political changes in a particular country could result in significant reductions or eliminations of subsidies or economic incentives. Electric utility companies that have significant political lobbying powers may also seek changes in the relevant legislation in their markets that may adversely affect the development and commercial acceptance of solar energy. The reduction or elimination of government subsidies and economic incentives for on-grid solar energy applications, especially those in our target markets, could cause demand for our products and our revenue to decline, and have a material adverse effect on our business, financial condition, results of operations and prospects.
The lack or inaccessibility of financing for off-grid solar energy applications could cause our sales to decline.
       Our products are used for “off-grid” solar energy applications in developed and developing countries, where solar energy is provided to end users independent of an electricity transmission grid. In some countries, government agencies and the private sector have, from time to time, provided subsidies or financing on preferred terms for rural electrification programs. We believe that the availability of financing could have a significant effect on the level of sales of off-grid solar energy applications, particularly in developing countries where users may not have sufficient resources or credit to otherwise acquire PV systems. If existing financing programs for off-grid solar energy applications are eliminated or if financing becomes inaccessible, the growth of the market for off-grid solar energy applications may be materially and adversely affected, which could cause our sales to decline. In addition, rising interest rates could render existing financings more expensive, as well as serve as an obstacle for potential financings that would otherwise spur the growth of the PV industry.
Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights may be costly.
       We rely primarily on patents, trademarks, trade secrets, copyrights and other contractual restrictions to protect our intellectual property. Nevertheless, these afford only limited protection and the actions we take to protect our intellectual property rights may not be adequate. In particular, third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition and results of operations. Policing unauthorized use of proprietary technology can be difficult and expensive. In addition, litigation may be necessary to enforce our intellectual property

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rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. We also cannot assure you that the outcome of any such litigation would be in our favor. Furthermore, any such litigation may be costly and may divert management attention as well as expend our other resources away from our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
       Implementation of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries.
We may be exposed to infringement or misappropriation claims by third parties, particularly in jurisdictions outside China which, if determined adversely against us, could disrupt our business and subject us to significant liability to third parties, as well as have a material adverse effect on our financial condition and results of operations.
       Our success depends, in large part, on our ability to use and develop our technology and know-how without infringing the intellectual property rights of third parties. As we continue to market and sell our products internationally, and as litigation becomes more common in the PRC, we face a higher risk of being the subject of claims for intellectual property infringement, as well as having indemnification relating to other parties’ proprietary rights held to be invalid. Our current or potential competitors, many of which have substantial resources and have made substantial investments in competing technologies, may have or may obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products in the European Union, the PRC or other countries. The validity and scope of claims relating to PV technology patents involve complex, scientific, legal and factual questions and analysis and, therefore, may be highly uncertain. In addition, the defense of intellectual property claims, including patent infringement suits, and related legal and administrative proceedings can be both costly and time consuming, and may significantly divert the efforts and resources of our technical and management personnel. Furthermore, an adverse determination in any such litigation or proceeding to which we may become a party could cause us to:
  •  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 technology embodied in the PV products we currently manufacture and sell, which could reduce our competitiveness and increase our expenses.
       Although we rely primarily on trade secret laws and contractual restrictions to protect the technology in the PV cells we currently manufacture and sell, our success and ability to compete

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in the future may also depend to a significant degree on obtaining patent protection for our proprietary technologies. As of September 30, 2006, we had one issued patent and three pending patent applications in the PRC. We do not have, and have not applied for, any patents for our proprietary technologies outside the PRC. As the protections afforded by our patents are effective only in the PRC, our competitors and other companies may independently develop substantially equivalent technologies or otherwise gain access to our proprietary technologies, and obtain patents for such technologies in other jurisdictions, including the countries in which we sell our products. Moreover, our patent applications in the PRC may not result in issued patents, and even if they do result in issued patents, the patents may not have claims of the scope we seek. In addition, any issued patents may be challenged, invalidated or declared unenforceable. As a result, our present and future patents may provide only limited protection for our technologies, and may not be sufficient to provide competitive advantages to us.
We depend on our key personnel, and our business and growth may be severely disrupted if we lose their services.
       Our future success depends substantially on the continued services of some of our directors and key executives. In particular, we are highly dependent upon our directors and officers, including Mr. Yonghua Lu, chairman of our board of directors and chief executive officer, Mr. Hanfei Wang, our director and chief operating officer, Mr. Kevin C. Wei, our chief financial officer, Mr. Yuting Wang, our chief engineer, and Ms. Xihong Deng, our director and executive vice president. If we lose the services of one or more of these directors and executive officers, we may not be able to replace them readily, if at all, with suitable or qualified candidates, and may incur additional expenses to recruit and retain new directors and officers, particularly those with a significant mix of both international and China-based solar power industry experience similar to our current directors and officers, which could severely disrupt our business and growth. In particular, it is anticipated that Ms. Xihong Deng, who currently serves as our executive vice president in charge of international business development as a secondee from Hony Capital II, L.P., one of our shareholders, will step down from that position by the end of 2007 or earlier, and we may be unable to identify an appropriate replacement for her before her departure date. In addition, if any of these directors or executives joins a competitor or forms a competing company, we may lose some of our customers. Each of these directors and executive officers has entered into an employment agreement with us, which contains confidentiality and non-competition provisions. However, if any disputes arise between these directors or executive officers and us, it is not clear, in light of uncertainties associated with the PRC legal system, the extent to which any of these agreements could be enforced in China, where all of these directors and executive officers reside and hold some of their assets. See “— Risks Related to Doing Business in China — Uncertainties with respect to the PRC legal system could have a material adverse effect on us.” Furthermore, as we expect to continue to expand our operations and develop new products, we will need to continue attracting and retaining experienced management and key research and development personnel.
       Competition for personnel in the solar energy industry in China is intense, and the availability of suitable and qualified candidates is limited. In particular, we compete to attract and retain qualified research and development personnel with other PV technology companies, universities and research institutions. Competition for these individuals could cause us to offer higher compensation and other benefits in order to attract and retain them, which could have a material adverse effect on our financial condition and results of operations. We may also be unable to attract or retain the personnel necessary to achieve our business objectives, and any failure in this regard could severely disrupt our business and growth.

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Our independent auditors, in the course of auditing our consolidated financial statements noted several significant deficiencies in our internal controls that were deemed to constitute material weaknesses. If we fail to maintain an effective system of internal control over financial reporting, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected. In addition, investor confidence and the market price of our ADSs may be adversely impacted if we or our independent auditors are unable to attest to the adequacy of the internal control over financial reporting of our company in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
       Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Prior to this offering, we have been a private company with a short operating history and limited accounting personnel and other resources with which to address our internal control and procedures over financial reporting. In connection with their audit of our consolidated financial statements for the period from August 27, 2004 (inception) to December 31, 2004 and the year ended December 31, 2005, our auditors, an independent registered public accounting firm, noted and communicated to us certain significant deficiencies in our internal control over financial reporting that were deemed to constitute “material weaknesses” as defined in standards established by the U.S. Public Company Accounting Oversight Board. These material weaknesses previously identified by our independent auditors, which could result in more than a remote likelihood that a material misstatement in our annual or interim financial statements would not be prevented or detected, consisted of inadequate independent oversight and inadequate personnel resources, processes and documentation to address reporting requirements under U.S. GAAP and relevant U.S. Securities and Exchange Commission, or SEC, regulations.
       In order to remedy these material weaknesses, we adopted and implemented several measures to improve our internal control over financial reporting. In addition to appointing a new chief financial officer in July 2006 to lead our company’s financial and risk management and a new principal accounting officer in August 2006, both of whom have extensive audit experience and U.S. GAAP knowledge, we established in November 2006 an audit committee composed entirely of independent directors to oversee the accounting and financial reporting processes as well as external and internal audits of our company. Our audit committee was recently notified of anonymous allegations of misconduct by our employees. Our audit committee subsequently conducted an investigation and found no basis for these allegations. See “Our Business — Legal and Administrative Proceedings.” However, if, despite our audit committee’s investigation, these allegations later prove to have merit, there could be liability for our company and we may be required to take additional measures to improve our internal controls. In addition, these types of allegations require our board of directors and management to expend significant resources to investigate and take other appropriate actions, and addressing such allegations could divert the attention of our board of directors and management from the operation of our business, thereby resulting in a negative impact on our financial condition and results of operations.
       In the course of auditing our consolidated financial statements as of and for the nine months ended September 30, 2006, our auditors noted improvements in our internal controls, as well as certain circumstances in which our financial statement closing processes could and should be further enhanced that collectively constituted a material weakness in our internal control over financial reporting. Specifically, written intentions to grant share options to certain of our employees should have been disclosed in the previously issued December 31, 2004, December 31, 2005 and March 31, 2006 financial statements as a subsequent event. This material weakness could result in more than a remote likelihood that a material misstatement in our annual or interim financial statements would not be prevented or detected. However, our management believes that none of the specific deficiencies identified has individually or collectively had a material adverse effect on our financial statements, and these deficiencies were not related to any fraudulent acts.

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       To address this material weakness, we have undertaken additional initiatives to strengthen our internal control over financial reporting generally and specifically to improve our U.S. GAAP financial closing-related policies and procedures. These initiatives have included hiring additional qualified professionals with relevant experience for our finance and accounting department and increasing the level of interaction among our management, audit committee, independent auditors and other external advisors. We are also in the process of implementing additional measures to further make improvements, including providing specialized training for our existing personnel. However, the implementation of these initiatives may not fully address these deficiencies in our internal control over financial reporting, and we cannot yet conclude that they have been fully remedied. Our failure to correct these deficiencies or our failure to discover and address any other weaknesses or deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected.
       Upon completion of this offering, we will become a public company in the United States that is subject to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act will require that we include a report from management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2007. In addition, beginning at the same time, our auditors must attest to and report on management’s assessment of the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management does conclude that our internal control over financial reporting is effective, our independent registered public accounting firm may disagree. If our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which our internal control over financial reporting is documented, designed, operated or reviewed, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently than we do, then they may decline to attest to our management’s assessment or may issue an adverse opinion. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our reporting processes, which could adversely impact the market price of our ADSs. We will need to incur significant costs and use significant management and other resources in order to comply with Section 404 of the Sarbanes-Oxley Act.
We have very limited insurance coverage and we are subject to the risk of damage due to fires or explosions because some materials we use in our manufacturing processes are highly flammable.
       We do not maintain any third-party liability insurance coverage or any insurance coverage for business interruption or environmental damage arising from accidents that occur in the course of our operations. As a result, we may have to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our financial condition and results of operations.
       Furthermore, we are subject to risk of explosion and fires, as highly flammable gases, such as silane and nitrogen gas, are generated in our manufacturing processes. While we have not experienced to date any explosion or fire, the risks associated with these gases cannot be completely eliminated. We have adopted various measures, such as using special gas treatment equipment, to minimize such risk. Although we maintain fire insurance coverage, it may not be sufficient to cover all of our potential losses due to an explosion or fire. Moreover, if any of our production lines or equipment were to be damaged or cease operation as a result of an explosion or fire, it would temporarily reduce our manufacturing capacity and may result in

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investigations or penalties by relevant regulatory authorities, which could materially and adversely affect our business, financial condition and results of operations.
Any environmental claims or failure to comply with any present or future environmental regulations may require us to spend additional funds and may materially and adversely affect our financial condition and results of operations.
       We are subject to a variety of laws and regulations relating to the use, storage, discharge and disposal of chemical by-products of, and water used in, our manufacturing operations and research and development activities, including toxic, volatile and otherwise hazardous chemicals and wastes. We are in compliance with current environmental regulations to conduct our business as it is presently conducted. Although we have not suffered material environmental claims in the past, the failure to comply with any present or future regulations could result in the assessment of damages or imposition of fines against us, suspension of production or a cessation of our operations. New regulations could also require us to acquire costly equipment or to incur other significant expenses. Any failure by us to control the use of, or to adequately restrict the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspension of our business, as well as our financial condition and results of operations.
       The use of certain hazardous substances, such as lead, in various products is also coming under increasingly stringent governmental regulation. Increased environmental regulation in this area could adversely impact the manufacture and sale of solar modules that contain lead and could require us to make unanticipated environmental expenditures. For example, the European Union Directive 2002/96/EC on Waste Electrical and Electronic Equipment, or the WEEE Directive, requires manufacturers of certain electrical and electronic equipment to be financially responsible for the collection, recycling, treatment and disposal of specified products placed on the market in the European Union. In addition, European Union Directive 2002/95/EC on the Restriction of the use of Hazardous Substances in electrical and electronic equipment, or the RoHS Directive, restricts the use of certain hazardous substances, including lead, in specified products. Other jurisdictions are considering adopting similar legislation. Currently, we are not required under the WEEE or RoHS Directives to collect, recycle or dispose any of our products. However, the Directives allow for future amendments subjecting additional products to the Directives’ requirements. If, in the future, our solar modules become subject to such requirements, we may be required to apply for an exemption. If we were unable to obtain an exemption, we would be required to redesign our solar modules in order to continue to offer them for sale within the European Union, which would be impractical. Failure to comply with the Directives could result in the imposition of fines and penalties, the inability to sell our solar modules in the European Union, competitive disadvantages and loss of net sales, all of which could have a material adverse effect on our business, financial condition and results of operations.
Our business benefits from certain PRC government incentives. Expiration of, or changes to, these incentives could have a material adverse effect on our results of operations.
       In accordance with the current PRC Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises and the related implementing rules, Linyang China is currently subject to a preferential enterprise income tax rate of 24% and a local income tax rate of 3%. In addition, under these taxation laws and regulations, Linyang China is exempted from enterprise income tax for 2005 and 2006 and will be taxed at a reduced rate of 12% in 2007, 2008 and 2009. From 2005 until the end of 2009, Linyang China is also exempted from the 3% local income tax. From 2010 onward, Linyang China will be taxed at a rate of 27%, consisting of 24% enterprise income tax and 3% local income tax. In addition, Linyang China is currently applying for a two-year income tax exemption and a reduced tax rate of 12% for the following

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three years on income generated from its increased capital resulting from our contribution to Linyang China of the funds we received through issuances of our series A convertible preference shares in June and August 2006. As these tax incentives expire, the effective tax rate of Linyang China will increase significantly, and any increase of Linyang China’s enterprise income tax rate in the future could have a material adverse effect on our financial condition and results of operations.
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 4% appreciation of the Renminbi against the U.S. dollar. The PRC government may decide to adopt an even more flexible currency policy in the future, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar. An appreciation of the Renminbi relative to other foreign currencies could decrease the per unit revenue generated from our international sales. If we increased our pricing to compensate for the reduced purchasing power of foreign currencies, we may decrease the market competitiveness, on a price basis, of our products. This could result in a decrease in our international sales and materially and adversely affect our business.
       A substantial portion of our sales is denominated in U.S. dollars and Euros, while a substantial portion of our costs and expenses is denominated in Renminbi and U.S. dollars. As a result, the revaluation of the Renminbi in July 2005 has increased, and further revaluations could further increase, our costs. In addition, as we rely entirely on dividends paid to us by Linyang China, our operating subsidiary in the PRC, any significant revaluation of the Renminbi may have a material adverse effect on our financial condition and results of operations. The value of, and any dividends payable on, our ADSs in foreign currency terms will also be affected. For example, when converting the U.S. dollars we receive from this offering into Renminbi for our operations, any appreciation of the Renminbi against the U.S. dollar will decrease the Renminbi amount we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, an appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.
       Fluctuations in exchange rates, particularly among the U.S. dollar, Renminbi and Euro, also affect our gross and net profit margins and could result in fluctuations in foreign exchange and operating gains and losses. We incurred net foreign currency losses of RMB1.8 million and RMB2.1 million in 2005 and the nine months ended September 30, 2006, respectively. We cannot predict the impact of future exchange rate fluctuations on our financial condition and results of operations, and we may incur net foreign currency losses in the future.
       Very limited hedging transactions are available in the PRC to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currencies.

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One of our existing shareholders has substantial influence over our company and his interests may not be aligned with the interests of our other shareholders.
       Mr. Yonghua Lu, chairman of our board of directors and chief executive officer, currently beneficially owns 42.9% of our outstanding share capital and will beneficially own approximately 32.2% of our outstanding share capital upon completion of this offering. Accordingly, Mr. Lu 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 their shares as part of a sale of our company and might reduce the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs in this offering.
If we grant employee share options and other share-based compensation in the future, our net income could be adversely affected.
       We adopted a share incentive plan for our employees in November 2006, pursuant to which we may issue options to purchase up to 10,799,865 ordinary shares. As of November 30, 2006, options to purchase 8,012,998 ordinary shares had been granted under this plan. As a result of these option grants and potential future grants under this plan, we expect to incur significant share compensation expenses in future periods. The amount of these expenses will be based on the fair value of the share-based awards. Fair value is determined based on an independent third party valuation. We have adopted Statement of Financial Accounting Standard No. 123 (revised 2004) for the accounting treatment of our share incentive plan. As a result, we will have to account for compensation costs for all share options, including share options granted to our directors and employees, using a fair-value based method and recognize expenses in our consolidated statement of operations in accordance with the relevant rules under U.S. GAAP, which may have a material adverse effect on our net profit. Moreover, the additional expenses associated with share-based compensation may reduce the attractiveness of such incentive plan to us. However, our share incentive plan and other similar types of incentive plans are important in order to attract and retain key personnel. We cannot assure you that employee share options or other share-based compensation we may grant in the future, would not have a material adverse effect on our profitability.
We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.
       We may become a passive foreign investment company for U.S. federal income tax purposes for any year. Such classification could result in adverse U.S. federal income tax consequences to U.S. investors. For a detailed discussion of the passive foreign investment company rules, please see “Taxation — United States Federal Income Taxation — Passive Foreign Investment Company” below. We urge U.S. investors to consult their own tax advisors with respect to the U.S. federal income tax consequences of their investment.
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

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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 over the past 25 years, the growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
       The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the PRC government. The continued control of these assets and other aspects of the national economy by the PRC government could materially and adversely affect our business. The PRC government also exercises significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the PRC government to slow the pace of growth of the PRC economy could result in decreased capital expenditure by solar energy users, which in turn could reduce demand for our products.
       Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of renewable energy investments and expenditures in China, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our business and prospects. In particular, the PRC government has, in recent years, promulgated certain laws and regulations and initiated certain government-sponsored programs to encourage the utilization of new forms of energy, including solar energy. We cannot assure you that the implementation of these laws, regulations and government programs will be beneficial to us. In particular, any adverse change in the PRC government’s policies towards the solar power industry may have a material adverse effect on our operations as well as on our plans to expand our business into downstream system integration services.
Uncertainties with respect to the PRC legal system could have a material adverse effect on us.
       We conduct substantially all of our business through our operating subsidiary in the PRC, Linyang China, a Chinese wholly foreign-owned enterprise. Linyang China is generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign-owned enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws,

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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.
We rely principally on dividends and other distributions on equity paid by our operating subsidiary to fund cash and financing requirements, and limitations on the ability of our operating subsidiary to pay dividends or other distributions to us could have a material adverse effect on our ability to conduct our business.
       We are a holding company and conduct substantially all of our business through our operating subsidiary, Linyang China, which is a limited liability company established in China. We rely on dividends paid by Linyang China for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to limitations. In particular, regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. Linyang China is also required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. In addition, Linyang China is required to allocate a portion of its after-tax profit to its staff welfare and bonus fund at the discretion of its board of directors. Moreover, 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 significant portion of our revenue and expenses are denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account”, which includes foreign direct investment and loans. Currently, Linyang China may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of the State Administration of Foreign Exchange, or SAFE. However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in the future. 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.

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Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to acquire PRC companies or to inject capital into our PRC subsidiary, limit our PRC 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 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 the proceeds from any reduction in capital, share transfer or liquidation to the offshore special purpose company. Moreover, failure to comply with the SAFE registration and amendment requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions. Our current beneficial owners who are PRC residents have registered with the local SAFE branch as required under the SAFE notice. The failure of these beneficial owners to amend their SAFE registrations in a timely manner pursuant to the SAFE notice or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in the SAFE notice may subject such beneficial owners to fines and legal sanctions and may also result in a restriction on our PRC 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.
Our failure to obtain the prior approval of the China Securities Regulatory Commission, or the CSRC, of the listing and trading of our ADSs on the Nasdaq Global Market could significantly delay this offering or could have a material adverse effect on our business, operating results, reputation and trading price of our ADSs, and may also create uncertainties for this offering.
       On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, or MOFCOM, the State Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC, and the SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became effective on September 8, 2006. This regulation, among other things, includes provisions that purport to require that an offshore special purpose vehicle, or SPV, formed for purposes of overseas listing of equity interest in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange.

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       On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by SPVs. The CSRC approval procedures require the filing of a number of documents with the CSRC and it would take several months to complete the approval process.
       The application of this new PRC regulation remains unclear with no consensus currently existing among the leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement.
       Our PRC counsel, Grandall Legal Group, has advised us that, based on their understanding of the current PRC laws, regulations and rules and the procedures announced on September 21, 2006:
  •  CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus shall be subject to this new procedure;
 
  •  In spite of the above, given that we have completed our restructuring before September 8, 2006, the effective date of the new regulation, this regulation does not require an application to be submitted to the CSRC for the approval of the listing and trading of our ADSs on the Nasdaq Global Market, unless we are clearly required to do so by possible later rules of CSRC.
       If the CSRC requires that we obtain its approval prior to the completion of this offering, this offering will be delayed until we obtain CSRC approval, which may take several months. If prior CSRC approval is required but not obtained, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur.
       Also, if the CSRC subsequently requires that we obtain its approval, we may be unable to obtain a waiver of the CSRC approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding this CSRC approval requirement could have a material adverse effect on the trading price of our ADSs.
We face risks related to health epidemics and other outbreaks.
       Adverse public health epidemics or pandemics could disrupt business and the economics of the PRC and other countries where we do business. From December 2002 to June 2003, China and other countries experienced an outbreak of a highly contagious form of atypical pneumonia now known as severe acute respiratory syndrome, or SARS. On July 5, 2003, the World Health Organization declared that the SARS outbreak had been contained. However, a number of isolated new cases of SARS were subsequently reported, most recently in central China in April 2004. During May and June of 2003, many businesses in China were closed by the PRC government to prevent transmission of SARS. Moreover, some Asian countries, including China, have recently encountered incidents of the H5N1 strain of bird flu, or avian flu. We are unable to predict the effect, if any, that avian flu may have on our business. In particular, any future outbreak of SARS, avian flu or other similar adverse public developments may, among other things, significantly disrupt our business, including limiting our ability to travel or ship our products within or outside China and forcing us to temporary close our manufacturing facilities. Furthermore, an outbreak may severely restrict the level of economic activity in affected areas,

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which may in turn materially and adversely affect our financial condition and results of operations. We have not adopted any written preventive measures or contingency plans to combat any future outbreak of avian flu, SARS or any other epidemic.
Risks Related to This Offering
There has been no public market for our ordinary shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.
       Prior to this offering, there has been no public market for our ADSs or our ordinary shares underlying the ADSs. We have applied to have our ADSs quoted on the Nasdaq Stock Market Inc.’s National Market. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active public market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs may be materially and adversely affected. Moreover, the initial public offering price for our ADSs will be determined by negotiation between us and the underwriters based upon several factors, and the price at which our ADSs trade after this offering may decline below the initial public offering price. As a result, investors in our ADSs may experience a decrease in the value of their ADSs regardless of our operating performance or prospects.
The market price for our ADSs may be volatile.
       The market price for our ADSs is likely to be highly volatile and subject to wide fluctuations in response to factors including the following:
  •  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 by securities research analysts;
 
  •  changes in the economic performance or market valuations of other PV technology companies;
 
  •  additions or departures of our directors, executive officers and key research personnel; and
 
  •  release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs.
       In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs. In particular, the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States may affect the volatility in the price and trading volumes for our ADSs. Some of these companies have experienced significant volatility, including significant price declines after their initial public offerings. The trading performances of these companies’ securities at the time or after their offerings may affect the overall investor sentiment towards PRC companies listed in the United States and consequently may impact the trading performance of our ADSs.

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As the initial public offering price of our ADSs is substantially higher than our net tangible book value per share, you will incur immediate and substantial dilution.
       If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately US$9.27 per ADS (assuming no exercise by the underwriters of options to purchase additional ADSs), representing the difference between our net tangible book value per ADS as of September 30, 2006, after giving effect to this offering and an initial public offering price of US$12.50 per ADS (the mid-point of the estimated initial public offering price range set forth on the front cover of this prospectus). In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of outstanding or to-be-issued share options. All of the ordinary shares issuable upon the exercise of currently outstanding share options will be issued at a purchase price on a per ADS basis that is less than the initial public offering price per ADS in this offering. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon the completion of this offering.
Substantial future sales or perceived sales of our ADSs or ordinary shares in the public market could cause the price of our ADSs to decline.
       Sales of our ADSs or ordinary shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have 239,994,754 ordinary shares outstanding, including 60,000,000 ordinary shares represented by 12,000,000 ADSs, or 239,994,754 ordinary shares outstanding, including 69,000,000 ordinary shares represented by 13,800,000 ADSs, if the underwriters exercise their option to purchase additional ADSs in full. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the U.S. Securities Act of 1933, as amended, or the Securities Act. The remaining ordinary shares outstanding after this offering will be available for sale upon the expiration of certain lock-up arrangements entered into with us, the underwriters and other shareholders as further described under “Underwriting” and “Shares Eligible for Future Sale.” In addition, ordinary shares that certain option holders will receive when they exercise their share options will not be available for sale until the later of (i) the first anniversary of the grant date and (ii) the expiration of any relevant lock-up periods, subject to volume and other restrictions that may be applicable under Rule 144 and Rule 701 under the Securities Act. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs.
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.
       We have adopted our amended and restated articles of association, which will become effective immediately upon completion of this offering. Our new articles of association limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of

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management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.
Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise those rights.
       Holders of ADSs do not have the same rights as our shareholders and may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under our amended and restated articles of association, the minimum notice period required to convene a general meeting is 14 days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter. If requested in writing by us, the depositary will mail a notice of such a meeting to you. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but you may not receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.
You may be subject to limitations on transfers of your ADSs.
       Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings, and you may not receive distributions with respect to the underlying ordinary shares if it is impractical to make them available to you.
       We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Also, under the deposit agreement, the depositary will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act, or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, in the event we conduct any rights offering in the future, the depositary may not make such rights available to you or may dispose of such rights and make the net proceeds available to you. As a result, you may be unable to participate in our rights offerings and may experience dilution in your holdings.
       In addition, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion

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to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. As a result, the depositary may decide not to make the distribution and you will not receive such distribution.
We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you may have less protection for your shareholder rights than you would under U.S. law.
       Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as that from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
       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.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
       This prospectus contains forward-looking statements that relate to our current expectations and views of future events. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements relate to events that involve known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.
       In some cases, these forward-looking statements can be identified by words or phrases such as “aim,” “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “is/are likely to,” “may,” “plan,” “potential,” “will” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things, statements relating to:
  •  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 increased revenue growth and our ability to achieve profitability resulting from increases in our production volumes;
 
  •  our expectations with respect to our ability to secure raw materials, especially silicon wafers, in the future;
 
  •  our future business development, results of operations and financial condition; and
 
  •  competition from other manufacturers of PV products and conventional energy suppliers.
       This prospectus also contains data related to the PV market worldwide and in China. This market data, including market data from Solarbuzz, an independent solar energy research firm, include projections that are based on a number of assumptions. The PV market may not grow at the rates projected by the market data, or at all. The failure of the market to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. In addition, the rapidly changing nature of the PV market subjects any projections or estimates relating to the growth prospects or future condition of our market to significant uncertainties. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

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       The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

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USE OF PROCEEDS
       We estimate that we will receive net proceeds from this offering of approximately US$134.8 million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and assuming an initial public offering price of US$12.50 per ADS, the midpoint of the estimated initial public offering price range as set forth on the cover page of this prospectus. A US$1.00 increase (decrease) in the assumed initial public offering price of US$12.50 per ADS would increase (decrease) the net proceeds to us from this offering by US$11.2 million, after deducting the estimated underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no exercise of the underwriters’ option to purchase additional ADSs and no other change to the number of ADSs offered by us as set forth on the cover page of this prospectus.
       We intend to use the net proceeds we will receive from this offering primarily for the following purposes:
  •  approximately US$50 million to purchase or prepay for raw materials;
 
  •  approximately US$40 million to expand our manufacturing capacity; and
 
  •  approximately US$10 million to invest in our research and development activities.
       We intend to use the remaining proceeds for other general corporate purposes and for potential acquisitions of, or investments in, businesses and technologies that we believe will complement our current operations and our expansion strategies. We do not currently have any agreements or understandings with third parties to make any material acquisitions of, or investments in, other businesses.
       Depending on future events and other changes in the business climate, we may determine at a later time to use the net proceeds for different purposes. Pending these uses, we intend to invest the net proceeds to us in short-term bank deposits, direct or guaranteed obligations of the U.S. government or other short-term money market instruments. These investments may have a material adverse effect on the U.S. federal income tax consequences of your investment in our ADSs. It is possible that we may become a passive foreign investment company for U.S. federal tax purposes, which could result in negative tax consequences for you. For a more detailed discussion of these consequences, see “Taxation — United States Federal Income Taxation — Passive Foreign Investment Company.” Also see “Risk Factors — Risks Related to Our Business — We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.”
       We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.

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CAPITALIZATION
       The following table sets forth our capitalization, as of September 30, 2006:
  •  on an actual basis;
 
  •  on a pro forma basis to reflect the automatic conversion of all 79,644,754 of our outstanding series A convertible preference shares we issued in June and August 2006 into 79,644,754 ordinary shares upon the completion of this offering; and
 
  •  on a pro forma as adjusted basis to give effect to (1) the conversion of all of our outstanding series A convertible preference shares and (2) the issuance and sale of 12,000,000 ADSs we are offering at an assumed initial public offering price of US$12.50 per ADS, the midpoint of the estimated initial public offering price range set forth on the front cover of this prospectus, after deducting underwriting discounts, commissions and estimated offering expenses payable by us.
       You should read this table together with “Selected Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.
                                                   
    As of September 30, 2006
     
        Pro Forma as   Pro Forma as
    Actual   Actual   Pro Forma   Pro Forma   Adjusted   Adjusted
                         
    RMB   US$   RMB   US$   RMB   US$
    (in thousands)
Series A redeemable convertible preference shares, US$0.0001 par value; 79,644,754 shares issued and outstanding (liquidation value US$61.7 million)
    423,704 (2)       53,606                          
Shareholders’ equity
                                               
 
Ordinary shares, US$0.0001 par value, 400,000,000 shares authorized; 100,350,000 shares issued and outstanding, 179,994,754 shares issued and outstanding on a pro forma basis and 239,994,754 shares issued and outstanding on a pro forma as adjusted basis(1)
    84       11       147       19       198       25  
Additional paid-in capital
    82,208       10,401       502,173       63,534       1,567,866       198,364  
Statutory reserve
    2,245       284       2,245       284       2,245       284  
Retained earnings
    80,753       10,216       80,753       10,216       80,753       10,216  
Total shareholders’ equity
    165,290       20,912       585,318       74,053       1,651,062       208,889  
                                     
 
Total capitalization
    588,994       74,518       585,318       74,053       1,651,062       208.889 (3)
                                     
 
(1)  Exclude 10,799,685 ordinary shares reserved for future issuance under our 2006 equity incentive plan.
 
(2)  Include accrued dividends of RMB3.7 million (US$0.5 million), which will be paid to the holders of the series A convertible preference shares prior to the conversion of 79,644,754 series A convertible preference shares into 79,644,754 ordinary shares upon the completion of this offering.
 
(3)  A US$1.00 increase (decrease) in the assumed initial public offering price of US$12.50 per ADS would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by US$11.2 million.
       As of the date of this prospectus, there has been no material change to our capitalization as set forth above.

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DILUTION
       If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the conversion of our series A convertible preference shares and the fact that the initial public offering price per ordinary share of our ADSs is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares. Our net tangible book value as of September 30, 2006 was approximately RMB158.7 million (US$20.1 million), or RMB1.58 (US$0.20) per ordinary share as of that date, and US$1.00 per ADS. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the conversion of all outstanding series A convertible preference shares into ordinary shares upon the completion of this offering and the additional proceeds we will receive from this offering, from the assumed initial public offering price per ordinary share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
       Without taking into account any other changes in net tangible book value after September 30, 2006, other than to give effect to our sale of the ADSs offered in this offering at the initial public offering price of US$12.50 per ADS after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us and the conversion of all outstanding series A convertible preference shares into ordinary shares upon the completion of this offering, our adjusted net tangible book value as of September 30, 2006 would have been RMB1,224.4 million (US$154.9 million), or RMB5.10 (US$0.65) per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, and RMB25.51 (US$3.23) per ADS. This represents an immediate increase in net tangible book value of US$0.45 per ordinary share and US$2.23 per ADS, to the existing shareholders and an immediate dilution in net tangible book value of US$1.85 per ordinary share and US$9.27 per ADS, to investors purchasing ADSs in this offering.
       The following table illustrates such dilution on a per ordinary share and per ADS basis:
         
Assumed initial public offering price per ordinary share
  US$ 2.50  
Assumed initial public offering price per ADS
  US$ 12.50  
Net tangible book value per ordinary share as of September 30, 2006
  US$ 0.20  
Increase in net tangible book value per ordinary share attributable to this offering
  US$ 0.45  
Adjusted net tangible book value per ordinary share after giving effect to the conversion of all outstanding series A convertible preference shares into ordinary shares upon the completion of this offering and the additional proceeds we will receive from this offering
  US$ 0.65  
Dilution in net tangible book value per ordinary share to new investors in this offering
  US$ 1.85  
Dilution in net tangible book value per ADS to new investors in this offering
  US$ 9.27  
       A US$1.00 increase (decrease) in the assumed initial public offering price of US$12.50 per ADS would increase (decrease) our adjusted net tangible book value after giving effect to the offering by RMB88.2 million (US$11.2 million), the adjusted net tangible book value per ordinary share and per ADS after giving effect to this offering by RMB0.37 (US$0.05) per ordinary share and RMB1.84 (US$0.23) per ADS and the dilution in adjusted net tangible book value per ordinary share and per ADS to new investors in this offering by RMB15.87 (US$2.01) per ordinary share and RMB79.36 (US$10.04) per ADS, assuming no change to the number of ADSs

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offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
       The following table summarizes, on an as adjusted basis, as of September 30, 2006, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per ordinary share paid before deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The total number of ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the option to purchase additional ADSs granted to the underwriters.
                                                   
    Ordinary Shares            
    Purchased   Total Consideration        
            Average Price Per   Average Price
    Number   Percent   Amount   Percent   Ordinary Share   Per ADS
                         
Existing shareholders
    179,994,754 (1)     75.0 %   US$ 63,553,000       29.8 %   US$ 0.35     US$ 1.77  
New investors
    60,000,000       25.0     US$ 150,000,000       70.2 %   US$ 2.50     US$ 12.50  
                                     
 
Total
    239,994,754       100.0 %   US$ 213,553,000       100.0 %   US$ 0.89     US$ 4.45  
                                     
 
(1)  Assumes conversion of all our series A convertible preference shares into ordinary shares upon completion of this offering.
       A US$1.00 increase (decrease) in the assumed initial public offering price of US$12.50 per ADS would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders and the average price per ADS paid by all shareholders by US$12.0 million, US$12.0 million and US$0.25, respectively, assuming no change in the number of ADSs sold by us as set forth on the cover page of this prospectus and without deducting underwriting discounts and commissions and estimated offering expenses payable by us.

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DIVIDEND POLICY
       We have never declared or paid dividends, nor do we have any present plan to pay any cash dividends on our ordinary shares 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. Under the amended and restated memorandum and articles of association that were in effect prior to this offering, holders of series A convertible preference shares were entitled to receive an annual 3.5% cumulative dividend. We will make a one-time cash dividend payment in the aggregate amount of approximately US$0.9 million immediately prior to this offering to these holders of the series A convertible preference shares.
       Our board of directors has complete discretion on whether to pay dividends, subject to the approval of our shareholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
       We rely on dividends paid by Linyang China for our cash needs, including the funds necessary to pay dividends to our shareholders. The payment of dividends by Linyang China is subject to limitations. See “Risk Factors — Risks Related to Doing Business in China — We rely principally on dividends and other distributions on equity paid by our operating subsidiary to fund cash and financing requirements, and limitations on the ability of our operating subsidiary to pay dividends or other distributions to us could have a material adverse effect on our ability to conduct our business.”

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EXCHANGE RATE INFORMATION
       The following table sets forth information regarding the noon buying rates in Renminbi and U.S. dollars for the periods indicated.
                                   
    Renminbi per U.S. Dollar Noon Buying Rate
     
    Period End   Average(1)   Low   High
                 
2001
    8.2766       8.2772       8.2709       8.2786  
2002
    8.2800       8.2772       8.2700       8.2800  
2003
    8.2767       8.2771       8.2765       8.2800  
2004
    8.2765       8.2768       8.2764       8.2774  
2005
    8.0702       8.1826       8.0702       8.2765  
2006
                               
 
June
    7.9943       8.0042       7.9943       8.0225  
 
July
    7.9690       7.9897       7.9690       8.0018  
 
August
    7.9730       7.9722       7.9538       8.0000  
 
September
    7.9040       7.9334       7.8965       7.9545  
 
October
    7.8785       7.9019       7.8728       7.9168  
 
November
    7.8340       7.8622       7.8303       7.8750  
 
December (through December 11)
    7.8340       7.8267       7.8217       7.8350  
 
Source: Federal Reserve Bank of New York
(1)  Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.
       On December 11, 2006, the noon buying rate was RMB7.8340 to US$1.00.
       We publish our financial statements in Renminbi. This prospectus contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the noon buying rate in the City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, as of September 29, 2006, which was RMB7.9040 to US$1.00. No representation is made that the Renminbi amounts referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all.
       The People’s Bank of China, or PBOC, issued a public notice on July 21, 2005 increasing the exchange rate of the Renminbi against the U.S. dollar by approximately 2% to RMB8.11 per US$1.00. Further to this notice, the PRC government has reformed its exchange rate regime by adopting a managed floating exchange rate regime based on market supply and demand with reference to a portfolio of currencies. Under this new regime, the Renminbi will no longer be pegged to the U.S. dollar. This change in policy has resulted in a more than 4% 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.

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
       The following selected consolidated financial data have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our consolidated statements of operations for the period from August 27, 2004 (inception) to December 31, 2004, the year ended December 31, 2005 and the nine months ended September 30, 2006 and our consolidated balance sheets as of December 31, 2004, 2005 and September 30, 2006 have been audited by Ernst & Young Hua Ming, an independent registered public accounting firm. The report of Ernst & Young Hua Ming on those consolidated financial statements is included elsewhere in this prospectus, and the selected consolidated financial information for those periods and as of those dates are qualified by reference to those financial statements and that report, and should be read in conjunction with them and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated statement of operations data for the nine months ended September 30, 2005 has been derived from our unaudited consolidated financial statements included elsewhere in this prospectus, which have been prepared on the same basis as our audited consolidated financial statements and contain normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for such unaudited periods. Our consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods.
                                                   
    Period from            
    August 27, 2004       Nine Months Ended September 30,
    (Inception) to   Year Ended    
    December 31, 2004   December 31, 2005   2005   2006   2006
                     
    (RMB)   (RMB)   (US$)   (RMB)   (RMB)   (US$)
                (unaudited)        
    (in thousands, except share and per share data)
Consolidated Statement of Operations Data                                                
Net revenue
                                               
 
PV modules
          165,636       20,956       86,484       360,154       45,566  
 
PV cells
          542       68             6,624       838  
 
PV cells processing
                            19,461       2,462  
                                     
Total net revenue
          166,178       21,024       86,484       386,239       48,866  
                                     
Cost of revenue
                                               
 
PV modules
          (139,481 )     (17,647 )     (75,627 )     (255,867 )     (32,371 )
 
PV cells
          (422 )     (53 )           (5,548 )     (702 )
 
PV cells processing
                            (6,014 )     (761 )
                                     
Total cost of revenue
          (139,903 )     (17,700 )     (75,627 )     (267,429 )     (33,834 )
                                     
Gross profit
          26,275       3,324       10,857       118,810       15,032  
                                     
Operating expenses
                                               
 
Selling expenses
          (5,258 )     (665 )     (2,653 )     (6,023 )     (762 )
 
General and administrative expenses
    (629 )     (4,112 )     (520 )     (2,711 )     (31,585 ) (1)     (3,996 )
 
Research and development expenses
          (750 )     (95 )     (415 )     (2,723 )     (344 )
                                     
Total operating expenses
    (629 )     (10,120 )     (1,280 )     (5,779 )     (40,331 )     (5,102 )
                                     

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    Period from            
    August 27, 2004       Nine Months Ended September 30,
    (Inception) to   Year Ended    
    December 31, 2004   December 31, 2005   2005   2006   2006
                     
    (RMB)   (RMB)   (US$)   (RMB)   (RMB)   (US$)
                (unaudited)        
    (in thousands, except share and per share data)
Consolidated Statement of Operations Data                                                
Operating profit (loss)
    (629 )     16,155       2,044       5,078       78,479       9,930  
Interest expenses
          (123 )     (15 )           (3,855 )     (488 )
Interest income
    22       95       12       24       492       62  
Exchange losses
          (1,768 )     (224 )     (935 )     (2,123 )     (269 )
Other income
          215       27       215       486       61  
Other expenses
          (260 )     (33 )     (207 )     (474 )     (60 )
Change in fair value of embedded foreign currency derivative
                            (1,082 )     (137 )
Government grant
                            640       81  
                                     
Net income (loss) before tax and minority interests
    (607 )     14,314       1,811       4,175       72,563       9,180  
Income tax benefit
          96       12       52       574       73  
Minority interest
                            (266 )     (33 )
                                     
Net income (loss)
    (607 )     14,410       1,823       4,227       72,871       9,220  
                                     
Net income (loss) attributable to ordinary shareholders
    (607 )     14,410       1,823       4,227       69,195       8,754  
                                     
Net income (loss) per share
                                               
 
— Basic
    (0.01 )     0.26       0.03       0.08       0.69       0.09  
 
— Diluted
    (0.01 )     0.22       0.03       0.07       0.55       0.07  
Shares used in computation
                                               
 
— Basic
    51,994,399       54,511,540       54,511,540       51,994,399       100,350,000       100,350,000  
 
— Diluted
    51,994,399       66,366,469       66,366,469       58,178,291       131,624,178       131,624,178  
Pro forma net income per share
                                               
 
— Basic
            0.11       0.01               0.40       0.05  
 
— Diluted
            0.09       0.01               0.37       0.05  
Shares used in computation
                                               
 
— Basic
            134,156,294       134,156,294               179,994,754       179,994,754  
 
— Diluted
            160,296,813       160,296,813               195,923,705       195,923,705  
 
(1)  In the nine months ended September 30, 2006, we recorded a share compensation charge of RMB10.3 million (US$1.3 million), which related to a sale of our ordinary shares to Linyang Electronics, a company controlled by our chairman and chief executive officer, at less than fair market value by other shareholders of our company and a share compensation charge of RMB12.1 million (US$1.5 million) as a result of the issuance of series A convertible preference shares to Good Energies Investments Limited.

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    Period from            
    August 27, 2004       Nine Months Ended September 30,
    (Inception) to   Year Ended    
    December 31, 2004   December 31, 2005   2005   2006   2006
                     
    (RMB)   (RMB)   (US$)   (RMB)   (RMB)   (US$)
                (unaudited)        
    (in thousands, except margin and other operating data)
Other Financial Data
                                               
 
Gross margin
          15.8 %             12.6 %     30.8 %        
 
Operating margin
          9.7 %             5.9 %     20.3 % (1)        
 
Net margin
          8.7 %             4.9 %     18.9 % (1)        
 
Net cash from (used in)
                                               
   
operating activities
    (8,180 )     (76,582 )     (9,688)       (76,194 )     (414,929 )     (52,497 )
 
Capital expenditures
    (295 )     (37,464 )     (4,740)       (19,167 )     (95,355 )     (12,064 )
Other Operating Data
                                               
 
Amount of PV cells produced (including PV cell processing) (in MW)
          1.0 (2)                   16.2 (3)        
 
Amount of PV modules produced (in MW):
          5.5               3.1       11.3          
 
Average selling price (in US$/W):
                                               
   
PV cells(4)
          3.00                     3.05          
   
PV modules(5)
          3.93               3.91       4.02          
 
(1)  Inclusive of the share compensation charge of RMB10.3 million (US$1.3 million) related to a sale of our ordinary shares to Linyang Electronics by other shareholders of our company and the share compensation charge of RMB12.1 million (US$1.5 million) as a result of the issuance of series A convertible preference shares to Good Energies Investments Limited.
 
(2)  Of which 0.9 MW was used in our PV module production.
 
(3)  Of which 11.5 MW was used in our PV module production and 3.3 MW represented output from our PV cell processing services that we delivered to our customers in the form of PV cells.
 
(4)  All sales contracts for PV cells are denominated in Renminbi. Translations of Renminbi into U.S. dollars have been made at period end exchange rates.
 
(5)  Represents the average unit selling price in U.S. dollars specified in the sales contracts for PV modules.

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       The following table represents a summary of our consolidated balance sheet data as of December 31, 2004, and 2005, and September 30, 2006.
                                           
        As of   As of
    As of   December 31,   September 30,
    December 31, 2004   2005   2006
             
    (RMB)   (RMB)   (US$)   (RMB)   (US$)
    (in thousands)
Consolidated Balance Sheet Data
                                       
 
Cash and cash equivalents
    3,525       7,054       892       68,946       8,723  
 
Restricted cash
          22,229       2,812       25,376       3,210  
 
Accounts receivable
                      13,798       1,746  
 
Inventories
    4,511       76,819       9,719       221,608       28,037  
 
Advance to suppliers
    4,850       61,312       7,757       388,123       49,105  
 
Other current assets
    762       20,705       2,620       30,864       3,905  
 
Amount due from related parties
    18,000                   153       20  
 
Fixed assets, net
    292       55,146       6,977       135,564       17,151  
 
Deferred initial public offering cost
                      25,506       3,227  
 
Total assets
    31,940       243,361       30,789       917,946       116,137  
 
Short-term bank borrowings
          20,000       2,530       184,746       23,374  
 
Long-term bank borrowings, current portion
                      8,000       1,012  
 
Accounts payable
    2,221       18,794       2,378       19,905       2,518  
 
Notes payable
          20,000       2,530              
 
Accrued expenses and other liabilities
    301       22,920       2,900       50,271       6,360  
 
Customer deposits
          55,319       6,999       32,577       4,122  
 
Amount due to related parties
    25       32,658       4,132       336       43  
 
Long-term bank borrowings, non-current portion
                      23,000       2,910  
 
Total liabilities
    2,547       169,691       21,469       318,835       40,339  
 
Minority interests
                      10,117       1,280  
 
Series A redeemable convertible preference shares
                      423,704       53,606  
 
Total shareholders’ equity
    29,393       73,670       9,320       165,290       20,912  
 
Total liabilities, preference shares and shareholders’ equity
    31,940       243,361       30,789       917,946       116,137  

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
       The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information provided under the caption “Risk Factors” beginning on page 13 of this prospectus.
Overview
       We are an established manufacturer of both PV cells and PV modules in China. We manufacture and sell a variety of PV cells and PV modules using advanced manufacturing process technologies that have helped us to rapidly increase our operational efficiency. All of our PV modules are currently produced using PV cells manufactured at our own facilities. We also provide PV cell processing services for some of our silicon suppliers. In addition, we recently incorporated Shanghai Linyang to provide system integration services in China whereby we tailor our PV products for specific customers’ needs and link them with the end-use devices that require solar power. We sell our products both directly to system integrators and through third party distributors.
       We commenced operations on August 27, 2004 through Linyang China. On August 27, 2004, Linyang Electronics, one of the leading electricity-measuring instrument manufacturers in China, owned 68% of the equity interests of Linyang China. In anticipation of our initial public offering, we incorporated Solarfun Power Holdings Co., Ltd., or Solarfun, in the Cayman Islands on May 12, 2006 as our listing vehicle. To enable us to raise equity capital from investors outside of China, we established a holding company structure by incorporating Linyang Solar Power Investment Holding Ltd., or Linyang BVI, in the British Virgin Islands on May 17, 2006. Linyang BVI is wholly-owned by Solarfun. Linyang BVI purchased all of the equity interests in Linyang China on June 2, 2006 from Linyang Electronics and the three other shareholders of Linyang China for aggregate consideration of US$7.3 million. This transaction was accounted for as a recapitalization. In March and April 2006, we established two majority-owned subsidiaries in China, Shanghai Linyang and Sichuan Leshan Jiayang New Energy Co., Ltd., or Sichuan Jiayang, to expand our business into new markets and sectors. As of September 30, 2006, we owned 83% and 55% of the equity interest in Shanghai Linyang and Sichuan Jiayang, respectively.
       We operate and manage our business as a single segment. We produced 5.6 MW of our PV products in 2005 and 16.2 MW of our PV products (including PV cell processing) in the nine months ended September 30, 2006. The average selling price of our PV modules was US$3.93 per watt and US$4.02 per watt in 2005 and the nine months ended September 30, 2006, respectively, and the average selling price of our PV cells was US$3.00 per watt and US$3.05 per watt during the same periods. In 2005 and the nine months ended September 30, 2006, approximately 79.7% and 93.7%, respectively, of our net revenue were attributable to sales to customers outside of the PRC. Moreover, in 2005 and the nine months ended September 30, 2006, customers accounting for more than 10% of our net revenue accounted in the aggregate for 50.8% and 76.4%, respectively, of our net revenue. Our products and services are primarily provided to European customers under our proprietary “Solarfun” brand.
       Since we completed our PV cell manufacturing line in November 2005, we began using our own PV cells for the production of our PV modules and only sell our PV cells to third parties on a selective basis. In the nine months ended September 30, 2006, all of our PV module products were manufactured using our own PV cells. In the three months ended December 31, 2005 and the nine months ended September 30, 2006, we produced 1.0 MW and 16.2 MW of PV cells, respectively, of which 0.9 MW and 11.5 MW was used for our module production during the

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respective periods. Out of 16.2 MW of PV cells produced in the nine months ended September 30, 2006, we produced 3.3 MW of PV cells as PV cell processing services for our customers.
       We have experienced significant revenue and earnings growth since we commenced operations in August 2004. Our net revenue and net income were RMB166.2 million (US$21.0 million) and RMB14.4 million (US$1.8 million), respectively, in 2005. Our net revenue was RMB386.2 million (US$48.9 million) in the first nine months of 2006, compared to RMB86.5 million in the same period in 2005. We had net income of RMB72.9 million (US$9.2 million) in the first nine months of 2006 and RMB4.2 million in the same period in 2005. The significant increase in our net revenue since 2005 was primarily due to the increase in sales of PV modules as well as the increase in the average selling price of our PV modules, while the significant increase in our net income was primarily a result of the cost savings derived from using our own PV cells for our PV module production since November 2005 and improved economies of scale in our operations.
Limited Operating History
       We have a limited operating history upon which you can evaluate our business. You should consider the risks and difficulties frequently encountered by companies with a relatively short operating history, such as us, in new and rapidly evolving markets, such as the PV market. Our rapid revenue growth since we started operations in August 2004 should not be taken as indicative of the rate of revenue growth, if any, that can be expected in the future. In addition, our limited operating history provides a limited historical basis to assess the impact that critical accounting policies may have on our business and our financial performance.
Key Factors Affecting Our Financial Performance
       The most significant factors affecting our financial performance are:
  •  availability and price of silicon wafers;
 
  •  average selling price of our PV products;
 
  •  manufacturing capacity;
 
  •  process technologies; and
 
  •  industry demand.
Availability and Price of Silicon Wafers
       Silicon wafers are the most important raw materials for manufacturing PV products, and substantially all of our raw material costs are attributable to silicon wafers. There is currently an industry-wide shortage of silicon and silicon wafers due to increased demand as a result of recent expansions and large demand in the solar energy and semiconductor industries, which has resulted in significant price increases for, and a shortage of, silicon and silicon wafers in 2004, 2005 and the nine months ended September 30, 2006. As the solar energy industry continues to grow, we believe the average prices of silicon and silicon wafers may increase and we expect the shortages of silicon and silicon wafers will continue. Moreover, as building silicon manufacturing lines generally requires significant upfront capital commitment and it typically takes an average of two to three years to construct a manufacturing line and ramp up production, silicon suppliers are generally willing to expand their capacity only if they are certain of sufficient customer demand. As a result, silicon and silicon wafer suppliers are increasingly requiring customers to make prepayments for raw materials well in advance of their shipment, which, in turn, leads to significant working capital commitments for PV product manufacturers such as us.

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       We do not currently produce silicon or silicon wafers ourselves but source them from other companies. To maintain competitive manufacturing operations, we depend on our suppliers’ timely delivery of quality silicon wafers in sufficient quantities and at acceptable prices. Our silicon wafer suppliers, in turn, depend on silicon manufacturers to supply silicon required for the production of silicon wafers. The significant growth of the solar energy industry has resulted in a significant increase in demand for silicon and silicon wafers. In addition, some suppliers of silicon also supply to silicon wafer manufacturers for the semiconductor industry, which typically have greater buying power and market influence than manufacturers for the solar energy industry.
       As we expect the shortage of silicon and silicon wafers to continue in 2006 and 2007, we entered into various short-term and long-term supply agreements in 2006 with our major silicon and silicon wafer suppliers to secure adequate and timely supply of silicon wafers. In particular, we have entered into agreements for the provision of silicon materials to meet our planned silicon supply requirements for the remainder of 2006, a majority of our planned silicon supply requirements in 2007 and a significant portion of our planned silicon supply requirements in 2008, including through:
  •  supply agreements entered into in March and July 2006 with ReneSola Co., Ltd., or ReneSola, under which ReneSola has agreed to supply us with an aggregate of 20.3 MW of silicon wafers through the end of 2007, with the majority of the deliveries to be made in 2007;
 
  •  supply and framework supply agreements entered into with Jiangxi LDK Solar Hi-Tech Co., Ltd., or LDK, a wafer manufacturer located in Jiangxi Province, China. Under an amendment to prior supply agreements with LDK that we entered into in November 2006, LDK will provide 9.3 MW of silicon wafers to us from December 2006 to July 2007 based on a fixed price. Furthermore, we entered into a framework supply agreement with LDK, under which product purchase prices and delivery schedules for the contracted periods are not fixed. Under this agreement, LDK will provide 56.4 MW of silicon wafers from July 2007 to June 2008. The actual product purchase prices will be negotiated between us and LDK in good faith during the contracted periods based on market prices; and
 
  •  supply agreements with several other suppliers, under which these suppliers agreed to supply us with an aggregate amount of 41.7 MW of silicon wafers through the end of 2007.
       In addition, we entered into a supply agreement in June 2006 with E-mei Semiconductor Material Factory in Sichuan Province, China, or E-mei. This agreement became effective in October 2006 and was further amended in November 2006. Under this agreement, we agreed to make prepayments totaling RMB220 million over a period not longer than 18 months starting from October 2006 to secure exclusive rights to purchase the silicon products to be produced by E-mei’s future manufacturing facility at a discount to the prevailing market price for five years starting from the completion of the facility. E-mei will use the prepayments to construct a new manufacturing facility with an expected annual production capacity of 500 tons of silicon products. The agreement also provides that E-mei will complete the construction of the new manufacturing facility within 18 months after the effective date of the agreement. Moreover, under another supply contract we entered into with E-mei in October 2006, E-mei agreed to reserve for us at least 50% of its annual manufacturing capacity for solar energy products at its existing silicon production facilities in 2007.
       We cannot assure you that we will be able to secure sufficient quantities of silicon and silicon wafers to meet our planned increase in manufacturing capacity. See “Risk Factors — Risks Related to Our Company and Our Industry — We are currently experiencing an industry-wide shortage of silicon wafers. The prices that we pay for silicon wafers have increased in the past and we expect prices may continue to increase in the future, which may materially and adversely affect our revenue growth and decrease our gross profit margins and profitability.” If

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the market price of silicon and silicon wafers increases, our suppliers may seek to renegotiate the terms of these supply contracts and may request for price increases on us. Increases in the prices of silicon and silicon wafers have in the past increased our production costs and may impact our cost of revenue, gross margins and profitability in the future. We have been successful in absorbing such increases in silicon wafer costs by improving our process technologies, increasing our manufacturing efficiencies or passing such cost increases to our customers. However, we cannot assure you that we will be able to absorb future silicon and silicon wafer price increases and continue to increase our gross margin and profitability.
       In addition, due to a shortage of raw materials for the production of silicon wafers, increased market demand for silicon wafers, a failure by some silicon suppliers to achieve expected production volumes and other factors, some of our major silicon wafer suppliers failed to fully perform during 2006 on their silicon wafer supply commitments to us, and we consequently did not receive all of the contractually agreed quantities of silicon wafers from these suppliers. We subsequently cancelled or renegotiated these silicon supply contracts, resulting in an aggregate decrease in the delivered or committed supply under these contracts from approximately 142 MW to approximately 71 MW for the period from June 2006 to June 2008. In particular, we entered into a framework supply agreement with LDK in December 2005, under which LDK agreed to provide us with an aggregate of 16.3 MW of silicon wafers from April 2006 through the end of 2007. The purchase price under this agreement for the period from April 2006 to December 2006 is fixed. We entered into another framework supply agreement with LDK in May 2006, under which LDK agreed to provide us with an aggregate of 595.0 MW of silicon wafers from 2006 to 2010. This framework agreement was not based on a fixed price. We also entered into three supply agreements with LDK in December 2005, May 2006 and July 2006, under which LDK agreed to supply us with an aggregate of 12.0 MW silicon wafers from April 2006 to April 2007 based on fixed prices. These two framework agreements and three supply agreements were cancelled in November 2006. Prior to this cancellation, LDK had supplied 3.3 MW of silicon wafers to us under these four silicon supply agreements. In November 2006, we entered into a new framework supply agreement with LDK, under which product purchase prices and delivery schedules for the contracted periods are not fixed. Under this agreement, LDK will provide 56.4 MW of silicon wafers from July 2007 to June 2008. Furthermore, we entered into a supply agreement with LDK in November 2006, under which LDK will provide 9.3 MW of silicon wafers to us from December 2006 to July 2007 based on fixed prices. The purchase price of the new supply agreement is higher than those of the framework supply agreement entered into in December 2005 and one of the three cancelled supply agreements, but lower than the purchase prices of the two other cancelled supply agreements. Furthermore, we were able to enter into agreements with other suppliers to replace the majority of the remaining supply shortfall at a lower average silicon purchase price. Nevertheless, we cannot assure you that we will not experience similar or additional shortfalls of silicon or silicon wafers from our suppliers in the future or that, in the event of such shortfalls, we will be able to find other silicon suppliers to satisfy our production needs. See “Risk Factors — Risks Related to Our Company and Our Industry — Our dependence on a limited number of suppliers for a substantial majority of silicon and silicon wafers could prevent us from delivering our products in a timely manner to our customers in the required quantities, which could result in order cancellations, decreased revenue and loss of market share.”
Average Selling Price of Our PV Products
       PV products are priced based on the number of watts of electricity they can generate. Pricing of PV products is principally affected by the manufacturing costs, including the cost of silicon wafers, as well as the overall demand in the PV industry. Increased economies of scale and advancement of process technologies over the past decade have also led to a reduction in manufacturing costs and the prices of PV products.

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       We generally price our products based on the prevailing market price at the time we enter into sales contracts with our customers, taking into account the size of the contract, the strength and history of our relationship with each customer and our capacity utilization. From time to time, we enter into agreements where the selling price for certain of our PV products is fixed over a defined period. This has helped reduce our exposure to risks from decreases in PV cell prices generally, but has, on the other hand, also prevented us from benefiting from price increases. An increase in our manufacturing costs, including the cost of silicon wafers, over such a defined period could have a negative impact on our overall gross profit. Our gross profit may also be impacted by certain adjustments for inventory reserves.
       Prices of PV products have risen gradually as a result of the growth in the demand for PV products worldwide and shortages of silicon and silicon wafers in 2004, 2005 and 2006. The average selling price of our PV modules was US$3.93 and US$4.02 per watt in 2005 and the nine months ended September 30, 2006, respectively, and the average selling price of our PV cells was US$3.00 and US$3.05 per watt during the same periods. Fluctuations in the prevailing market prices have historically affected the prices of our products and may continue to have a material effect on the prices of our products in the future.
       We believe that the high conversion efficiencies of our PV products and our low-cost manufacturing capabilities have enabled us to price our products competitively, and will further provide us with flexibility in adjusting our price while maintaining our profit margin.
Manufacturing Capacity
       Capacity and capacity utilization are key factors in growing our net revenue and gross profit. In order to accommodate the growing demand for our products, we have expanded, and plan to continue to expand, our manufacturing capacity. An increase in capacity has a significant effect on our financial results, both by allowing us to produce and sell more PV products and achieve higher net revenue, and by lowering our manufacturing costs as a result of increased economies of scale.
       Due to current strong end-market demand for PV products, we have been attempting to maximize the utilization of our available manufacturing capacity as it comes on-line, so as to allow us to spread our fixed costs over a higher production volume, thereby reducing our per unit and per MW fixed costs. As we build additional production facilities, our fixed costs will increase, and the overall utilization rate of our production facility could decline, which could negatively impact our gross profit. However, regardless of the capacity of a particular manufacturing facility, our capacity utilization may vary greatly depending on the mix of products we produce at any particular time.
       We have expanded rapidly our manufacturing capacity since our establishment in August 2004. We produced 5.6 MW of our PV products in 2005 and 16.2 MW of our PV products (including PV cell processing) in the nine months ended September 30, 2006. We currently operate two PV cell manufacturing lines with an annualized aggregate capacity of 60 MW and have an aggregate annualized PV module manufacturing capacity of 60 MW. We commenced commercial production on these PV cell manufacturing lines in November 2005 and September 2006, respectively. We plan to increase our annual manufacturing capacity of PV cells in terms of capacity installed or under installation to 120 MW by the end of 2006. We expect to use the net proceeds from the sale of our series A convertible preference shares and from this offering to fund these contemplated expansions in manufacturing capacity.
Process Technologies
       Advancements of process technologies have enhanced conversion efficiencies of PV products. High conversion efficiencies reduce the manufacturing cost per watt of PV products and could thereby contribute to increasing gross profit margins. For this reason, solar energy

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companies, including us, are continuously developing advanced process technologies for large-scale manufacturing while reducing costs to maintain and improve profit margins.
       Since our first PV cell production line became operational in November 2005, we have increased the average daily output of each of our monocrystalline PV cell production lines to 26,000 cells for the month ended September 30, 2006, improved the conversion efficiency of our monocrystalline PV cells to 16.8%, and reduced monocrystalline PV cell thickness to 200 microns and the average cell breakage rate to 2.7%. Our advanced process technologies have also significantly improved our productivity and increased the efficiency of our raw material usage, both of which have led to the lowering of the cost per watt of our products and improved our gross profit margins.
Industry Demand
       Our business and revenue growth depends on PV industry demand. There has been a significant growth of the PV market in the past decade. According to Solarbuzz, the global PV market increased from 345 MW in 2001 to 1,460 MW in 2005 in terms of total annual PV installations. Annual PV installations are expected to increase to 3.9 GW by 2010. See “Our Industry.” In addition, any policy changes by relevant governmental bodies in certain key countries towards the solar energy industry will also have an impact on PV industry demand and, as a result, our business, financial condition, results of operations and prospects.
Net Revenue
       We currently generate a substantial majority of our net revenue from the production and sale of PV modules. We also generate a small portion of our net revenue from the sale of PV cells to third parties. In addition, we have also entered into PV cell processing arrangements with certain silicon suppliers to produce PV cells made from silicon provided by these customers, and a portion of our net revenue in the nine months ended September 30, 2006 was derived from these services. We record the amount of revenue on these processing transactions based on the amount received from a customer for PV cells sold less the amount paid for the raw materials purchased from the same customer. The revenue recognized is recorded as PV cell processing revenue and the production costs incurred related to providing the processing services are recorded as PV cell processing costs within cost of revenue. Furthermore, in the event we pay the shipping costs on behalf of our customers, we include the shipping costs passed on to our customers in our sales revenue. We record revenue net of all value-added taxes imposed by governmental authorities and collected by us from customers concurrent with revenue-producing transactions.
       The following table sets forth the net revenue from our principal products and services and as a percentage of our net revenue for the periods indicated.
                                                     
    Year Ended   Nine Months Ended
    December 31, 2005   September 30, 2006
         
        Percentage of       Percentage of
    Amount   Net Revenue   Amount   Net Revenue
                 
    (RMB)   (US$)       (RMB)   (US$)    
    (In thousands, except percentages)
Net Revenue:
                                               
 
PV modules
    165,636       20,956       99.7 %     360,154       45,566       93.3 %
 
PV cells
    542       68       0.3       6,624       838       1.7  
 
PV cell processing
                      19,461       2,462       5.0  
                                     
   
Total
    166,178       21,024       100.0 %     386,239       48,866       100.0 %
                                     
       We commenced manufacturing and selling PV modules in January 2005, and had net revenue of RMB165.6 million (US$20.9 million) in 2005 and RMB360.1 million (US$45.6 million)

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in the nine months ended September 30, 2006. During this period, we experienced both increased sales volumes and increases in the average selling prices for our PV modules.
       We began manufacturing PV cells in November 2005, primarily to supply our PV module production. As a result, we only sold a small number of the total PV cells we manufactured to certain customers to maintain business relationships. Since our business strategy is focused on increasing our own output of PV modules on a cost-efficient basis, we plan to continue to use the substantial majority of our PV cells for use in manufacturing our PV modules and will maintain our sale of PV cells to third parties at a relatively low level. In 2005 and the nine months ended September 30, 2006, our net revenue from the sale of PV cells was RMB0.5 million (US$0.07 million) and RMB6.6 million (US$0.8 million), respectively.
       In the nine months ended September 30, 2006, we provided services to certain of our silicon suppliers to process their silicon wafers into PV cells. We record as our net revenue from such services the gross revenue from sales of PV cells less the purchase cost of the silicon wafers. We recorded RMB19.5 million (US$2.5 million) as our net revenue from these services in this period. We plan to continue providing these services only on a selective basis to maintain relationships with certain of our silicon suppliers, as well as to optimize utilization of our manufacturing facilities, particularly during periods in which there is a shortage of silicon and silicon wafers.
       We currently depend on a limited number of customers for a high percentage of our net revenue. In 2005 and the nine months ended September 30, 2006, customers accounting for more than 10% of our net sales accounted for an aggregate of 50.8% and 76.4%, respectively, of our net revenue. From a geographic standpoint, Europe, particularly Germany, has been our largest market. In 2005 and the nine months ended September 30, 2006, our sales to European customers accounted for 79.7% and 93.7%, respectively, of our net revenue, with German customers accounting for 76.2% and 45.7%, respectively, in such periods. Although we anticipate that our dependence on a limited number of customers in a few concentrated geographic regions will continue for the foreseeable future, we are actively expanding our customer base and geographic coverage through various marketing efforts, especially in other developing European PV markets, such as Spain, Italy and Austria.
       Sales to our customers are typically made through non-exclusive, short-term arrangements. We require payment of deposits of a certain percentage of the contract price from our customers which we record under customer deposits in our consolidated balance sheets. Once the revenue recognition criteria are met, we then recognize these payments as net revenue. As of December 31, 2005 and September 30, 2006, we had received deposits of RMB55.3 million (US$7.0 million) and RMB32.6 million (US$4.1 million), respectively.

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Costs of Revenue and Operating Expenses
Cost of Revenue
       The following table sets forth our cost of revenue and operating expenses and these amounts as percentages of our net revenue for the periods indicated.
                                                     
    Year Ended   Nine Months Ended
    December 31, 2005   September 30, 2006
         
        Percentage of       Percentage of
    Amount   Net Revenue   Amount   Net Revenue
                 
    (RMB)   (US$)       (RMB)   (US$)    
    (In thousands, except percentages)
Cost of revenue
    (139,903 )     (17,700 )     84.2%       (267,429 )     (33,834 )     69.2%  
                                     
Operating expenses:
                                               
 
Selling expenses
    (5,258 )     (665 )     3.2       (6,023 )     (762 )     1.6  
 
General and administrative expenses
    (4,112 )     (520 )     2.5       (31,585 ) (1)     (3,996 )     8.2  
 
Research and development expenses
    (750 )     (95 )     0.4       (2,723 )     (344 )     0.7  
                                     
   
Total
    (10,120 )     (1,280 )     6.1%       (40,331 )     (5,102 )     10.5%  
                                     
 
(1)  In the nine months ended September 30, 2006, we recorded a share compensation charge of RMB10.3 million (US$1.3 million), which related to a sale of our ordinary shares to Linyang Electronics, a company controlled by our chairman and chief executive officer, at less than fair market value by other shareholders of our company and a share compensation charge of RMB12.1 million (US$1.5 million) as a result of the issuance of series A convertible preference shares to Good Energies Investments Limited.
       Our cost of revenue includes the cost of raw materials used for our PV module and PV cell production and PV cell processing, such as silicon wafers, and other direct raw materials and components, including ethylene vinyl acetate, triphenyltin, tempered glass, connecting bands, welding bands, silica gel, aluminum alloy and junction boxes. The costs relating to providing the PV cell processing services are recorded as service processing costs within cost of revenue. We expect the cost of silicon wafers, our primary raw material for the manufacturing of PV products, will continue to constitute a substantial portion of our cost of revenue in the near future.
       Other items contributing to our cost of revenue are direct labor, which includes salaries and benefits for personnel directly involved in manufacturing activities, manufacturing overhead, which consists of utility, maintenance of production equipment, shipping and handling costs for products sold, and other support expenses associated with the manufacturing of our PV products and depreciation and amortization of manufacturing equipment and facilities.
       We expect cost of revenue to increase as we increase our capacity and production volume. Potential increases in our suppliers’ cost of silicon wafers as well as the potential increase in shipping costs for our PV products may also contribute to higher cost of revenue.
       Silicon wafers are the most important raw materials for our products. We record the purchase price of silicon wafers and other raw materials initially as inventory in our consolidated balance sheets, and then transfer this amount to cost of revenue after the raw materials are consumed in our manufacturing process and the finished products are sold and delivered. As of December 31, 2005 and September 30, 2006, our inventory of raw materials totaled

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RMB65.0 million (US$8.2 million) and RMB187.6 million (US$23.7 million), respectively, of which RMB58.2 million (US$7.3 million) and RMB168.8 million (US$21.4 million), respectively, represent silicon and silicon wafers. Silicon suppliers generally require prepayments from us in advance of delivery. We classify such prepayments as advances to suppliers and record such prepayments under current assets in our consolidated balance sheets. However, if such suppliers fail to fulfill their delivery obligations under the silicon supply agreements, we may not be able to recover such prepayments and would suffer losses, which may have a significant impact on our financial condition and results of operations.
Operating Expenses
       Our operating expenses consist of selling expenses, general and administrative expenses and research and development expenses.
Selling Expenses
       Our selling expenses primarily consist of warranty costs, advertising and other promotional expenses, and salaries, commissions, traveling expenses and benefits for our sales and marketing personnel. As we intend to pursue an aggressive marketing strategy to promote our products in different geographic markets, we expect that our selling expenses will increase for the immediate future. In 2005 and the nine months ended September 30, 2006, our selling expenses were RMB5.3 million (US$0.7 million) and RMB6.0 million (US$0.8 million), respectively.
       We provide a two-year unlimited warranty for technical defects, a 10-year warranty against declines of greater than 10%, and a 20 or 25-year warranty against declines of greater than 20%, in the initial power generation capacity of our PV modules. As a result, we bear the risk of extensive warranty claims for a long period after we have sold our products and recognized net revenue. Since we began selling PV modules in February 2005, none of our PV products has been in use for more than two years. We consider various factors when determining the likelihood of product defects, including an evaluation of our quality controls, technical analysis, industry information on comparable companies and our own experience. As of December 31, 2005 and September 30, 2006, our accrued warranty costs totaled RMB1.5 million (US$0.2 million) and RMB5.1 million (US$0.6 million), respectively. Since our products have been in use for only a relatively short period, our assumptions regarding the durability and reliability of our products may not be accurate. Since we began to sell our products in 2005, we provided RMB1.6 million (US$0.2 million) and RMB3.6 million (US$0.5 million) in warranty costs in 2005 and the nine months ended September 30, 2006, respectively.
General and Administrative Expenses
       Our general and administrative expenses primarily consist of salaries and benefits of our administrative staff, depreciation charges of fixed assets used for administrative purposes, as well as administrative office expenses including, among others, consumables, traveling expenses, insurance and share compensation expenses. In 2005 and the nine months ended September 30, 2006, our general and administrative expenses were RMB4.1 million (US$0.5 million) and RMB31.6 million (US$4.0 million), respectively. The significant increase in these expenses during the nine months ended September 30, 2006 was mainly due to a RMB12.1 million (US$1.5 million) share compensation charge as a result of the issuance of series A convertible preference shares to Good Energies Investments Limited. An additional RMB10.3 million (US$1.3 million) in share compensation expenses was recorded relating to a sale of our ordinary shares to Linyang Electronics, a company controlled by our chairman and chief executive officer, at less than fair market value by other shareholders of our company. See notes 13 and 15 to our consolidated financial statements included elsewhere in this prospectus.

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       After this offering, we will become a public company and will incur a significantly higher level of legal, accounting and other expenses than we did as a private company and, as a result, our general and administrative expenses may increase significantly. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC and the Nasdaq Global Market have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
Research and Development Expenses
       Our research and development expenses primarily consist of salaries and benefits of our research and development staff, other expenses including depreciation, materials used for research and development purpose, and the travel expenses incurred by our research and development staff or otherwise in connection with our research and development activities. In 2005 and the nine months ended September 30, 2006, our research and development expenses were RMB0.7 million (US$0.1 million) and RMB2.7 million (US$0.3 million), respectively.
Share Compensation Expenses
       We adopted our 2006 equity incentive plan in November 2006 pursuant to which we may issue up to 10,799,685 ordinary shares upon exercise of awards granted under the plan. As of November 30, 2006, options to purchase 8,012,998 ordinary shares have been granted under this plan at an exercise price of US$1.80 per ordinary share. As a result of these option grants and potential future grants under this plan, we expect to incur significant share compensation expenses in future periods. As of the date of this prospectus, we plan to use US$2.50 per ordinary share, the per-ordinary share equivalent of the estimated initial public offering price of US$12.50 per ADS (the mid-point of our estimated initial public offering price range), based on an ordinary share-to-ADS ratio of 5:1, as the underlying ordinary share value when calculating the total share-based compensation expenses. Based on our preliminary evaluation, we have estimated the total share-based compensation expenses to be RMB76.9 million (US$9.7 million). We expect to recognize this amount ratably over the vesting period. The vesting period ranges from six months to five years commencing December 2006. Based on the current estimates, we will recognize 2.4%, 26.4%, 24.3%, 21.5%, 13.6% and 11.8% of this amount during the three months ended December 31, 2006 and each of the year ended December 31, 2007, 2008, 2009, 2010 and 2011, respectively. Given the preliminary nature of our estimates, our actual share-based compensation expenses may be materially different from our current expectations upon further evaluation. We have adopted SFAS No. 123-R for the accounting treatment of our share option plan and we will record compensation expenses based on the fair value of the award, which is determined with the assistance of a third party valuer. See “— Recent Accounting Pronouncements” and “Management — 2006 Equity Incentive Plan.”
       In 2005, we recorded RMB0.5 million (US$0.06 million) as share compensation expenses relating to shares subscribed for by Linyang Electronics in connection with a rights offering. In the nine months ended September 30, 2006, we recorded share compensation expenses of RMB10.3 million (US$1.3 million), which was reflected entirely in our general and administrative expenses for that period, relating to a sale of our ordinary shares to Linyang Electronics, a company controlled by our chairman and chief executive officer, at less than fair market value by other shareholders of our company, and a share compensation charge of RMB12.1 million (US$1.5 million) as a result of the issuance of series A convertible preference shares to Good Energies Investments Limited. See “— Operating Expenses — General and Administrative Expenses” and notes 13 and 15 to our consolidated financial statements included elsewhere in this prospectus.

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Taxation
PRC Enterprise Income Tax
       PRC enterprise income tax is calculated based on taxable income determined under PRC accounting principles. In accordance with the PRC Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises, or the Income Tax Law, and the related implementing rules, foreign invested enterprises incorporated in the PRC are generally subject to an enterprise income tax rate of 33%, consisting of 30% state enterprise income tax and 3% local enterprise income tax. The Income Tax Law and the related implementing rules provide certain favorable tax treatments to foreign invested enterprises. Production-oriented foreign-invested enterprises, which are scheduled to operate for a period of ten years or more, are entitled to exemption from income tax for two years commencing from the first profit-making year and 50% reduction of income tax for the subsequent three years. In certain special areas such as coastal open economic areas, special economic zones and economic and technology development zones, foreign-invested enterprises are entitle to reduced enterprise income tax rates, namely, in coastal open economic areas, the tax rate applicable to production-oriented foreign-invested enterprises is 24%; in special economic zones, the rate is 15%. In addition, according to the Income Tax Law, local governments at the provincial level are authorized to waive or reduce the 3% local income tax on foreign-invested enterprises that operate in an encouraged industry.
       In accordance with the current PRC Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises and the related implementing rules, as a foreign-invested production-oriented enterprise established in Qidong, Nantong City, a coastal open economic area, Linyang China is currently subject to a preferential state enterprise income tax rate of 24%. In addition, under these taxation laws and regulations, Linyang China is exempted from state and local enterprise income tax for 2005 and 2006 and will be taxed at a reduced state enterprise income tax rate of 12% for the years of 2007, 2008 and 2009 and at a rate of 24% from 2010 onward. From 2005 until the end of 2009, Linyang China is also exempt from the 3% local income tax applicable to foreign-invested enterprises in Jiangsu Province. From 2010 onward, Linyang China will not be exempt from the 3% local enterprise income tax. In addition, under relevant PRC tax rules and regulations, Linyang China may apply for a two-year income tax exemption on income generated from its increased capital resulting from our contribution to Linyang China of funds we received through issuances of series A convertible preference shares in a private placement in June and August 2006, and a reduced tax rate of 12% for the three years thereafter. We are currently in the process of applying for such preferential tax treatment. In addition, our subsidiaries, Shanghai Linyang and Sichuan Jiayang, are subject to an enterprise income tax rate of 33%, consisting of 30% enterprise income tax and 3% local enterprise income tax.
       If Linyang China no longer qualifies for the preferential enterprise income tax rate, we will consider available options under applicable law that would enable us to qualify for alternative preferential tax treatment. To the extent we are unable to offset the expiration of this preferential tax treatment with other tax benefits, the expiration of this preferential tax treatment will cause our effective tax rate to increase.
Critical Accounting Policies and Estimates
       We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of, among other things, assets, liabilities, revenue and expenses. We base our estimates on our own historical experience and on various other factors that we believe to be relevant under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of

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our financial statements as their application places the most significant demands on our management’s judgment.
Revenue Recognition
       Our primary business activity is to produce and sell PV modules. We periodically, upon special request from customers, sell an insignificant amount of PV cells in the form of cells. We record revenue related to the sale of PV modules or PV cells when the criteria of SEC Staff Accounting Bulletin No. 104, “Revenue Recognition,” are met. These criteria include all of the following; persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured.
       More specifically, our sales arrangements are evidenced by either master sales agreements or by individual sales agreements for each transaction. The shipping terms of our sales arrangements are generally “free-on-board” shipping point, whereby the customer takes title and assumes the risks and rewards of ownership of the products upon delivery to the shipper. Other than warranty obligations, we do not have any commitments or obligations to deliver additional products or services to our customers. The product sales price agreed to at the order initiation date is final and not subject to adjustment. We do not accept sales returns and do not provide customers with price protection. Generally, our customers pay all or a substantial portion of the product sales price prior to shipment. We assess customer’s creditworthiness before accepting sales orders. Historically we have not experienced any credit losses related to sales. Based on the above, we record revenue related to product sales upon transfer of title, which in almost all cases occurs upon delivery of the product to the shipper.
       In the event we pay the shipping costs for the convenience of the customer, the shipping costs are included in the amount billed to the customer. In these cases, sales revenue includes the amount of shipping costs passed on to the customer. We record the shipping costs incurred in our cost of revenue.
       We periodically enter into service arrangements to process raw materials into PV cells. For these PV cell service arrangements, we purchase raw material from a customer and contemporaneously agree to sell a specified quantity of PV cells back to the same customer. The quantity of PV cells sold back to the customers under these processing arrangements is consistent with the amount of raw materials purchased from the customer based on current production conversion rates. We record the amount of revenue from these processing transactions based on the amount received for PV cells sold less the amount paid for the raw materials purchased from the customer. The revenue recognized is recorded as processing service revenue and the production costs incurred related to providing the processing services are recorded as service processing costs within cost of revenue. These sales are subject to all of the above-noted accounting policy disclosure relating to revenue recognition.
       Revenue is recognized net of all value-added taxes imposed by governmental authorities and collected by us from customers concurrent with revenue-producing transactions.
Fixed Assets, Net
       Fixed assets are stated at cost net of accumulated depreciation and are depreciated using the straight-line method over the estimated useful lives of the assets, as follows:
         
Buildings
    20  years  
Plant and machinery
    10  years  
Furniture, fixtures and office equipment
    5 years  
Computer software
    5 years  
Motor vehicles
    5 years  

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       We periodically reassess the useful lives of our fixed assets and in doing so we take into consideration any relevant changes in technology, the industry and the manner in which we plan to use the assets.
       Repair and maintenance costs are charged as expenses when incurred, whereas the cost of renewals and betterment that extend the useful life of fixed assets are capitalized as additions to the related assets. Retirement, sale and disposals of assets are recorded by removing the cost and accumulated depreciation with any resulting gain or loss reflected in the consolidated statement of operations.
       Cost incurred in constructing new facilities, including progress payments, interest and other costs relating to the construction, are capitalized and transferred to fixed assets on completion. Interest capitalized at September 30, 2006 totaled RMB0.3 million (US$0.04 million).
Warranty Costs
       Our standard warranty on PV modules sold to customers provides for a two-year unlimited warranty against technical defects, a 10-year warranty against a decline from initial power generation capacity of more than 10% and a 20 to 25-year warranty against a decline from initial power generation capacity of more than 20%. We consider various factors in determining the likelihood of product defects, including our quality controls, technical analyses, industry information on comparable companies and our own experience. Based on those considerations and our ability and intention to provide refunds for defective products, we have accrued for warranty costs for the two-year unlimited warranty against technical defects based on 1% of revenue derived from the sales of our PV modules. No warranty cost accrual has been recorded for the 10-year and 20 to 25-year warranties because we have determined the likelihood of claims arising from these warranties to be remote based on internal and external testing of the PV modules and the quality control procedures in place in the production process. The basis for the warranty accrual will be reviewed periodically based on our actual experience. Apart from our standard warranty, we do not sell any other warranty coverage.
Impairment of Long-Lived Assets
       We evaluate our long-lived assets or asset group for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying amount of a group of long-lived asset group may not be recoverable. Such a determination of recoverability requires a careful analysis of all relevant factors affecting the assets or asset group and involves significant judgment on the part of our management. When these events occur, we evaluate the impairment by comparing the carrying amount of the assets to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. The estimation of future undiscounted net cash flows requires significant judgments regarding such factors as future silicon prices, production levels and PV product prices. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we would recognize an impairment loss based on the excess of the carrying amount of the asset group over fair value.
Beneficial Conversion Features
       We have evaluated the embedded conversion option in our series A convertible preference shares to determine if there are any embedded derivatives requiring bifurcation and to determine if there are any beneficial conversion features. No beneficial conversion feature was recorded because the fair value per ordinary share at the commitment date was less than the conversion price. When estimating the fair value of our ordinary shares, we review both internal and external sources of information. As there was no public trading market for the underlying shares at the

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date of measurement, the sources used to determine the fair market value of the underlying shares are subjective in nature, and involve significant judgment and estimation processes.
Share Compensation
       For share transactions with, or awards granted to, directors, employees or other service providers during the pre-initial public offering period, we recorded compensation expenses equal to the difference between the consideration paid and the fair value of the ordinary shares. Fair value is determined by management with the assistance of an independent third party valuer. The valuation of privately held securities involves significant judgment and estimation processes.
Controls and Procedures
       Our auditors, an independent registered public accounting firm, in connection with their audit of our consolidated financial statements for the period from August 27, 2004 (inception) to December 31, 2004 and the year ended December 31, 2005, noted and communicated to us certain significant deficiencies in our internal control over financial reporting that were deemed to constitute “material weaknesses” in our internal control over financial reporting as defined in standards established by the U.S. Public Company Accounting Oversight Board, or the PCAOB. A material weakness is defined by the PCAOB as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement in the annual or interim financial statements will not be prevented or detected. A “significant deficiency” is a control deficiency, or combination of control deficiencies, that adversely affects the company’s ability to initiate, authorize, record, process or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement in the company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. A “control deficiency” exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
       These material weaknesses previously identified by our independent auditors consisted of inadequate independent oversight and inadequate personnel resources, processes and documentation to address reporting requirements under U.S. GAAP and relevant SEC regulations. In order to remedy these material weaknesses, we adopted and implemented several measures to improve our internal control over financial reporting. In addition to appointing a new chief financial officer in July 2006 to lead our company’s financial management and a new principal accounting officer in August 2006, both of whom have extensive audit experience and U.S. GAAP knowledge, we established in November 2006 an audit committee composed of a majority of independent directors to oversee the accounting and financial reporting processes as well as external and internal audits of our company.
       In the course of auditing our consolidated financial statements as of and for the nine months ended September 30, 2006, our auditors noted improvements in our internal controls, as well as certain circumstances in which our financial statement closing processes could and should be further enhanced that collectively constituted a material weakness in our internal control over financial reporting. Specifically, written intentions to grant share options to certain of our employees should have been disclosed in the previously issued December 31, 2004, December 31, 2005 and March 31, 2006 financial statements as a subsequent event. However, our management believes that none of the specific deficiencies identified has individually or collectively had a material adverse effect on our financial statements, and these deficiencies were not related to any fraudulent acts.
       To address this material weakness, we have undertaken additional initiatives to strengthen our control over financial reporting generally and specifically to improve our U.S. GAAP financial

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closing-related policies and procedures. These initiatives have included hiring additional qualified professionals with relevant experience for our finance and accounting department, and increasing the level of interaction among our management, audit committee independent auditors and other external advisors. We are also in the process of implementing additional measures to further make improvements, including providing additional specialized training for our existing personnel. However, the process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations. See “Risk Factors — Risks Relating to Our Business — Our independent auditors, in the course of auditing our consolidated financial statements noted several significant deficiencies in our internal controls that were deemed to constitute material weaknesses. If we fail to maintain an effective system of internal control over financial reporting, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected. In addition, investor confidence and the market price of our ADSs may be adversely impacted if we or our independent auditors are unable to attest to the adequacy of the internal control over financial reporting of our company in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.”
Consolidated Results of Operations
Quarterly Results of Operations Data
       The following table sets forth selected unaudited quarterly consolidated statement of operations data for each of our seven most recent fiscal quarters.
                                                             
    Three Months Ended
     
    March 31,   June 30,   September 30,   December 31,   March 31,   June 30,   September 30,
    2005   2005   2005   2005   2006   2006   2006
                             
    (In thousands of Renminbi)
Net revenue:
                                                       
 
PV modules
    5       20,297       66,183       79,151       93,551       85,769       180,834  
 
PV cells
                      542       1,547       5,025       52  
 
PV cell processing
                            7,373       10,216       1,872  
                                           
   
Total
    5       20,297       66,183       79,693       102,471       101,010       182,758  
                                           
Cost of revenue:
                                                       
 
PV modules
    (549 )     (17,373 )     (57,706 )     (63,853 )     (62,867 )     (63,081 )     (129,919 )
 
PV cells
                      (422 )     (1,437 )     (4,040 )     (71 )
 
PV cell processing
                            (2,361 )     (2,773 )     (880 )
                                           
   
Total
    (549 )     (17,373 )     (57,706 )     (64,275 )     (66,665 )     (69,894 )     (130,870 )
                                           
Gross profit (loss)
    (544 )     2,924       8,477       15,418       35,806       31,116       51,888  
                                           
Operating expenses:
                                                       
 
Selling expenses
    (82 )     (492 )     (2,079 )     (2,605 )     (1,581 )     (1,536 )     (2,906 )
 
General and administrative expenses
    (633 )     (667 )     (1,411 )     (1,401 )     (1,609 )     (12,782 ) (1)     (17,194 )(2)
 
Research and development expenses
    (7 )     (89 )     (319 )     (335 )     (360 )     (820 )     (1,543 )
                                           
   
Total
    (722 )     (1,248 )     (3,809 )     (4,341 )     (3,550 )     (15,138 )     (21,643 )
                                           

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    Three Months Ended
     
    March 31,   June 30,   September 30,   December 31,   March 31,   June 30,   September 30,
    2005   2005   2005   2005   2006   2006   2006
                             
    (In thousands of Renminbi)
Operating profit (loss)
    (1,266 )     1,676       4,668       11,077       32,256       15,978       30,245  
Interest expenses
                      (123 )     (361 )     (1,417 )     (2,077 )
Interest income
    9       6       9       71       31       72       389  
Exchange loss
          (385 )     (550 )     (833 )     (10 )     112       (2,225 )
Other income
          188       27             29       701       (244 )
Government grant
                            540       100        
Change in fair value of embedded foreign currency derivative
                            498       68       (1,648 )
Other expenses
          (11 )     (196 )     (53 )     31       (265 )     (240 )
                                           
Net income (loss) before tax
    (1,257 )     1,474       3,958       10,139       33,014       15,349       24,200  
Income tax benefit
          12       38       46       112       150       311  
Minority interest
                                  53       (319 )
                                           
Net income (loss)
    (1,257 )     1,486       3,996       10,185       33,126       15,552       24,193  
                                           
Net income (loss) attributable to ordinary shares
    (1,257 )     1,486       3,996       10,185       33,126       15,552       20,517  
                                           
 
(1)  In the three months ended June 30, we recorded share compensation expenses of RMB10.3 million (US$1.3 million) relating to a sale of our ordinary shares at less than fair market value to Linyang Electronics, a company controlled by our chairman and chief executive officer, by other shareholders of our company.
 
(2)  In the three months ended September 30, 2006, we recorded share compensation expenses of RMB12.1 million (US$1.5 million) as a result of the issuance of series A convertible preference shares to Good Energies Investments Limited.
                                   
    Three Months Ended
     
    December 31,   March 31,   June 30,   September 30,
    2005   2006   2006   2006
                 
Other Operational Data
                               
Amount of PV cells produced (including PV cell processing) (in MW)
    1.0       3.9       5.0       7.3  
Amount of PV modules produced (in MW):
    2.4       2.8       2.9       5.7  
Average selling price (in US$/W):
                               
 
PV cells(1)
    3.00       2.82       3.10       1.68  
 
PV modules(2)
    3.95       3.98       4.00       4.04  
Average conversion efficiency rate of monocrystalline cells
    15.8 %     16.0 %     16.1 %     16.5 %
Minimum PV cell thickness (in mm)(3)
    NA       240       220       200  
 
(1)  All sales contracts for PV cells are denominated in Renminbi. Translations of Renminbi into U.S. dollars were made at period end exchange rates.
 
(2)  Represents the average unit selling price in U.S. dollars specified in the sales contracts for PV modules.
 
(3)  Represents the minimum cell thickness that can be mass-produced as of the end of that period.
Net Revenue
       Our net revenue was RMB20.3 million, RMB66.2 million, RMB79.7 million, RMB102.5 million, RMB101.0 million and RMB182.8 million in the three months ended June 30, 2005, September 30, 2005, December 31, 2005, March 31, 2006, June 30, 2006 and September 30, 2006, respectively.

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Net Revenue from PV Modules
       PV module production accounts for a substantial majority of our net revenue in each quarter. We also provide PV cell processing services, which account for a much smaller portion of our net revenue in each quarter. Our net revenue from the sale of PV modules was RMB20.3 million, RMB66.2 million, RMB79.2 million, RMB93.6 million, RMB85.8 million and RMB180.8 million in the three months ended June 30, 2005, September 30, 2005, December 31, 2005, March 31, 2006, June 30, 2006 and September 30, 2006, respectively. This represented quarterly growth rates of 226.1%, 19.6%, and 18.2% over the three-month periods ended September 30, 2005, December 31, 2005 and March 31, 2006, respectively. Our net revenue from the sale of PV modules in the three months ended June 30, 2006 represented a decrease of 9.1% from RMB93.6 million in the three months ended March 31, 2006. However, our net revenue from PV modules subsequently increased by 110.8% to RMB180.8 million in the three months ended September 30, 2006. The growth in the three-month periods ended September 30, 2005, December 31, 2005 and March 31, 2006 was mainly due to the ramp-up of our operations during these periods and the efforts of our sales and marketing teams to increase unit sales of our PV modules. The growth in the three months ended September 30, 2006 was primarily due to the commencement of the commercial operations of our second PV cell production line in September 2006, which resulted in a significant increase in the production and sales volume of our PV modules. In addition, the increase in average conversion efficiency rate of monocrystalline PV cells from 16.1% in the three months ended June 30, 2006 to 16.5% in the three months ended September 30, 2006 contributed to the significant increase in our net revenue between these periods. To a lesser extent, the growth was also due to increases in the average selling prices of our PV modules, which increased from US$4.00 per watt in the three months ended June 30, 2006 to US$4.04 per watt in the three months ended September 30, 2006. The decrease from the three months ended March 31, 2006 to the three months ended June 30, 2006 was primarily due to our increased use of our PV cell production line for PV cell processing during that period.
Net Revenue from PV Cells
       Our net revenue from the sale of PV cells was RMB0.5 million, RMB1.5 million, RMB5.0 million and RMB0.05 million in the three months ended December 31, 2005, March 31, 2006, June 30, 2006 and September 30, 2006, respectively. The decrease in our net revenue from the sale of PV cells in the three months ended September 30, 2006 was mainly attributable to the fact that we used the substantial majority of the PV cells we produced for our module production, and we only sold a limited amount of these cells to third parties on a selective basis. We do not expect that sales of PV cells to third parties will constitute a significant portion of our net revenue in the future as we plan to continue to use our own cells primarily for the manufacture of our PV modules.
Net Revenue from PV Cell Processing
       Our net revenue from the PV cell processing services increased from RMB7.4 million in the three months ended March 31, 2006 to RMB10.2 million in the three months ended June 30, 2006, principally as a result of the increased use of our PV cell production line for PV cell processing. Net revenue from PV cell processing decreased from RMB10.2 million in the three months ended June 30, 2006 to RMB1.9 million in the three months ended September 30, 2006, mainly due to the decreased PV cell processing services we provided during this period.
Cost of Revenue
       Our cost of revenue showed corresponding increases over these periods as a result of the ramp-up of our PV module and PV cell manufacturing operations. In particular, our cost of revenue increased significantly on a quarterly basis by 232.2% and 11.4%, respectively, over the three-month periods ended September 30, 2005 and December 31, 2005, but remained relatively

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flat in the two three-month periods ended March 31, 2006 and June 30, 2006, and increased by 87.2% in the three months ended September 30, 2006.
Cost of Revenue for PV Modules
       Our cost of revenue relating to PV modules increased from RMB17.4 million in the three months ended June 30, 2005 to RMB57.7 million in the three months ended September 30, 2005 to RMB63.9 million in the three months ended December 31, 2005. This represented quarterly growth rates of 232.2% and 10.7% over these periods. Our cost of revenue for PV modules remained relatively flat at RMB62.9 million in the three months ended March 31, 2006 and RMB63.1 million in the three months ended June 30, 2006, despite increases in our revenue from PV modules, mainly due to the fact that all of our PV module products in that period were manufactured using our own PV cells, which allowed us to significantly reduce our related costs. Our cost of revenue relating to PV modules increased to RMB129.9 million in the three months ended September 30, 2006, principally due to the significant increase in the sales volume of our PV modules.
Cost of Revenue for PV Cells
       Our cost of revenue relating to PV cells was RMB0.4 million, RMB1.4 million, RMB4.0 million and RMB0.07 million in the three months ended December 31, 2005, March 31, 2006, June 30, 2006 and September 30, 2006, respectively. The changes in our cost of revenue relating to PV cells were mainly due to the fluctuations in sales of PV cells.
Cost of Revenue for PV Cell Processing
       In the three months ended March 31, June 30 and September 30, 2006, our cost of revenue relating to our PV cell processing services was RMB2.4 million, RMB2.8 million and RMB0.9 million, respectively, primarily consisting of the cost of raw materials other than silicon we used for the processing and related labor costs. The changes in these costs relate primarily to the fluctuations in our PV cell processing sales.
Gross Profit and Gross Margin
       PV module production accounts for a substantial majority of our profit in each quarter. We also provide PV cell processing services, which account for a much smaller portion of our profit in each quarter. Our gross profit increased from RMB2.9 million in the three months ended June 30, 2005 to RMB8.5 million in the three months ended September 30, 2005. This significant increase was primarily due to increased production and sales volume of our PV modules while the cost of revenue as a percentage of our net revenue remained relatively stable. Our gross profit in the three months ended December 31, 2005 was RMB15.4 million, and mainly reflected increased sales of PV modules, which was offset by both the losses from the PV cell production line in its initial ramp-up phase and the increased silicon costs we incurred during that period. Our gross profit in the three months ended March 31, 2006 increased to RMB35.8 million, primarily due to the ramp-up of our PV cell operations and use of our own PV cells for module production, which resulted in higher profit margin for our PV module operations. This increase was also attributable to the increased efficiencies in operating our PV cell production line. Gross profit decreased to RMB31.1 million in the three months ended June 30, 2006, principally because of the increased costs of silicon wafers and our increased use of our production line for PV cell processing during that period, which reduced the available capacity for PV module production. Gross profit increased to RMB51.9 million in the three months ended September 30, 2006, primarily due to our second PV cell production line commencing commercial operations in September 2006, which resulted in an increase in the production and sales volume of our PV modules. Our gross margin in the three months ended June 30, 2005, September 30, 2005,

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December 31, 2005, March 31, 2006, June 30, 2006 and September 30, 2006 was 14.4%, 12.8%, 19.3%, 34.9%, 30.8% and 28.4%, respectively.
Operating Expenses
       Our operating expenses, consisting of selling expenses, general and administrative expenses and research and development expenses, increased in the three months ended March 31, 2005, the three months ended June 30, 2005 and the three months ended September 30, 2005. These increases corresponded mainly to the ramp-up of our sales and marketing team and our marketing efforts, as well as the general increase in the size of our operations. The increase in our selling expenses from RMB2.1 million in the three months ended September 30, 2005 to RMB2.6 million in the three months ended December 31, 2005 was primarily due to the increase in our marketing expenses, including the expenses relating to our participation in a trade show in Shanghai at the end of 2005. The decrease in our operating expenses in the three months ended March 31, 2006 from RMB4.3 million to RMB3.6 million was primarily due to the fact that we did not incur such marketing expenses in the three months ended March 31, 2006. Our overall operating expenses in the three months ended June 30, 2006 increased to RMB15.1 million mainly due to the recording of share compensation expenses of RMB10.3 million, which related to a sale of our ordinary shares to Linyang Electronics, a company controlled by our chairman and chief executive officer, at less than fair market value by other shareholders of our company. Our operating expenses increased to RMB21.6 million in the three months ended September 30, 2006 from RMB15.1 million in the three months ended June 30, 2006, primarily due to a share compensation charge of RMB12.1 million as a result of the issuance of series A convertible preference shares to Good Energies Investments Limited and the increased costs we incurred for hiring new management and research and development personnel.
Operating Profit (Losses)
       As a result of the foregoing, after experiencing operating losses in the first three months of our operations, we recorded operating profit of RMB1.7 million, RMB4.7 million, RMB11.1 million, RMB32.3 million, RMB16.0 million and RMB30.2 million in the three months ended June 30, 2005, September 30, 2005, December 31, 2005, March 31, 2006, June 30, 2006 and September 30, 2006, respectively. The decrease in the operating profit in the three months ended June 30, 2006 was mainly due to our increased use of our production line for PV cell processing during that period and a share compensation charge of RMB10.3 million. Operating profit increased from the three months ended June 30, 2006 to the three months ended September 30, 2006, primarily due to the commencement of our second PV cell production line, which was partially offset by the RMB12.1 million of share compensation expenses that resulted from the issuance of series A convertible preference shares to Good Energies Investments Limited.
Other Income (Expenses)
       We incurred interest expenses of RMB0.1 million, RMB0.4 million, RMB1.4 million and RMB2.1 million relating to our outstanding borrowings in the three months ended December 31, 2005, March 31, 2006, June 30, 2006 and September 30, 2006, respectively. In the three months ended June 30, 2005, September 30, 2005, December 31, 2005, March 31, 2006, June 30, 2006 and September 30, 2006, we also recorded exchange losses of RMB0.4 million, RMB0.6 million, RMB0.8 million, RMB0.01 million, RMB0.1 million and RMB2.2 million, respectively. In the three months ended March 31, June 30 and September 30, 2006, we recorded changes in fair value of embedded foreign currency derivatives in our sales contracts of RMB0.5 million, RMB0.07 million and negative RMB1.6 million, respectively, which related to our fixed-price arrangements denominated in U.S. dollars. In the three months ended March 31, 2006 and June 30, 2006, we had government grants of RMB0.5 million and RMB0.1 million, respectively.

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Net Income
       As a result of the foregoing, we had net income of RMB1.5 million, RMB4.0 million, RMB10.2 million, RMB33.1 million, RMB15.6 million and RMB24.2 million in the three months ended June 30, 2005, September 30, 2005, December 31, 2005, March 31, 2006, June 30, 2006 and September 30, 2006, respectively. The increase in our net income in the three months ended June 30, 2005, September 30, 2005, December 31, 2005 and March 31, 2006 was primarily due to the increased sales of our PV products coupled with the increased efficiencies in operating our PV cell production line, the use of our own PV cells for our PV module production since November 2005 and improved economies of scale in our operations. The decrease in our net income in the three months ended June 30, 2006 was primarily due to share compensation expenses of RMB10.3 million during that period. Our net income in the three months ended September 30, 2006 was lower than the three months ended March 31, 2006, primarily due to a share compensation charge of RMB12.1 million as a result of the issuance of series A convertible preference shares to Good Energies Investments Limited in August 2006.
Net Income (Loss) Attributable to Ordinary Shares
       The net income attributable to ordinary shares in the three months ended June 30, 2005, September 30, 2005, December 31, 2005, March 31, 2006, June 30, 2006 and September 30, 2006 was RMB1.5 million, RMB4.0 million, RMB10.2 million, RMB33.1 million, RMB15.6 million and RMB20.5 million, respectively. The net income attributable to ordinary shares in the three months ended September 30, 2006 reflects the deemed dividend of RMB3.7 million to holders of series A convertible preference shares.

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Results of Operations in the Period from August 27 (Inception) to December 31, 2004, the Year Ended December 31, 2005 and the Nine Months Ended September 30, 2005 and 2006
       The following table sets forth our summary consolidated statement of operations for the periods indicated:
                                                     
    From August 27       Nine Months Ended September 30,
    (Inception) to   Year Ended    
    December 31,   December 31,        
    2004   2005   2005   2006
                 
    (RMB)   (RMB)   (US$)   (RMB)   (RMB)   (US$)
    (in thousands)
Net revenue:
                                               
 
PV modules
          165,636       20,956       86,484       360,154       45,566  
 
PV cells
          542       68             6,624       838  
 
PV cell processing
                            19,461       2,462  
                                     
   
Total
          166,178       21,024       86,484       386,239       48,866  
                                     
Cost of revenue:
                                               
 
PV modules
          (139,481 )     (17,647 )     (75,627 )     (255,867 )     (32,371 )
 
PV cells
          (422 )     (53 )           (5,548 )     (702 )
 
PV cell processing
                            (6,014 )     (761 )
   
Total
          (139,903 )     (17,700 )     (75,627 )     (267,429 )     (33,834 )
                                     
Gross profit
          26,275       3,324       10,857       118,810       15,032  
                                     
Operating expenses:
                                               
 
Selling expenses
          (5,258 )     (665 )     (2,653 )     (6,023 )     (762 )
 
General and administrative expenses(1)
    (629 )     (4,112 )     (520 )     (2,711 )     (31,585 )     (3,996 )
 
Research and development expenses
          (750 )     (95 )     (415 )     (2,723 )     (344 )
                                     
   
Total
    (629 )     (10,120 )     (1,280 )     (5,779 )     (40,331 )     (5,102 )
                                     
Operating profit (loss)
    (629 )     16,155       2,044       5,078       78,479       9,930  
Interest expenses
          (123 )     (15 )           (3,855 )     (488 )
Interest income
    22       95       12       24       492       62  
Exchange losses
          (1,768 )     (224 )     (935 )     (2,123 )     (269 )
Other income
          215       27       215       486       61  
Other expenses
          (260 )     (33 )     (207 )     (474 )     (60 )
Changes in fair value of embedded foreign currency derivative
                            (1,082 )     (137 )
Government Grant
                            640       81  
                                     
Net income (loss) before tax
    (607 )     14,314       1,811       4,175       72,563       9,180  
Income tax benefit
          96       12       52       574       73  
Minority interest
                            (266 )     (33 )
                                     
Net income (loss)
    (607 )     14,410       1,823       4,227       72,871       9,220  
                                     
Net income (loss) attributable to ordinary shares
    (607 )     14,410       1,823       4,227       69,195       8,754  
                                     
 
(1)  In the nine months ended September 30, 2006, we recorded a share compensation charge of RMB10.3 million (US$1.3 million), which related to a sale of our ordinary shares to Linyang Electronics, a company controlled by our chairman and chief executive officer, at less than fair market value by other shareholders of our company and a share compensation charge of RMB12.1 million (US$1.5 million) as a result of the issuance of series A convertible preference shares to Good Energies Investments Limited.
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
       We began PV module production in January 2005 and began selling PV modules in February 2005. Our operating results in the nine months ended September 30, 2006 represented significant increases compared to the same period in 2005 due to the increase in sales volume, average

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selling prices and profit margins of our products. We previously outsourced PV cells used for our PV module production from third party suppliers at market prices. In the nine months ended September 30, 2006, we manufactured all of the PV cells used for our PV module production, thereby significantly reducing our reliance on third party PV cell suppliers, decreasing our PV module production costs and increasing our profit margins.
Net Revenue
       Our net revenue was RMB386.2 million (US$48.9 million) in the nine months ended September 30, 2006, compared to RMB86.5 million in the same period in 2005. The net revenue we generated from our PV cell business and PV module business amounted to RMB6.6 million (US$0.8 million) and RMB360.2 million (US$45.6 million), respectively, during the nine months ended September 30, 2006. Our sales volumes of PV cells and modules in the same period reached 0.3 MW and 11.2 MW, respectively. We also began providing PV cell processing services from January 2006 and generated revenue of RMB19.5 million (US$2.5 million) from PV cell processing in the nine months ended September 30, 2006, based on 3.3 MW of PV cells we processed and provided to our customers in this period. We derived 93.7% and 6.3% of our net revenue in the nine months ended September 30, 2006 from customers in Europe and China, respectively. The average selling prices of our PV modules and cells were US$4.02 per watt and US$3.05 per watt, respectively, during this period.
Cost of Revenue and Gross Profit
       Our cost of revenue was RMB267.4 million (US$33.8 million) in the nine months ended September 30, 2006, compared to RMB75.6 million in the same period in 2005. The costs associated with PV cell and PV module production were RMB5.5 million (US$0.7 million) and RMB255.9 million (US$32.4 million), respectively, accounting for 2.1% and 95.7% of our total cost of revenue, respectively, in the nine months ended September 30, 2006. We also had cost of revenue relating to PV cell processing of RMB6.0 million (US$0.8 million) in the nine months ended September 30, 2006. Cost of revenue as a percentage of our net revenue was 69.2% in the nine months ended September 30, 2006. As a result of the foregoing, our gross profit was RMB118.8 million (US$15.0 million) for the nine months ended September 30, 2006, compared to RMB10.9 million in the same period in 2005. Our gross profit margin in the nine months ended September 30, 2006 was 30.8%, compared to 12.6% in the same period in 2005.
Operating Expenses and Operating Profit (Loss)
       Our operating expenses were RMB40.3 million (US$5.1 million) in the nine months ended September 30, 2006, compared to RMB5.8 million in the same period in 2005. These operating expenses consisted mainly of general and administrative expenses, as well as, to a lesser extent, selling expenses and research and development expenses.
       We incurred selling expenses of RMB6.0 million (US$0.8 million) in the nine months ended September 30, 2006, which represented 1.6% of our net revenue in the same period. These expenses mainly related to our marketing efforts in our main target markets of Germany, Spain, Italy and China. We incurred selling expenses of RMB2.7 million (US$0.3 million) in the nine months ended September 30, 2005.
       Our general and administrative expenses increased by RMB28.9 million to RMB31.6 million (US$4.0 million) in the nine months ended September 30, 2006 from RMB2.7 million in the same period in 2005, due primarily to a RMB12.1 million (US$1.5 million) share compensation charge resulting from the issuance of series A convertible preference shares to Good Energies Investments Limited and the recording of an additional RMB10.3 million (US$1.3 million) in share compensation expenses, which related to a sale of our ordinary shares to Linyang Electronics, a company controlled by our chairman and chief executive officer, at less than fair market value by

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other shareholders of our company. See notes 13 and 15 to our consolidated financial statements included elsewhere in this prospectus. General and administrative expenses also increased due to an increase in the number of our general and administrative personnel, as well as the overall increase in our business activities and the size of our operations. General and administrative expenses as a percentage of our net revenue was 8.2% in the nine months ended September 30, 2006. This measure includes a share compensation charge of RMB10.3 million (US$1.3 million) related to a sale of our ordinary shares to Linyang Electronics by other shareholders of our company and the share compensation charge of RMB12.1 million (US$1.5 million) as a result of the issuance of series A convertible preference shares to Good Energies Investments Limited during this period.
       In addition, we also incurred research and development expenses of RMB2.7 million (US$0.3 million) in the nine months ended September 30, 2006, compared to RMB0.4 million in the same period in 2005.
       As a result of the foregoing, our operating profit in the nine months ended September 30, 2006 was RMB78.5 million (US$9.9 million), representing an increase of RMB73.4 million from RMB5.1 million in the same period in 2005. Our operating margin in the nine months ended September 30, 2006 was 20.3%. This measure includes a share compensation charge of RMB10.3 million (US$1.3 million) related to a sale of our ordinary shares to Linyang Electronics by other shareholders of our company and the share compensation charge of RMB12.1 million (US$1.5 million) as a result of the issuance of series A convertible preference shares to Good Energies Investments Limited during this period.
Interest Expenses and Other Income (Expenses)
       Our interest expenses in the nine months ended September 30, 2006 were RMB3.9 million (US$0.5 million), mainly consisting of interest expenses on our commercial loans. Our interest expenses were nil in the nine months ended September 30, 2005. In the nine months ended September 30, 2006, exchange losses were RMB2.1 million (US$0.3 million) and losses from changes in the fair value of embedded foreign currency derivatives in our sales contracts were RMB1.1 million (US$0.1 million), primarily due to the expected appreciation of the Renminbi against the U.S. dollar. Exchange losses and losses from changes in the fair value of embedded foreign currency derivatives were RMB0.9 million and nil, respectively, in the same period in 2005. We had other income of RMB0.5 million (US$0.06 million) in the nine months ended September 30, 2006, compared to RMB0.2 million in the same period in 2005.
Net Income Before Tax and Income Tax Benefit
       As a result of the foregoing, we had net income before tax of RMB72.6 million (US$9.2 million) in the nine months ended September 30, 2006 and RMB4.2 million in the same period in 2005. Our tax expenses were nil in the nine months ended September 30, 2006, because Linyang China, our operating subsidiary in the PRC, was exempted from enterprise income tax for 2006. Our tax expenses were nil in the same period in 2005. We recorded RMB0.6 million (US$0.1 million) income tax benefit as a result of recognizing deferred tax assets related to warranty provision in the nine months ended September 30, 2006.
Net Income
       We had net income of RMB72.9 million (US$9.2 million) in the nine months ended September 30, 2006 and RMB4.2 million in the same period in 2005. Our net income margin in the nine months ended September 30, 2006 was 18.9%. This measure includes a share compensation expenses of RMB10.3 million (US$1.3 million) related to a sale of our ordinary shares to Linyang Electronics by other shareholders of our company and the share

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compensation expenses of RMB12.1 million (US$1.5 million) as a result of the issuance of series A convertible preference shares to Good Energies Investments Limited during this period.
Year Ended December 31, 2005
       The following discussion summarizes our results of operations for the year ended December 31, 2005. Since we only had minimal operating activities during the period from August 27 to December 31, 2004, we do not believe that a comparison between this period and the year ended December 31, 2005 is meaningful.
Net Revenue
       Our net revenue in 2005 was RMB166.2 million (US$21.0 million), which was derived entirely from sales of our PV modules and cells. The net revenue we generated from our PV cell business and PV module business totaled RMB0.5 million (US$0.1 million) and RMB165.6 million (US$21.0 million), respectively, during this period. We sold 5.2 MW of PV modules and 0.02 MW of PV cells manufactured during this period. Substantially all of our PV modules manufactured in 2005 used PV cells purchased from third parties, as we did not begin production of our own PV cells until November 2005. Approximately 99.7% and 0.3% of our net revenue in 2005 was generated from sales of PV modules and cells to overseas customers and customers in China, respectively. The average selling prices of our PV modules and cells were US$3.93 per watt and US$3.00 per watt, respectively, during this period.
Cost of Revenue and Gross Profit
       Our cost of revenue was RMB139.9 million (US$17.7 million) in 2005, which represented 84.2% of our net revenue during this period. The costs associated with PV cell and PV module production were RMB0.4 million (US$0.05 million) and RMB139.5 million (US$17.6 million), accounting for 0.3% and 99.7% of our total cost of revenue, respectively. As a result of the foregoing, we had gross profit of RMB26.3 million (US$3.3 million) and gross margin of 15.8% in 2005.
Operating Expenses and Operating Profit (Loss)
       Our operating expenses were RMB10.1 million (US$1.3 million) in 2005, including RMB5.3 million (US$0.7 million) in selling expenses and RMB4.1 million (US$0.5 million) in general and administrative expenses and RMB0.8 million (US$0.1 million) in research and development expenses, which accounted for 3.2%, 2.5% and 0.5%, respectively, of our net revenue during this period. As a result of the foregoing, our operating profit in 2005 was RMB16.2 million (US$2.0 million), representing an operating margin of 9.7%.
Interest Expenses, Interest Income and Other Income (Expenses)
       Our interest expenses in 2005 were RMB0.1 million (US$0.01 million), mainly consisting of interest expenses on our commercial loans. Our interest income in 2005 was RMB0.1 million (US$0.01 million), mainly consisting of interest income on our bank deposits. We also incurred exchange losses in the amount of RMB1.8 million (US$0.2 million) in 2005, mainly due to foreign currency exchange losses resulting from the increased exchange rate of the Renminbi against the U.S. dollar.
Net Income (Loss) Before Tax and Income Tax Benefit
       As a result of the foregoing, our net income before tax in 2005 was RMB14.3 million (US$1.8 million). We did not incur any tax expenses in 2005 because Linyang China was exempted from enterprise income tax for 2005 and 2006. We recorded RMB0.1 million income tax benefit as a result of recognizing deferred tax assets related to warranty provision.

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Net Income (Loss)
       Our net income in 2005 was RMB14.4 million and our net income margin was 8.7%.
Period from August 27, 2004 (Inception) to December 31, 2004
       We commenced our business operations on August 27, 2004. Since we did not begin production of any of our PV products until 2005, we did not generate any revenue or incur any cost of revenue for the period from August 27 to December 31, 2004. We incurred general and administrative expenses of RMB0.6 million, and as a result, we had net loss of RMB0.6 million during this period.
Liquidity and Capital Resources
       We believe that our current cash and cash equivalents, cash flow from operations and the proceeds from this offering will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least 12 months following this offering. We may, however, require additional cash resources due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. In addition, after this offering, we will become a public company and will incur a significantly higher level of legal, accounting and other expenses than we did as a private company and we may need to obtain additional capital resources to cover these costs.
       We are a holding company, and conduct substantially all of our business through Linyang China, our PRC operating subsidiary. We rely on dividends paid by Linyang China for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to limitations. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside a certain amount of its after-tax profits each year, if any, to fund certain statutory reserves. These reserves are not distributable as cash dividends. As of September 30, 2006, a total of RMB2.2 million (US$0.3 million) was not available for distribution to us in the form of dividends due to these PRC regulations.
Liquidity
       The following table sets forth a summary of our cash flows for the periods indicated:
                                                 
    Period from           Nine Months Ended September 30,
    August 27, 2004        
    (Inception) to   Year Ended        
    December 31, 2004   December 31, 2005   2005   2006
                 
    (RMB)   (RMB)   (US$)   (RMB)   (RMB)   (US$)
    (in thousands)
Net cash used in operating activities
    (8,180 )     (76,582 )     (9,688 )     (76,194 )     (414,929 )     (52,497 )
Net cash used in investing activities
    (295 )     (37,464 )     (4,740 )     (19,167 )     (95,117 )     (12,034 )
Net cash generated from financing activities
    12,000       117,575       14,874       101,600       571,938       72,362  
Net increase in cash and cash equivalents
    3,525       3,529       446       6,239       61,892       7,831  

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Net Cash Used in Operating Activities
       Net cash used in operating activities primarily consists of net income (loss), as adjusted for non-cash items such as depreciation, amortization of intangible assets, warranty provision, share compensation expense and deferred tax benefit, and the effect of changes in certain operating assets and liabilities line items such as inventories, other current assets (including advances to suppliers and other receivables), amounts due to related parties, accounts and notes payable, customer deposits, accrued expenses and other liabilities.
       Our net cash used in operating activities was RMB414.9 million (US$52.5 million) in the nine months ended September 30, 2006, which was derived from a net income of RMB72.9 million (US$9.2 million) adjusted to reflect a net increase relating to non-cash items and a net decrease relating to changes in operating assets and liabilities. The adjustments relating to non-cash items were primarily comprised of an increase for depreciation expense of RMB4.0 million (US$0.5 million), warranty provision of RMB3.6 million (US$0.5 million), share compensation expenses of RMB22.4 million (US$2.8 million) and deferred tax benefits of RMB0.6 million (US$0.1 million). The adjustments relating to changes in operating assets and liabilities, which resulted in a net decrease of RMB517.6 million (US$65.5 million), were primarily comprised of:
  •  a RMB326.8 million (US$41.3 million) increase in advances to suppliers, primarily due to increased prepayments to our suppliers for purchases of silicon and silicon wafers;
 
  •  a RMB144.8 million (US$18.3 million) increase in inventories principally as a result of increased purchases of silicon and silicon wafers; and
 
  •  a RMB22.7 million (US$2.9 million) decrease in deposits received from customers, primarily due to our provision of more preferential credit terms to our customers.
       Our net cash used in operating activities was RMB76.2 million in the nine months ended September 30, 2005, based on a net income of RMB4.2 million and a net change in operating assets and liabilities of RMB81.8 million, including primarily:
  •  a RMB37.2 million increase in deposits received from customers;
 
  •  a RMB37.7 million increase in inventories; and
 
  •  a RMB61.1 million increase in advances to suppliers.
       Our net cash used in operating activities was RMB76.6 million (US$9.7 million) in 2005, consisting primarily of net income of RMB14.4 million (US$1.8 million), adjusted by a RMB0.8 million (US$0.1 million) depreciation of fixed assets, RMB1.5 million (US$0.2 million) warranty provision, and RMB0.5 million (US$0.06 million) stock compensation expense, and offset by a net increase in operating assets and liabilities of RMB93.8 million, including primarily:
  •  an increase of RMB72.3 million (US$9.1 million) in inventories principally as a result of an increase of RMB60.5 million (US$7.5 million) in the purchase of raw materials;
 
  •  an increase of RMB56.5 million (US$7.1 million) in advances to suppliers;
 
  •  an increase of RMB16.6 million (US$2.1 million) in accounts payable mainly due to raw materials purchases;
 
  •  an increase of RMB22.2 million (US$2.8 million) in restricted cash relating to customer deposits; and
 
  •  an increase of RMB55.3 million (US$7.0 million) in deposits received from customers.
       These changes in 2005 were all principally due to the increase in our overall business as we ramped up our production and sale of PV modules and PV cells.

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       Our net cash used in operating activities was RMB8.2 million in the period from August 27 to December 31, 2004, primarily consisting of a net loss of RMB0.6 million, adjusted by an increase of RMB7.6 million in operating assets and liabilities, which principally resulted from an increase of RMB4.5 million in inventories and an increase of RMB4.9 million in advances to suppliers.
Net Cash Used in Investing Activities
       Our net cash used in investing activities primarily consists of cash used for the acquisition of fixed assets and advances made to related parties.
       Our net cash used in investing activities was RMB95.1 million (US$12.0 million) in the nine months ended September 30, 2006, consisting of RMB88.7 million (US$11.2 million) of cash used for the acquisition of fixed assets, including primarily our manufacturing machinery and equipment, and RMB6.7 million (US$0.8 million) of cash used for the acquisition of intangible assets. Our net cash used in investing activities in the nine months ended September 30, 2005 was RMB19.2 million, all of which related to the acquisition of fixed assets.
       Our net cash used in investing activities was RMB37.5 million (US$4.7 million) in 2005, consisting primarily of cash used for the acquisition of fixed assets of RMB37.5 million (US$4.7 million).
       Our net cash used in investing activities in the period from August 27 to December 31, 2004 was RMB0.3 million, all of which related to the acquisition of fixed assets.
Net Cash Generated from Financing Activities
       Our net cash generated from financing activities primarily consists of capital contributions by equity shareholders, short-term bank borrowings and advances provided by related parties, as offset by bank deposits for securing credit facilities granted by commercial banks, which are not available for use for our operations.
       Our net cash generated from financing activities was RMB571.9 million (US$72.4 million) in the nine months ended September 30, 2006. This was mainly attributable to the issuance of series A convertible preference shares in the amount of RMB423.8 million (US$53.6 million) and new bank loans of RMB219.7 million (US$27.8 million). We generated RMB101.6 million of net cash from financing activities in the nine months ended September 30, 2005.
       Our net cash generated from financing activities was RMB117.6 million (US$14.9 million) in 2005, including RMB29.3 million (US$3.7 million) in proceeds received as capital contributions from our shareholders and RMB20.0 million (US$2.5 million) in short-term bank loans, RMB146.4 million (US$18.5 million) in repayment of advances and RMB116.1 million (US$14.7 million) in advances from Linyang Electronics Co., Ltd. for working capital purposes.
       We had net cash generated from financing activities of RMB12.0 million in the period from August 27 to December 31, 2004, consisting entirely of capital contributions from our shareholders offset by the advance of RMB18.0 million to Linyang Electronics Co., Ltd. and Huaerli (Nantong) Electronics Co., Ltd. as silicon purchase prepayments.

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Contractual Obligations and Commercial Commitments
       The following table sets forth our contractual obligations as of September 30, 2006:
                                           
    Payment Due by Period
     
        Less Than       More Than
    Total   1 Year   1 to 3 Years   3 to 5 Years   5 Years
                     
    (in thousands of Renminbi)
Purchase obligations relating to machinery and equipment
    76,922       76,922                    
Purchase obligations relating to raw materials
    1,666,525       967,925       698,600              
Other purchase obligations
                             
Other long-term liabilities reflected on the balance sheet
                             
                               
 
Total
    1,743,447       1,044,847       698,600              
                               
       One of the raw material purchase contracts totaling approximately RMB1,265.4 million (US$160.1 million) was terminated and certain other raw material purchase contracts have been renegotiated subsequent to September 30, 2006. Subsequent to September 30, 2006, we entered into various fixed price and fixed quantity agreements with certain domestic suppliers to procure silicon wafers or ingots, with a planned total purchase amount of RMB920.8 million (US$116.5 million). See also note 20 to our consolidated financial statements included elsewhere in this prospectus.
       In October and November 2006, Linyang China entered into entrusted loan agreements with Linyang Electronics under which Linyang Electronics lent to Linyang China an aggregate of RMB80.0 million (US$10.1 million) through a third party PRC commercial bank. These entrusted loans bear interest at 6.138% per annum, are unsecured and are repayable six months from the date of inception. Furthermore, in November 2006, we obtained short-term bank borrowings totaling RMB109.9 million (US$13.9 million) from three PRC commercial banks, of which RMB30.0 million (US$3.8 million) was guaranteed by Linyang Electronics; RMB39.9 million (US$5.0 million) was jointly guaranteed by Linyang Electronics and Huaerli (Nantong) Electronics Co., Ltd., or Huaerli (Nantong); and RMB40.0 million (US$5.0 million) was secured by land use rights and guaranteed by Linyang Electronics, Qidong Huahong Electronics Co., Ltd., or Qidong Huahong, and our chairman and chief executive officer and his wife.
       As of the date of this prospectus, we had already entered into contracts to sell the majority of our planned production of PV products for 2007. See “Our Business — Sales and Distribution.”
Capital Resources
       We have financed our operations primarily through cash flows from operations and also through bank loans and related-party loans. As of September 30, 2006, we had short-term bank loans from various commercial banks with an aggregate outstanding balance of RMB192.7 million (US$24.4 million) and outstanding long-term bank loans in the aggregate amount of RMB23.0 million (US$2.9 million). Our short-term bank loans bore average interest rates of 5.859% and 5.67% per annum, respectively, in 2005 and the nine months ended September 30, 2006. These short-term bank loans have terms of six months to one year, and expire at various times throughout the year. These facilities contain no specific renewal terms but we have historically been able to obtain extensions of some of the facilities shortly before they mature. In addition, our short-term bank loans are secured by land use rights, restricted cash or guaranteed by our related parties. Our long-term bank loans had an average interest rate of 5.76% per annum in the nine months ended September 30, 2006 and were guaranteed by Linyang Electronics.

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Capital Expenditures
       Our capital expenditures were RMB0.3 million, RMB37.5 million (US$4.7 million) and RMB95.4 million (US$12.1 million) in the period from August 27 to December 31, 2004, the year ended December 31, 2005 and the nine months ended September 30, 2006, respectively, and all related primarily to the purchase of manufacturing equipment for the production of PV cells and modules. We expect to incur capital expenditures of RMB60.0 million and RMB360.0 million for the remainder of 2006 and in 2007, respectively, which will be used primarily to purchase additional manufacturing equipment to meet our manufacturing capacity expansion plans.
       We believe that our current cash and cash equivalents, anticipated cash flow from operations and the proceeds from this offering will be sufficient to meet our expected cash requirements, including for working capital and capital expenditure purposes, for at least 12 months following this offering. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to sell additional equity securities, debt securities or borrow from lending institutions. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. The sale of additional equity securities, including convertible debt securities, would dilute our shareholders. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.
Off-Balance Sheet Arrangements
       We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. We do not engage in speculative transactions involving derivatives.
Inflation
       Since our inception, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the change of consumer price index in China was 3.9% and 1.5% in 2004 and 2005, respectively.
Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
       Our financial statements are expressed in Renminbi and our functional currency is Renminbi. The change in value of the Renminbi against the U.S. dollar, Euro and other currencies is affected by, among other things, changes in 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 4% appreciation of the Renminbi against the U.S. dollar since the date of its announcement. There remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar.
       A substantial portion of our sales is denominated in U.S. dollars, Renminbi and Euros, while a substantial portion of our costs and expenses is denominated in Renminbi and U.S. dollars, with the remainder in Euros. Therefore, the revaluation in July 2005 and potential future revaluations have increased and could further increase our costs. In addition, any significant

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revaluation of the Renminbi may have a material adverse effect on our revenue and financial condition. The value of, and any dividends payable on, our ADSs in foreign currency terms may also be affected. For example, when converting the U.S. dollars we receive from this offering into Renminbi for our operations, any appreciation of the Renminbi against the U.S. dollar will have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making dividend payments on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.
       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.
Interest Rate Risk
       Our exposure to interest rate risk primarily relates to the interest rates for our short-term bank deposits. We have not used any derivative financial instruments to manage our interest risk exposure. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. However, our future interest income may be lower than expected due to changes in market interest rates.
Recent Accounting Pronouncements
       In June 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” or FIN 48, which is an interpretation of FAS 109, “Accounting for Income Taxes,” to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will adopt FIN 48 as of January 1, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded in retained earnings (or other appropriate components of equity or net assets in the statement of financial position as applicable) in the year of adoption. We do not expect that the adoption of FIN 48 will have a significant effect on our financial condition or results of operations.
       In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” or SFAS No. 157. SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The provisions are to be applied prospectively as of the beginning of the fiscal year in which SFAS No. 157 is initially applied, except as it pertains to a change in accounting principles related to (i) large positions previously accounted for using a block discount and (ii) financial instruments (including derivatives and hybrids) that were initially measured at fair value using the transaction price in accordance with guidance in footnote 3 of EITF 02-3 or similar guidance in SFAS No. 155. For these transactions, differences between the amounts recognized in the statement of financial position prior to the adoption of SFAS No. 157 and the amounts recognized after adoption should be accounted for as a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. We are currently assessing the impact, if any, that SFAS No. 157 will have on our financial condition or results of operations.

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OUR INDUSTRY
Overview
       Global demand for electric power has grown consistently at a rate of 2%-5% annually in the past decade in line with the continued increase in reliance on electricity-dependent technologies worldwide, according to the Energy Information Administration of the U.S. Department of Energy. In particular, demand for electric power has increased at a high rate in emerging economies such as China, where reliable electricity is critical to continued industrialization and economic growth. According to International Energy Outlook 2006 published by the U.S. Department of Energy, worldwide electricity consumption is expected to increase from 14.8 trillion kilowatt hours, or kWh, in 2003 to 30.1 trillion kWh in 2030, while during the same period, demand is expected to grow at 4% per year in non-OECD (Organisation for Economic Co-operation and Development) economies.
       Sources for generating electricity include traditional sources, such as coal, natural gas, oil and nuclear power, and renewable resources, such as solar, biomass, geothermal, hydro-electric and wind power. Compared to fossil and nuclear fuels, which are finite resources that may eventually become too expensive to extract and bring to market, renewable resources are potentially unlimited in availability, although appropriate technology and a supportive regulatory environment are necessary to make the harnessing of renewable energy sources commercially viable. Renewable energy sources excluding hydroelectric power represented approximately 2% of worldwide electricity generation in 2004 and their use has the potential to increase significantly in the future. The following table sets forth the amount of electricity generated from various sources as percentages of total worldwide electricity generation for the periods indicated.
                                             
    Year Ended December 31,
     
    2000   2001   2002   2003   2004
                     
    (In percentages)
Thermal electric
    63.4 %     64.0 %     64.6 %     65.7 %     65.7 %
Nuclear electric
    16.8       17.0       16.6       15.9       15.8  
Renewable sources
                                       
 
Hydroelectric
    18.1       17.3       16.9       16.5       16.5  
 
Other(1)
    1.7       1.7       1.9       1.9       2.0  
                               
   
Total
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
                               
 
Source: U.S. Department of Energy — Energy Information Administration
(1)  Includes geothermal, solar, wind, and wood and waste electric power generation.
       Among the renewable resources for electricity generation, solar electricity generation has emerged as a rapidly growing segment with significant potential to meet the global electricity needs. Solar energy technologies can be used to convert sunlight into heat, generally called solar thermal energy, or directly into electricity, generally called PV electricity generation.
       PV generation systems utilize interconnected PV cells, most of which are made with specially processed silicon that generates electric current upon exposure to sunlight. Such PV cells are packaged into PV modules, which not only protect the cells but also collect the electricity generated. Multiple PV modules, related power electronics, and other components make up the PV systems, which are used for both on-grid and off-grid generation. In the first instance, electricity generated is fed into an electricity transmission grid for sale, whereas in the latter instance, electricity is generated for locations where access to the electricity transmission grid is either physically impossible or not economically feasible.

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       Compared to traditional energy sources and other renewable energy technologies for electricity generation, the benefits of PV systems include the following:
  •  Renewability and Environmental Friendliness. Solar energy is derived from non-depleting sources. PV systems consume no fuel and produce no air, water or noise emissions.
 
  •  No Fuel Risk Advantage. Unlike traditional energy sources, such as fossil and nuclear fuels, solar energy is not subject to fuel price volatility or delivery risk. Although the amount and timing of sunlight vary over the day, season and year, a well configured system could provide a reliable, long-term supply source for fixed price electricity.
 
  •  Peak Energy Generation. Given that maximum sunlight hours correspond to peak electricity demand periods, PV panels generate the highest amount of electricity when electricity prices reach their highest levels.
 
  •  Location Advantage. Given the universal availability of sunlight, PV systems are generally installed at a customer’s site. Therefore solar power does not face the same expenses and energy losses associated with transmission and distribution from large scale power generation plants to the end users. In addition, solar power often is regarded as an attractive, and sometimes the only viable, choice among renewable energy sources for retail customers given its universal location availability.
 
  •  Relatively Minimal Infrastructure Investment. PV systems can be deployed for large-scale residential and commercial applications very quickly, typically without the construction of a complex infrastructure.
 
  •  Modularity. PV systems can be deployed in many sizes and configurations to meet the specific needs of customers.
 
  •  Dual Use. In addition to power generation, PV panels can be used as the exterior of a building and are increasingly installed on the roofs and facades of commercial and residential buildings.
 
  •  Durability. Accelerated aging tests have shown that, without the need for major maintenance, solar power systems can operate for 25 or more years.
The Global PV Market
       The PV market worldwide has experienced significant growth since the beginning of this decade. According to Solarbuzz, the global PV market increased from 345 MW in 2001 to 1,460 MW in 2005 in terms of total annual PV installations. In addition, PV industry revenue increased from US$7 billion in 2004 to US$9.8 billion in 2005. Cumulative installed PV electricity generation capacity also expanded by 39% in 2005, and currently exceeds 5 GW worldwide. Furthermore, investment in new plants to manufacture PV cells exceeded US$1 billion in 2005. According to Solarbuzz, annual PV installations are expected to increase to 3.9 GW, and PV industry revenue is expected to increase to US$23.1 billion by 2010.
       On the basis of data published by Solarbuzz, the following tables set forth actual (for 2004-2005) and projected (for 2006-2010) PV market size in terms of annual revenue and installations for the periods indicated.
                                                         
    Actual   Projected
         
    2004   2005   2006   2007   2008   2009   2010
                             
Installations (MW)
    1,086       1,460       1,600       1,795       2,255       2,932       3,938  
Revenue (US$ billion)
    7.0       9.8       11.0       11.3       14.5       18.0       23.1  
 
Source: Solarbuzz Marketbuzz 2006 upside case

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       Currently, installations in Germany, Japan and the United States together comprise a majority of worldwide PV industry installations. This is primarily attributable to government policies in these countries, in the form of regulations and incentives, which have accelerated the adoption of solar technologies. For example, Germany’s annual PV installations grew 53% to 837 MW in 2005, and represented 57% of the world market in 2005. In addition, Japan’s annual PV installations grew 14% to 292 MW in 2005. Other geographic areas, such as Southern Europe and China, have also increasingly demonstrated potential for rapid market development.
Competitive Landscape
       According to Solarbuzz, although there are over 100 companies engaged in PV cell manufacturing or which have announced plans to do so, PV cell production is currently dominated by a small number of manufacturers. The top ten PV cell manufacturers accounted for 74% of the total PV cells produced worldwide in 2005. In terms of geographical distribution, the top manufacturers were generally based in regions from which the majority of solar energy revenue is currently derived, with manufacturers in Japan, Europe and the United States representing 46%, 28% and 9%, respectively, of the total world PV cell production in 2005. Meanwhile, the percentage of global PV cell production for regions other than Japan, Europe and the United States increased from 10% in 2001 to 17% in 2005.
       The following table sets forth global cell production by geographic region for the periods indicated.
                                         
Production (MW)   2001   2002   2003   2004   2005
                     
Europe
    89       134       203       340       508  
Japan
    168       246       365       596       829  
USA
    93       101       90       139       156  
Rest of the World
    38       49       84       171       307  
                               
Total
    388       530       742       1,246       1,800  
                               
 
Source: Solarbuzz Marketbuzz 2006
The PV Industry Value Chain
       The following diagram illustrates the stages of the PV electricity generation value chain.
(CHART)

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Growth Trends in the Global PV Market
       We believe the following factors will continue to drive the growth of the global PV market, including the demand for our products and services:
Rising Energy Demand and Limited Fossil Energy Sources with Increasing Prices
       In recent years, global economic development has resulted in surging energy demand and rising energy prices. The situation is compounded by the finite supply of traditional energy sources, such as natural gas, coal, and petroleum. In addition, petroleum prices have risen dramatically because of war, political instability, labor unrest, and the threat of terrorism in oil-producing regions. Thus, future energy demand is increasingly expected to be met by renewable energy sources, such as solar energy.
Growing Adoption of Government Incentives for Solar and Other Renewable Energy Sources
       In response to the increasing environmental concerns worldwide, many governments have promulgated regulations and implemented policies to limit the release of hazardous and “green house” gases, such as carbon dioxide, and to encourage the use of renewable energy sources. Due to the fact that most renewable energy sources are currently less cost competitive than traditional energy sources, a growing number of countries have created incentive programs for the solar sector, including:
  •  direct subsidies to end users to counter costs of equipment and installation;
 
  •  net metering laws enabling on-grid end users to sell electricity back to the grid at retail prices;
 
  •  government standards mandating minimum consumption levels of renewable energy sources; and
 
  •  low interest loans and tax incentives to finance solar power systems.
       Due to government support in the past decade, solar energy has become an attractive alternative to traditional energy sources. Set forth below are brief descriptions of the incentive programs adopted by selected countries.
       China. The PRC government has been introducing various laws, regulations and initiatives to support renewable energy, including solar energy, over the last few years. In 2000, the PRC government initiated the Brightness Program, a rural electrification program, to provide electricity to rural areas in China. Under the initial phase of the Brightness Program relating to township electrification, an estimated 20 MW of PV or PV/ wind systems were installed from 2002-2004, impacting 1,000 municipalities. According to Solarbuzz, a second phase of the Brightness Program relating to village electrification contemplates installing village PV systems and solar home systems with a total capacity of over 250 MW from 2005-2010.
       In February 2005, China enacted the Renewable Energy Law, which became effective in January 2006. The Renewable Energy Law provides certain financial incentives for the development of renewable energy projects. According to Solarbuzz, China will spend approximately US$180 billion over the next 15 years to increase its use of renewable energy, including solar and wind energy, from the current 7% of its total energy consumption to 15% by 2020, and the Chinese government is planning for its cumulative domestic solar PV installations to reach 400 MW by 2010 and 1,000 MW by 2020 from approximately 75 MW in 2005.
       Various local authorities have also introduced initiatives to encourage the adoption of renewable energy, including solar energy. For example, in 2005, the Shanghai municipal government endorsed the “100,000 Roofs Project.” The goal of the project is to install solar power systems onto 100,000 rooftops or equivalent of 300 MW in Shanghai by 2015. In the short

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term, there are plans to install 5 MW of PV systems by 2007 in Shanghai. In addition, solar power will be used at various sports venues of Beijing 2008 Olympic Games. We expect that the increase in solar energy consumption in local municipalities will encourage further growth of the solar energy industry in China.
       Germany. Under Germany’s Renewable Energy Sources Act, the country aims to increase the share of electricity from renewable energy to 12.5% by 2010 and 20% by 2020. In particular, the Renewable Energy Sources Act requires electricity transmission grid operators to connect various renewable energy sources to their electricity transmission grids and to purchase all electricity generated by such sources at guaranteed feed-in tariffs. Additional regulatory support measures include investment cost subsidies, low-interest loans and tax relief to end users of renewable energy.
       Italy. Before 2005, the Italian PV market benefited primarily from regional support for PV installations with grants of up to 65% of investment, in the absence of national incentive funds. In 2005, Italy passed a new law that sets fixed feed-in tariffs for electricity produced from renewable energy sources. The incentives are available to individuals, companies and public bodies. In January 2006, the Italian government approved various measures relating to PV feed-in tariffs, including increasing the PV feed-in tariff cap to 500 MW by 2015.
       Japan. The Japanese government has implemented a series of incentive programs, including the “PV 2030” roadmap, which outlines government policies to support solar power electricity. Japan also provides government subsidies for research and development. According to Solarbuzz, due to those incentive programs, there are over 200,000 PV installations on residential housing in Japan.
       Spain. The incentive regime in Spain includes a national net metering program and favorable interest loans. The actual feed-in tariff for solar energy in Spain is fully guaranteed for 25 years and guaranteed at 80% subsequently. The target for cumulative installed generation capacity from PV in 2010 was recently raised by the Spanish government to 400 MW.
       United States. At the federal level, several recent developments are favorable to the PV industry in general. The United States Congress approved the Energy Policy Act of 2005, which provides a 30% investment tax credit for PV installations. In addition, the President of the United States announced the Advanced Energy Initiative in January 2006, which sets the goal of replacing more than 75% of oil imports from the Middle East by 2025 through using alternative energy. Furthermore, the President of the United States proposed US$148 million in funds to support the solar energy research and development program in the United States government’s 2007 budget. In addition, a number of states, including California and New Jersey, have committed substantial resources to developing and implementing renewable energy programs. For example, in January 2006, the California Public Utilities Commission passed the California Solar Initiative with the goal of installing 3 GW PV systems by 2017. In April 2006, the New Jersey Board of Public Utilities voted to approve new regulations which expand the State’s Renewable Portfolio Standard by extending the existing goals out to 2020 and increasing the required amount of renewable energy and solar energy. Under the newly adopted regulations, 20% of New Jersey’s electricity must come from renewable sources by 2020. The New Jersey regulations also include a 2% solar set aside which is forecast to require 1,500 MW of electricity to be generated through solar power, the largest solar commitment relative to population and electricity consumption in the United States.
Continuously Decreasing Production Costs
       Currently, the cost of solar energy substantially exceeds the retail price of electricity in most markets of the world. According to Solarbuzz, the total cost of producing solar electricity is approximately 25-40 cents/ kWh in most industrialized countries, whereas domestic tariffs are generally 7-12 cents/ kWh and bulk electricity generation costs are 2-5 cents/ kWh. As a result,

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the demand for solar power products is highly dependent on government subsidies and economic incentives. However, over the long term, a self-sustaining PV market requires PV installation prices to decrease to a point where PV can complete in most segments with retail electricity.
       We believe that the cost per watt of solar power systems could be further reduced by the following measures:
  •  lowering silicon raw material costs;
 
  •  decreasing silicon usage per watt;
 
  •  increasing conversion efficiencies of PV cells in a cost-effective manner;
 
  •  improving manufacturing efficiencies;
 
  •  reducing capital expenditure per unit of solar power capacity expansion; and
 
  •  enhancing manufacturers’ economies of scale.
Challenges Facing the Industry
       In spite of the advantages of solar energy generated through PV systems, the PV industry still must overcome a number of hurdles in order to grow and accomplish broad commercialization of its products, including:
  •  Current high cost of solar electricity. Without government subsidies, solar electricity is currently less cost competitive than traditional electricity sources. Such government subsidies may include feed-in tariffs, net metering programs, renewable portfolio standards, rebates, tax incentives, and low interest loans. Any reduction in or elimination of government subsidies during this stage of the solar energy industry’s development may result in a decrease in demand for solar modules. See “Risk Factors — Risks Related to Our Company and Our Industry — The reduction or elimination of government subsidies and economic incentives for on-grid solar energy applications could have a materially adverse effect on our business and prospects.”
 
  •  Intermittent source of power. PV systems need sunlight to generate electricity and are less efficient in climates with low sunlight and extreme temperatures. As a result, these systems usually cannot be used as the sole source of electricity. To offer a complete solution to the end user, PV systems need to be combined with a storage solution, such as a battery, or other source of electricity, such as grid electricity or diesel generation.
 
  •  Limited availability of semiconductor materials. Semiconductor materials are required to convert solar energy into electricity for solar modules. According to Solarbuzz, crystalline silicon technology was used for over 94% of the PV cells produced in 2005. High demand from the PV and microelectronics industries has resulted in a shortage of silicon feedstock, limiting the growth of many solar module manufacturers.
Even though silicon feedstock manufacturers are building new plants to boost supply, these projects are not only time-consuming, but also require substantial capital expenditures.

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OUR CORPORATE HISTORY AND STRUCTURE
       We are a Cayman Islands holding company and conduct substantially all of our business through our operating subsidiary in the PRC, Jiangsu Linyang Solarfun Co., Ltd., or Linyang China. We own 100% of Linyang Solar Power Investment Holding Ltd., or Linyang BVI, a British Virgin Islands holding company, which owns 100% of Linyang China. Linyang China has two subsidiaries, Shanghai Linyang Solar Technology Co., Ltd., or Shanghai Linyang, and Sichuan Leshan Jiayang New Energy Co., Ltd., or Sichuan Jiayang. We established these subsidiaries to expand our business into new markets and sectors. The diagram sets forth the entities directly or indirectly controlled by us following our restructuring, which was completed on June 27, 2006:
(FLOWCHART)
 
(1)  The other shareholders of Shanghai Linyang Solar Technology Co., Ltd. are three individuals: Mr. Yongliang Gu, Mr. Rongqiang Cui, and Mr. Cui’s spouse. Mr. Gu and Mr. Cui are our shareholders.
 
(2)  The other shareholders of Sichuan Jiayang are Sichuan Jianengjia, which holds a 30% equity interest, and a member of Sichuan Jiayang’s management team, Mr. Wei Gu, who holds a 15% equity interest on behalf of Mr. Yonghua Lu, our chairman and chief executive officer, pursuant to an entrustment agreement entered into in November 2006. Under this entrustment agreement, Mr. Lu provided RMB3.0 million (US$0.4 million) to Mr. Gu to acquire the 15% equity interest in Sichuan Jiayang. Under the entrustment agreement, all the rights enjoyed by Mr. Gu as the holder of record of the 15% equity interest in Sichuan Jiayang, including economic rights, belong to Mr. Lu. Mr. Gu may only exercise rights relating to this equity interest in Sichuan Jiayang, such as voting and transfer rights, pursuant to written instructions from Mr. Lu. Mr. Lu also has the right to transfer all or a portion of the 15% equity interest to the management of Sichuan Jiayang or other third parties. This entrustment arrangement was originally contemplated at the time of establishment of Sichuan Jiayang, but was not formalized in writing until November 2006, and was meant to serve as a transitional step in advance of potentially fully transferring these equity interests to Mr. Gu and other members of Sichuan Jiayang’s management team as performance incentives.
       We commenced our operations in August 2004 through Linyang China. In connection with our initial public offering, we completed a restructuring in June 2006 pursuant to which we established our current holding company structure. Immediately prior to our restructuring, on

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June 1, 2006, Linyang China was a Sino-foreign joint venture company with four shareholders: Jiangsu Linyang Electronics Co., Ltd., or Linyang Electronics, held 70% of the equity interests of Linyang China; Mr. Rongqiang Cui, our shareholder, and Mr. Yongliang Gu, our shareholder, held 3% and 2%, respectively, of Linyang China; and a non-PRC resident held the remaining 25% as the non-PRC joint venture partner. Linyang Electronics is one of the leading electricity-measuring instrument manufacturers in China. Mr. Yonghua Lu, our founder, chairman and chief executive officer, together with his spouse, holds 75% of the equity interests of Linyang Electronics, with the non-PRC resident joint venture partner of Linyang China holding the remaining 25%. In connection with the restructuring, the non-PRC resident joint venture partner of Linyang China ceased to own any interest in our company and received cash for the transfer of his interest in Linyang China.
       In June and August 2006, we issued in a private placement an aggregate of 79,644,754 series A convertible preference shares to Citigroup Venture Capital International Growth Partnership, L.P., Citigroup Venture Capital International Co-Investment, L.P., Hony Capital II, L.P., LC Fund III, L.P., Good Energies Investments Limited and two individual investors. The proceeds we received from this transaction, before deduction of transaction expenses, were US$53 million.
       For a discussion of our current shareholding structure, see “Principal and Selling Shareholders.”

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OUR BUSINESS
Overview
       We are an established manufacturer of both PV cells and PV modules in China. We manufacture and sell a variety of PV cells and PV modules using advanced manufacturing process technologies that have helped us to rapidly increase our operational efficiency. All of our PV modules are currently produced using PV cells manufactured at our own facilities. We sell our products both directly to system integrators and through third party distributors. We also provide PV cell processing services for some of our silicon suppliers. We conduct our business in China through our operating subsidiary, Linyang China. In addition, we recently incorporated Shanghai Linyang to provide system integration services in China whereby we tailor our PV products for specific customers’ needs and link them with the end-use devices that require solar power. In November 2006, Shanghai Linyang won a competitive bid to provide a substantial majority of the PV modules to be used in a 1 MW solar power plant in Shanghai. Shanghai Linyang is still in the process of negotiating the final agreement relating to this project.
       Since our first PV cell production line became operational in November 2005, we have increased the average daily output of each of our monocrystalline PV cell production lines to 26,000 cells for the month ended September 30, 2006, improved the conversion efficiency of our monocrystalline PV cells to 16.8%, and reduced monocrystalline PV cell thickness to 200 microns and the average cell breakage rate to 2.7%.
       We currently operate two PV cell production lines, each with 30 MW of annual manufacturing capacity. We commenced commercial production on these lines in November 2005 and September 2006, respectively. In order to meet the fast-growing market demands for solar products, we plan to significantly expand our PV cell manufacturing capacity over the next several years. We expect that, by the end of 2006, the aggregate annual manufacturing capacity of our PV cell production lines that are completed or under construction will reach 120 MW. In addition, we plan to achieve an aggregate annual manufacturing capacity of 240 MW by the end of 2007 and 360 MW by the end of 2008.
       We increased our annual PV module manufacturing capacity from 30 MW to 60 MW in October 2006, and plan to achieve an aggregate annual manufacturing capacity of 80 MW by the end of 2006, 180 MW by the end of 2007 and 300 MW by the end of 2008. In addition, we established Sichuan Leshan Jiayang New Energy Co., Ltd., or Sichuan Jiayang, in April 2006, to increase our PV module production capacity and capture potential system integration opportunities in western China. Sichuan Jiayang’s 10 MW of PV module assembly capacity became operational in June 2006 and we expect to increase this capacity to 20 MW by the end of 2007 and 60 MW by the end of 2008. As part of our expansion plans, we also ordered the equipment for a new 15 MW automatic “building integrated” PV production line in May 2006, which is expected to become operational by early 2007. A “building integrated” PV system integrates PV modules into the core structure of a building’s roof or facade.
       We have experienced significant revenue and earnings growth since our establishment in August 2004. Our net revenue and net income were RMB166.2 million (US$21.0 million) and RMB14.4 million (US$1.8 million), respectively, in 2005. Our net revenue was RMB386.2 million (US$48.9 million) in the first nine months of 2006, compared to RMB86.5 million in the first nine months of 2005. We had net income of RMB72.9 million (US$9.2 million) in the nine months ended September 30, 2006, compared to RMB4.2 million in the same period in 2005.

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Our Strengths
       We believe the following strengths enable us to capture opportunities in the rapidly growing PV industry and compete effectively in the PV market in China and internationally:
Strong Execution Capability Demonstrated by Significant and Rapid Operational and Financial Achievements in a Competitive Market
       We have achieved significant milestones in a highly competitive market within the short period since our establishment, including the following:
  •  Rapid Buildout of Manufacturing Capacity and Fast Rollout of Products. We built up our manufacturing capacity within a short period of time, achieving an annual manufacturing capacity of 60 MW of PV cells and 60 MW of PV modules as of September 30, 2006. We completed our first PV cell production line within seven months from the initial project design phase in April 2005 to final completion of construction in November 2005. In February 2006, less than three months after our PV cell production line became operational, the average conversion efficiency rate of our monocrystalline PV cells had increased to 16.2%. We also reduced the thickness of our monocrystalline PV cells to 240 microns and the average breakage rate to 2.9%, and increased the average daily output of our PV cell production line to 23,000 cells. We believe our ability to build up our manufacturing capacity and produce high-quality products within a short period of time has allowed us to meet the market demands in a timely manner.
 
  •  Continuing Improvements of Process Technology and Product Quality. In line with the ongoing refinement of our manufacturing processes, from February 2006 to September 2006, we further improved the technical parameters of our PV cells, with the average conversion efficiency rate of our monocrystalline PV cells increasing from 16.2% to 16.8%, the thickness of our monocrystalline PV cells decreasing from 240 microns to 200 microns and the average breakage rate decreasing from 2.9% to 2.7%. In October 2005, we obtained TÜV certification for our PV modules after only one trial and on-site audit. The TÜV certification means that our production process has been qualified for IEC 61215 and safety class II test standards and production quality inspections are performed periodically. IEC 61215 is a test standard for the durability and reliability of crystalline silicon modules and safety class II is a test standard for the electrical shock insulation capabilities of PV modules. Obtaining and maintaining this certification has significantly enhanced our sales in Europe, since European customers generally require this certification for any PV products they purchase.
 
  •  Rapid Increase in Profitability. In 2005, we had net income of RMB14.4 million (US$1.8 million), which increased to RMB72.9 million (US$9.2 million) in the nine months ended September 30, 2006.
       We believe these achievements reflect the execution capabilities of our experienced management team, the technical support offered by our research and development team, the skills of our operational personnel, and the efficiency of our production and management system. Due to these factors, we believe we are well-positioned to maintain our execution momentum to capitalize on the rapidly growing PV market.
Extensive Industry Relationships and Scalable Manufacturing Capacity to Support Our
Manufacturing Expansion Plans
       We believe our existing manufacturing capacity and strong customer and supplier relationships will serve as a solid base for us to implement our future expansion plans.
       We currently have an annual manufacturing capacity of 60 MW for both PV cells and PV modules. We also began installation of two additional 30 MW PV cell production lines, and expect

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to complete the construction of these lines in February 2007. We believe our experience in building up capacity within short periods of time will allow us to successfully execute our future capacity expansion plans.
       We believe our access to silicon supplies is a key factor in our expansion plans, as there is currently an industry-wide shortage of these raw materials. We have established long-term strategic cooperation arrangements with our key silicon and silicon wafer suppliers, including supply contracts with LDK that are effective from December 2006 to June 2008 and two supply contracts with ReneSola with terms of 16 months and one year, respectively. In addition, we entered into a supply agreement in June 2006 with E-mei, which became effective in October 2006 and was further amended in November 2006, under which we agreed to make prepayments to purchase the silicon products to be produced by E-mei’s future manufacturing facility. Furthermore, under another supply contract we entered into with E-mei in October 2006, E-mei agreed to reserve for us at least 50% of its annual manufacturing capacity at its existing solar energy products manufacturing facilities in 2007. We have also established PV cell processing arrangements with some of our silicon suppliers. We believe these and other supply agreements we have already entered into will satisfy our planned silicon wafer requirements for the remainder of 2006, a majority of our planned silicon supply requirements in 2007 and a significant portion of our planned silicon supply requirements in 2008.
       In addition, our key customers include prominent solar power system integrators, such as S.E. Project S.R.L. and Social Capital S.L., as well as a growing group of Chinese customers. We expect these strategic relationships with suppliers and customers will serve as the basis for our further growth and expansion. In addition, we are in the process of discussing potential business opportunities with other leading international solar energy companies.
Operational Cost Advantages Achieved through Efficient Utilization of Management, Engineering, Labor and Manufacturing Resources in China
       As our operations are based in China, we have significant cost advantages over companies in the solar energy industry that are based in developed countries. Our approach to manufacturing is aimed to take advantage of the low labor costs and other savings afforded by China’s production environment. In particular, the factors that contribute to our relatively low cost basis include the following:
  •  The cost of professional management and engineering personnel as well as skilled labor in China is much lower than in developed countries. In the nine months ended September 30, 2006, our operating expenses (inclusive of the share compensation charge of RMB10.3 million (US$1.3 million) related to a sale of our ordinary shares to Linyang Electronics by other shareholders of our company and the share compensation charge of RMB12.1 million (US$1.5 million) as a result of the issuance of series A convertible preference shares to Good Energies Investments Limited) accounted for 10.4% of our net revenue.
 
  •  We have enjoyed relatively low equipment costs. We combine imported equipment with domestically produced equipment based on our own manufacturing design to achieve an optimal mix between technical specifications and cost, without compromising the process and product quality.
 
  •  Due to the continuous improvement of our production system, we have increased our daily average production volume, improved our conversion rate and reduced our average cell breakage rate. In addition, we have implemented a performance-based compensation and incentive system for our employees that is aimed at aligning the interests and objectives of each department with the common goals of our company. As a result, we have increased the efficiency of our operations due to better communication and interaction between departments and thereby have achieved lower operating costs.

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Industry Experience to Support Our Development of Downstream Business Opportunities in China
       We believe we are well-positioned to leverage our core competencies in PV cell and PV module manufacturing to effectively develop system integration and other downstream businesses. This evolution is supported by:
  •  Our management’s extensive participation in the electricity generation industry and experience in electronics manufacturing over the last decade.
 
  •  Our establishment of Shanghai Linyang in the first quarter of 2006 to explore downstream opportunities. In particular, Shanghai Linyang’s personnel have previously been involved in several solar energy electricity generation projects in Shanghai, including the Shanghai Xinzhuang Industry Park 3 KW on-grid application system, the Shanghai Charity Foundation 3 KW on-grid application system and the Shanghai Energy Conservation Center 1 KW off-grid application system. In September 2006, Shanghai Linyang won the bid for the Suyuan Group 74 KW on-grid application system project in Nanjing. Furthermore, in November 2006, Shanghai Linyang won a competitive bid to provide a substantial majority of the PV modules to be used in a 1 MW solar power plant in Shanghai. However, Shanghai Linyang is still in the process of negotiating the final agreements relating to these projects. We believe Shanghai will become one of the key testing grounds for solar energy consumption in China.
 
  •  Our fully automatic “building integrated” PV production line, which we ordered from G.T. Solar in May 2006 and which is expected to become operational by early 2007. This additional production capability will help us to meet the needs of the developing market for PV building materials.
Research and Development Capabilities That Leverage Both Third Party Collaborations and Internal Resources
       We have adopted a systematic approach to our research and development activities that is aimed at achieving both near-term manufacturing process efficiency gains and long-term technological breakthroughs by leveraging third party collaborations as well as our internal resources. This approach consists of:
  •  Collaborations with Leading Research Institutions. We have established a joint research program with ISC Konstanz in Germany to improve our PV cell manufacturing. We also have a long-term joint development relationship with Shanghai Jiaotong University, one of the leading science and engineering universities in China. We believe this relationship will provide our company access to leading PV experts in China and allow us to participate in the development and implementation of the next generation of PV technologies. We have also cooperated with the Institute of Electrical Engineering of the Chinese Academy of Sciences to construct a testing laboratory that conforms to international standards. In addition, we have established a joint PV research program with Sun Yat-sen University in China relating to system integration technologies and are also in the process of discussing the formation of potential collaborative relationships with several other leading international research institutions. We believe these and other initiatives in the area of research and development have helped us to achieve our current level of technological advancement and will continue to drive our technological advancements in the future.
 
  •  Internal Research and Development Capabilities. Our research and development efforts have yielded practical results that have allowed us to improve our products and enhance our overall business. Our research and development team is led by three overseas-educated senior research engineers. We currently have four patents either granted or pending in China. From the inception of our company through September 30, 2006, we

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  have spent RMB20.0 million to construct a pilot line at our PV Engineering Center. This PV Engineering Center will help us to convert our research results into commercially viable products. We plan to utilize the PV Engineering Center to further optimize our production processes and improve our average conversion efficiency and reduce the thickness and average breakage rates of our PV cells.
 
  •  Establishment of PV Technology Committee. We have established a PV technology committee that is composed of 16 PV technology experts. This committee’s mandate is to monitor and report on technological developments, trends and new governmental policies affecting the industry. The committee also participates in the research and development activities of our company, conducts its own research on selected topics and contributes to the development and training of our research and development team.
Entrepreneurial Management with Extensive Industry Contacts and Strong Track Record of Successful Execution
       Our management team consists of an experienced and diversified group of entrepreneurs and professionals who have positioned our company to take advantage of the rapidly growing PV market. Our senior management has significant industry and managerial experience and numerous contacts throughout the electricity generation industry, which is evidenced by their track records of founding and managing successful enterprises. For example, Mr. Yonghua Lu, our founder, chairman and chief executive officer, has been chairman and general manager of Linyang Electronics, one of the largest electricity measuring instrument manufacturers in China since 1997. Mr. Hanfei Wang, our director and chief operating officer, was a key management team member of a leading solar company in China from 2001 to 2004. Mr. Kevin C. Wei, our chief financial officer, has over 15 years of financial management and internal and external audit experience in both the United States and China. Mr. Yuting Wang, our chief engineer, has extensive experience in solar energy research and development in China. In addition, more than half of our middle management and production supervisors have extensive manufacturing and managerial experience based on their prior employment at Linyang Electronics and other successful PV enterprises. In addition, Ms. Xihong Deng, who currently serves as our director and executive vice president in charge of international business development as a secondee from Hony Capital II, L.P., one of our shareholders, with over 15 years of working experience at leading financial institutions and private equity firms, has extensive international working experience in mergers and acquisitions and business development in the United States and other countries.
Our Strategies
       Our long-term goal is to become a leading global PV cell and module manufacturer and to leverage our core strengths to become an innovator and an important player in the downstream PV markets, particularly in China. To achieve this goal, we plan to implement the following specific strategies:
Continue to Expand Manufacturing Capacity and Reduce Operational Costs to Achieve Greater Economies of Scale
       We believe that scale and manufacturing capacity are the key factors in determining competitiveness in the PV market. Our plans for expanding our production capacity are three-fold:
  •  PV Cell Production. We currently have two PV cell production lines in commercial operation. We also began installation of two additional 30 MW PV cell production lines, which we expect to become operational by February 2007. We plan to add four additional

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  PV cell production lines in each of 2007 and 2008 to raise our production capacity to 240 MW by the end of 2007 and to 360 MW by the end of 2008.
 
  •  PV Module Assembly. We plan to increase our PV module assembly capacity to 80 MW, 180 MW and 300 MW by the end of 2006, 2007 and 2008, respectively. We have also set up 10 MW of PV module assembly capacity through our majority-owned subsidiary, Sichuan Jiayang, and expect to increase this capacity to 60 MW by the end of 2008.
 
  •  Other Production Lines. In addition, we plan to install other production lines for other products. For example, we plan to begin operation of a new 15 MW “building integrated” PV production line by early 2007.
       Our planned expansion is expected to help us to achieve economies of scale in production and reduced materials procurement costs, as well as rationalize our equipment costs and general and administrative expenses. In addition, we plan to begin to design our own equipment, including cleaning and printing machines, debottleneck our production capacity and improve our manufacturing processes. We believe that this will reduce our investment and production costs and allow us to meet our customers’ product and volume requirements, while maintaining our profitability. We believe that as silicon prices decline over time, the low labor cost of our manufacturing processes and our production management system will allow us to maintain our price competitiveness in the global market.
Increase Investments for Research and Development Activities, Enhance Production Process Technologies and Develop Next Generation Products through Continuous Innovation
       To further enhance our existing product technology and our manufacturing processes and develop new products and technologies, we plan to devote substantial resources to research and development, including by supporting various types of cooperation projects with leading international research institutions. In particular, our research and development efforts will focus on the following areas:
  •  Increase Conversion Efficiencies. We are developing new technologies and designing advanced equipment to manufacture, on a large scale and cost-effectively, PV cells with higher conversion efficiencies.
 
  •  Reduce Silicon Usage by Using Thinner Silicon Wafers. We are developing process technologies for wafers with thicknesses of less than 150 microns to address manufacturing challenges associated with reducing the thickness of silicon wafers.
 
  •  Develop Thin-Film Silicon PV Cell Technologies and Other Technologies. We are developing manufacturing technologies for the next generation thin film silicon PV cells on glass, which would significantly reduce the consumption of silicon materials and manufacturing costs.
       In addition, in order to improve our operating efficiency, we continue to develop new equipment and tools and redesign our manufacturing processes. We also plan to build upon our existing research and development capabilities by continuing to recruit experienced research personnel and establishing additional alliances and collaborations with leading Chinese and international institutions.
Diversify Our Product and Service Offerings and Expand Our Business in Downstream Markets
       We plan to diversify our PV cell and PV module offerings and to enter the system integration business by leveraging our core competencies in cell and module manufacturing and

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our management’s experience and relationships in the electricity generation and electronics manufacturing industries. In particular:
  •  Our product lines currently include primarily PV cells and PV modules, and we plan to expand them to include “building integrated” PV and other PV applications and products, such as inverters and net meters, in order to address a broader range of market opportunities and reduce our dependence on our current products. Moreover, we believe the addition of these products will also help us to increase our profitability and brand recognition.
 
  •  We expect the PV market in China to grow rapidly in light of recent legislation and policies. We plan to take advantage of the rapid development of China’s PV market, including the potential opportunities relating to the 2008 Beijing Olympic Games, the 2010 Shanghai World Expo and the PRC government’s promotion of the development of solar energy in China’s western provinces, to begin to provide PV system services. By targeting high-profile projects, we believe we can also use these downstream opportunities to enhance awareness of our core products and our brand. We have already established Shanghai Linyang and Sichuan Jiayang to capitalize on the potential system integration opportunities in China. Provision of system integration services typically generates a higher profit margin than PV cells and PV modules. Development of system integration products and services may also provide us with greater pricing power, as the new products and services are less susceptible to commoditization than our current products.
Secure Long-Term Supplies of Silicon
       We intend to leverage our financial strength, market position and industry experience in China to enter into various forms of strategic alliances with silicon suppliers in China and overseas to reduce our exposure to the risk of supply shortages. In particular, we plan to secure long-term supplies of silicon necessary for our production through the following means:
  •  Long-Term Supply Contracts. We have entered into supply contracts with LDK, ReneSola and E-mei. We are in active discussions with many other silicon and silicon wafer suppliers both in China and overseas to secure additional contracts for stable and reliable silicon supplies. We believe that our expanding production capacity makes us an attractive customer for global silicon and silicon wafer suppliers.
 
  •  PV Cell Processing Arrangements. We plan to diversify our supply channels by seeking to establish, where appropriate, PV cell processing arrangements with silicon and silicon wafer suppliers both overseas and in China. We have already established PV cell processing arrangements with some of our silicon suppliers and PV manufacturers.
 
  •  Other Solutions. We plan to establish alliances with and make investments in silicon producers and selectively enter into spot market silicon purchase contracts to supplement our existing long-term supply agreements.
Broaden Our Geographical Revenue Base, and Build and Enhance Brand Recognition Both Domestically and Internationally
       We plan to broaden the geographical distribution of our sales in order to seek new market opportunities, reduce our reliance on any particular geographic region and to achieve a more balanced distribution of our products.
  •  Overseas Market. Europe has been our largest market since we commenced operations in 2004. As part of our plan to enter the United States market, we are in the process of obtaining UL certification for our products in the United States, which we expect to obtain by early 2007, and to commence our marketing efforts in the United States thereafter. We also plan to set up our own marketing and services network in the United States and

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  Europe during the first half of 2007 to coordinate and organize our local marketing and after-sales activities to achieve further penetration into the international markets and greater customer satisfaction.
 
  •  PRC Market. We believe that China’s PV market will grow rapidly with the enactment of more solar energy incentive policies by the PRC government. By leveraging upon the existing broad domestic sales platform of Linyang Electronics, our affiliate, we intend to further expand our PRC market presence, especially in the downstream market.
 
  •  Strengthening Our Brand. We plan to build and enhance our “Solarfun” brand both domestically and internationally by continuing to provide high quality products and services and through a targeted marketing campaign.
Strengthen and Grow Our Management and Research and Development Teams Through Training and Professional Development and Recruitment of Personnel with International Experience
       We have increased our focus on training and professional development at all levels of our management and technical personnel and plan to hire several experienced management team members. We intend to make full use of our incentive schemes in order to motivate and nurture our existing employees and attract qualified candidates. We also plan to:
  •  use our presence in Shanghai as a hiring platform and operational base to attract international professionals;
 
  •  encourage our existing research and development personnel to participate in technological exchange programs at leading domestic and overseas research institutions and universities; and
 
  •  actively utilize Linyang PV Research and Development Center at Shanghai Jiaotong University to foster engineering talent through cooperative projects and by offering solar industry-related grants.
Our Products and Services
       Our products and services include PV cells, PV modules and PV cell processing services. The table below shows our net revenue derived from the sales of PV cells, PV modules, the provision of PV cell processing services, and the percentage contribution of each of these products and services to our net revenue, for the periods indicated:
                                 
    Year Ended   Nine Months Ended
    December 31, 2005   September 30, 2006
         
Products and Services   Net Revenue   %   Net Revenue   %
                 
    (In thousands of Renminbi, except percentages)
PV cells
    542       0.3%       6,624       1.7%  
PV modules
    165,636       99.7%       360,154       93.2%  
PV cell processing
                19,461       5.1%  

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Our Products
PV Cells
       A PV cell is a semiconductor device that converts sunlight into electricity by a process known as the photovoltaic effect. The following table sets forth the specifications of two types of PV cells we currently produce:
                                 
    Dimensions   Conversion   Thickness   Maximum
PV Cell Type   (mm×mm)   Efficiency (%)   (em)   Power (W)
                 
Monocrystalline silicon cell
    125 × 125       15.0 - 17.2 %     200 - 220       2.23 - 2.56  
      156 × 156       15.0 - 16.8 %     200 - 220       3.60 - 4.03  
Multicrystalline silicon cell
    125 × 125       14.5 - 16.0 %     220 - 240       2.19 - 2.50  
      156 × 156       14.5 - 15.8 %     220 - 240       3.41 - 3.85  
       The key technical efficiency measurement of PV cells is the conversion efficiency rate. In general, the higher the conversion efficiency rate, the lower the production cost of PV modules per watt because more power can be incorporated into a given size package. The average conversion efficiency rate of our monocrystalline PV cells reached 16.8% in September 2006, representing an increase from 14.8% in November 2005 when we began producing PV cells.
       We currently produce a variety of PV cells ranging from 200 microns to 240 microns in thickness, with the substantial majority of these PV cells having a thickness of 220 microns. In order to further lower our production costs, we intend to focus on producing PV cells with decreasing thickness levels.
PV Modules
       A PV module is an assembly of PV cells that have been electrically interconnected and laminated in a durable and weather-proof package. We have been selling a wide range of PV modules, currently ranging from 5W to 200W in power output specification, made primarily from the PV cells we manufacture. We are developing modules with higher power to meet the rising expansion of on-grid configurations. The majority of the PV modules we currently offer to our customers range in power between 160W and 200W. We sell approximately 84% of our PV modules under our proprietary “Solarfun” brand, and approximately 16% of our PV modules under the brand names of our customers.
       The following table sets forth the types of PV modules we manufacture with the specifications indicated.
                         
    Dimensions   Weight    
PV Module Manufactured with:   (mm)   (Kg)   Power (W)
             
Monocrystalline silicon
    1580 ×  808 ×        45 15       160 - 185  
      1494 × 1000 × 4       5 18       190 - 210  
Multicrystalline silicon
    1580 ×  808 ×        45 15       155 - 180  
      1494 × 1000 × 4       5 18       185 - 205  
       We believe our PV cells and modules are highly competitive with other products in the solar energy market in terms of efficiency and quality. We expect to continue improving the conversion efficiency and power, and reducing the thickness, of our solar products as we continue to devote significant financial and human resources in our various research and development programs.

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Our Services
PV Cell Processing
       We provide PV cell processing services to convert silicon wafers into PV cells on behalf of third parties, including some of our silicon suppliers. For these PV cell processing service arrangements, we “purchase” raw materials from a customer and at the same time agree to “sell” a specified quantity of PV cells back to the same customer. The quantity of PV cells sold back to the customer under these processing arrangements is consistent with the amount of raw materials purchased from the customer based on current production conversion rates. We record the amount of revenue from these processing transactions based on the amount received for PV cells sold less the amount paid for the raw materials purchased from the customer. The revenue recognized is recorded as processing service revenue and the production costs incurred related to providing the processing services are recorded as service processing costs within cost of revenue.
Solar System Integration
       A solar application system consists of one or more PV modules that are physically mounted and electrically interconnected, with system components such as batteries and power electronics, to produce and reserve electricity. On March 29, 2006, we incorporated our 83%-owned subsidiary, Shanghai Linyang. We have commenced our commercial activities to provide solar system integration services to end-users in China through Shanghai Linyang. We intend to focus on designing and installing solar application systems based on customers’ specific requirements, using PV modules we manufacture under our “Solarfun” brand. Shanghai Linyang’s personnel have previously been involved in several on-grid and off-grid pilot projects in China, including the Shanghai Xinzhuang Industry Park 3KW on-grid application system, the Shanghai Charity Foundation 3KW on-grid application system, and the Shanghai Energy Conservation Center 1KW off-grid application system. In September 2006, Shanghai Linyang won the bid for the Suyuan Group 74KW on-grid application system project in Nanjing. In November 2006, Shanghai Linyang won a competitive bid to provide a substantial majority of the PV modules to be used in a 1 MW solar power plant in Shanghai. However, Shanghai Linyang is still in the process of negotiating the final agreements relating to these projects.
Raw Materials Supply Management
       Manufacturing of our solar products requires reliable supplies of various raw materials, including silicon wafers, ethylene vinyl acetate, triphenyltin, tempered glass, connecting bands, welding bands, silica gel, aluminum alloy and junction boxes. We seek to diversify the supply sources of raw materials and have not in the past experienced any disruption of our manufacturing process due to insufficient supply of raw materials. In addition, we are not dependent on any single supplier. The aggregate costs attributable to our five largest raw materials suppliers in 2005 and in the nine months ended September 30, 2006 were 71.3% and 54.6%, respectively, of our total raw materials purchases.
       We maintain different inventory levels of our raw materials, depending on the type of product and the lead time required to obtain additional supplies. We seek to maintain reasonable inventory levels that achieve a balance between our efforts to reduce our storage costs and optimize working capital on one hand, and the need to ensure that we have access to adequate supplies on the other. In light of the current industry-wide constraints on silicon wafer supply, our current policy is to procure as many silicon wafers as possible. As of December 31, 2005 and September 30, 2006, we had RMB65.0 million (US$8.2 million) and RMB187.6 million (US$23.7 million), respectively, of raw materials in inventory.

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Table of Contents

Silicon Wafers
       Among the various raw materials required for our manufacturing process, silicon wafers are the most important for producing PV cells. A silicon wafer is a flat piece of crystalline silicon that can be processed into a PV cell. Silicon wafers used for PV cell production are generally classified into two different types: monocrystalline and multicrystalline silicon wafers. Compared to monocrystalline silicon wafers, multicrystalline silicon wafers have a lower conversion rate but are less expensive. We currently use 5-inch and 6-inch wafers in our production, and plan to use 8-inch wafers in the future, since the amount of silicon wastage decreases with an increase in the diameter of the wafers used. Our PV cell production line is suitable for manufacturing using both types of silicon wafers. We believe that the ability to manufacture using both types of silicon wafers provides us with greater flexibility in procuring raw materials, especially during the periods of silicon supply shortages.
       We purchase both silicon ingots and silicon wafers from third-party suppliers. We outsource the slicing of silicon ingots into silicon wafers to third parties. We purchase silicon from both domestic and overseas suppliers, with the majority of our purchases being made in the domestic market. Currently, our principal silicon suppliers include LDK, ReneSola and E-mei.
       We purchase silicon from third-party suppliers on a purchase order or annual or semi-annual contract basis. Under the annual/semi-annual purchase agreements, we are typically required to prepay a certain percentage of the purchase price.
       We seek to secure a dependable silicon supply through various means, including entering into PV cell processing arrangements, long-term supply contracts and strategic alliances with local and overseas silicon suppliers. In addition, we are seeking opportunities to invest in silicon producers in China to secure silicon supplies.
       We are actively exploring opportunities to establish long-term relationships and strategic alliances with our major suppliers. Under an amendment to prior supply agreements with LDK that we entered into in November 2006, LDK will provide 9.3 MW of silicon wafers to us from December 2006 to July 2007 based on a fixed price. Furthermore, we entered into a framework supply agreement with LDK, under which product purchase prices and delivery schedules for the contracted periods are not fixed. Under this agreement, LDK will provide 56.4 MW of silicon wafers from July 2007 to