20-F 1 d29418.htm 20-F


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

                         

FORM 20-F

                         

(Mark One)

[   ]

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011.

OR

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _______

OR

[   ]

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report________

 

Commission file number: 001-33840

 

 

WSP HOLDINGS LIMITED

                                                      

(Exact Name of Registrant as Specified in Its Charter)

N/A

                                                      

(Translation of Registrant’s Name Into English)

 

Cayman Islands

                                                      

(Jurisdiction of Incorporation or Organization)

 

No. 38 Zhujiang Road

Xinqu, Wuxi

Jiangsu Province

People’s Republic of China

                                                      

 

(Address of Principal Executive Offices)

 

Choon-Hoi Then

WSP Holdings Limited

No. 38 Zhujiang Road

Xinqu, Wuxi

Jiangsu Province

People’s Republic of China

Phone: 510-8536-0401

Email: info@wsphl.com

             

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

                                                      

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

Name of exchange on which each class is to be registered

American Depositary Shares, each representing ten ordinary shares, par value $0.0001 per share

New York Stock Exchange

                                                      

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

                                                      

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None

                                                      

(Title of Class)

 

Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

204,375,226 ordinary shares, par value $0.0001 per share, as of December 31, 2011.

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [   ]      No [X]

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    

Yes  [   ]    No  [X]

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    

Yes  [X]    No  [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

Yes  [   ]   No  [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  [   ]  Accelerated filer  [   ]     Non-accelerated filer   [X]

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

US GAAP [X]                 International Financial Reporting Standards as issued by the                            Other [   ]

International Accounting Standards Board [   ]

 

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 [   ]   Item 18 [   ]

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    

Yes  [   ]    No  [X]

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes  [   ]    No  [   ]

 

 






TABLE OF CONTENTS

            Page
INTRODUCTION
           
 
         1    
PART I
           
 
         2    
Item 1.
           
Identity of Directors, Senior Management and Advisers
         2    
Item 2.
           
Offer Statistics and Expected Timetable
         2    
Item 3.
           
Key Information
         2    
Item 4.
           
Information on the Company
         21    
Item 4A.
           
Unresolved Staff Comments
         38    
Item 5.
           
Operating and Financial Review and Prospects
         38    
Item 6.
           
Directors, Senior Management and Employees
         60    
Item 7.
           
Major Shareholders and Related Party Transactions
         69    
Item 8.
           
Financial Information
         70    
Item 9.
           
The Offer and Listing
         72    
Item 10.
           
Additional Information
         73    
Item 11.
           
Quantitative and Qualitative Disclosures About Market Risk
         82    
Item 12.
           
Description of Securities Other than Equity Securities
         83    
PART II
           
 
         85    
Item 13.
           
Defaults, Dividend Arrearages and Delinquencies
         85    
Item 14.
           
Material Modifications to the Rights of Security Holders and Use of Proceeds
         85    
Item 15.
           
Controls and Procedures
         85    
Item 16A.
           
Audit Committee Financial Expert
         86    
Item 16B.
           
Code of Ethics
         86    
Item 16C.
           
Principal Accountant Fees and Services
         86    
Item 16D.
           
Exemptions from the Listing Standards for Audit Committees
         86    
Item 16E.
           
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
         87    
Item 16F.
           
Change in Registrant’s Certifying Accountant
         87    
Item 16G.
           
Corporate Governance
         87    
PART III
           
 
         88    
Item 17.
           
Financial Statements
         88    
Item 18.
           
Financial Statements
         88    
Item 19.
           
Exhibits
         88    
 

i



INTRODUCTION

Unless the context otherwise requires, in this annual report on Form 20-F,

•  
  “we,” “us,” “our company,” “our” or “WSP Holdings” refers to WSP Holdings Limited, which, unless otherwise required under the context, includes its predecessor entities and its consolidated subsidiaries;

•  
  “ADSs” refers to our American depositary shares, each representing ten ordinary shares;

•  
  “China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this annual report on Form 20-F only, Taiwan, Hong Kong and Macau;

•  
  “Oil Country Tubular Goods,” or “OCTG,” refers to pipes and other tubular products used in the exploration, drilling and extraction of oil, gas and other hydrocarbon products. OCTG mainly consist of casing, tubing and drill pipes. Unless otherwise indicated, discussions relating to OCTG in this annual report on Form 20-F are limited to these three types of OCTG;

•  
  “Production capacity” refers to the maximum production capacity that can be achieved at the optimal level of operations of a production line, calculated using an estimated product mix for such production line, which may differ from its actual product mix;

•  
  “RMB” or “Renminbi” refers to the legal currency of China, “HK$” refers to the legal currency of Hong Kong, and “$,” “US$” or “U.S. dollars” refers to the legal currency of the United States; and

•  
  “shares” or “ordinary shares” refers to our ordinary shares, par value $0.0001 per share.

Names of certain companies provided in this annual report are translated or transliterated from their original Chinese legal names.

Discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

This annual report on Form 20-F includes our audited consolidated financial statements for the years ended December 31, 2009, 2010 and 2011.

We use U.S. dollars as the reporting currency in our financial statements and in this annual report. When reporting our operating results and financial position, we use the monthly average exchange rate for the year and the exchange rate at the balance sheet date, respectively, as published by the People’s Bank of China. With respect to amounts not recorded in our consolidated financial statements included elsewhere in this annual report, all translations of Renminbi into U.S. dollars were made at RMB6.2939 to $1.00, the noon buying rate on December 31, 2011 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We make no representation that the Renminbi or U.S. dollar amounts in this annual report 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 “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Fluctuations in exchange rates could adversely affect our business as well as result in foreign currency exchange losses.” On April 20, 2012, the noon buying rate was RMB6.3080 to $1.00.

1



PART I

Item 1.
  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

Item 2.
  OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

Item 3.
  KEY INFORMATION

A.
  Selected Financial Data

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and notes to those consolidated financial statements included elsewhere in this annual report and “Item 5. Operating and Financial Review and Prospects.” The selected consolidated statement of operations data for the years ended December 31, 2009, 2010 and 2011 and the selected consolidated balance sheet data as of December 31, 2010 and 2011 are derived from our audited consolidated financial statements, which are included elsewhere in this annual report. The selected consolidated statement of operations data for the years ended December 31, 2007 and 2008 and the selected consolidated balance sheet data as of December 31, 2007, 2008 and 2009 are derived from our audited consolidated financial statements, which are not included in this annual report. 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.

        For the year ended December 31,
   
(in thousands, except for share and per share data)
        2007
    2008
    2009
    2010
    2011
Selected Consolidated Income Statement Data:
                                                                                       
Net revenues
              $ 483,783          $ 912,090          $ 577,029          $ 470,465          $ 686,125   
Cost of revenues
                 (357,997 )            (703,531 )            (496,656 )            (467,400 )            (637,615 )  
Gross profit
                 125,786             208,559             80,373             3,065             48,510   
Selling and marketing expenses
                 (8,578 )            (22,770 )            (18,244 )            (20,841 )            (34,486 )  
General and administrative expenses
                 (13,591 )            (41,740 )            (44,798 )            (67,008 )            (61,774 )  
Impairment on long-lived assets
                                                        (17,055 )               
Gain on disposal of subsidiary
                                                                     3,268   
Other operating (expenses) income, net
                 (32 )            2,589             2,559             5,446             2,777   
Income (loss) from operations
                 103,585             146,638             19,890             (96,393 )            (41,705 )  
Interest income (expense), net
                 (10,541 )            (15,319 )            (17,026 )            (26,043 )            (30,609 )  
Other income
                 212              767              767              767              767    
Exchange differences
                 (1,898 )            (6,984 )            218              (1,484 )            (5,144 )  
Income (loss) from continuing operations before provision for income taxes
                 91,358             125,102             3,849             (123,153 )            (76,691 )  
Provision for income taxes
                 (15,188 )            (24,405 )            (2,137 )            (9,388 )            (99 )  
Net income (loss) from continuing operations before earnings in equity investments
                 76,170             100,697             1,712             (132,541 )            (76,790 )  
Loss in equity investments
                              1              (105 )            (211 )            (10 )  
Net income (loss) from continuing operations
                 76,170             100,698             1,607             (132,752 )            (76,800 )  
Net income (expense) from discontinued operations
                                                                        
Net income (loss)
                 76,170             100,698             1,607             (132,752 )            (76,800 )  
Less: Net income (loss) attributable to the non-controlling interests
                 (1,609 )            (1,349 )            2,568             13,989             8,320   
Net income (loss) attributable to WSP Holdings Limited
              $ 74,561          $ 99,349          $ 4,175          $ (118,763 )            (68,480 )  
Net income (loss) per share—basic
                                                                                       
Net income (loss) from continuing operations
              $ 0.49          $ 0.48          $ 0.02          $ (0.58 )            (0.34 )  
Loss on discontinued operations
                                                                        
Net income (loss) per share
              $ 0.49          $ 0.48          $ 0.02          $ (0.58 )            (0.34 )  
Net income (loss) per share—diluted
                                                                                       
Net income (loss) from continuing operations
              $ 0.48          $ 0.48          $ 0.02          $ (0.58 )            (0.34 )  
Loss on discontinued operations
                                                                        
Net income (loss) per share
              $ 0.48          $ 0.48          $ 0.02          $ (0.58 )            (0.34 )  
Weighted average ordinary shares used in computation of earnings per share:
                                                                                       
Basic
                 153,561,644             205,663,247             205,789,800             204,771,144             204,375,226   
Diluted
                 153,738,133             205,663,247             205,789,800             204,771,144             204,375,226   
 

2



The following table presents a summary of our consolidated balance sheet data as of December 31, 2007, 2008, 2009, 2010 and 2011:

        As of December 31,    
(in thousands)
        2007
    2008
    2009
    2010
    2011
Consolidated balance sheet data
                                                                                       
Cash and cash equivalents
              $ 179,973          $ 89,097          $ 133,250          $ 48,688          $ 27,742   
Restricted cash
                 120,759             231,988             205,613             142,027             249,812   
Accounts and bills receivable, net of allowance for doubtful accounts
                 137,497             246,463             204,906             199,970             260,139   
Advances to suppliers
                 18,167             15,049             23,514             17,123             19,229   
Inventories
                 163,246             311,383             266,090             240,713             242,240   
Total current assets
                 626,042             919,931             870,166             692,435             866,562   
Property and equipment, net
                 185,136             313,936             407,052             536,942             653,783   
Intangible assets, net
                 187              136              971              244              108    
Total assets
              $ 827,221          $ 1,310,611          $ 1,394,394          $ 1,331,062          $ 1,571,116   
Accounts payable
              $ 179,065          $ 344,817          $ 162,557          $ 176,379          $ 307,740   
Borrowings—due within one year
                 208,356             337,438             506,448             596,546             773,541   
Total current liabilities
                 423,032             796,135             764,428             877,956             1,245,000   
Total liabilities
                 482,095             808,616             960,082             1,028,287             1,339,734   
Total WSP Holdings Limited shareholders’ equity
                 341,124             482,606             410,738             297,031             238,873   
Non-controlling interest
                 4,002             19,389             23,574             5,744             (2,491 )  
Total equity
                 345,126             501,995             434,312             302,775             231,382   
Total liabilities and equity
              $ 827,221          $ 1,310,611          $ 1,394,394          $ 1,331,062          $ 1,571,116   
 
B.
  Capitalization and Indebtedness

    Not Applicable.

C.
  Reasons for the Offer and Use of Proceeds

    Not Applicable.

D.
  Risk Factors

Our financial statements indicate that there is a going concern uncertainty, which could adversely affect our ability to meet our ongoing financing needs as well as to obtain third party financing.

We have suffered significant operating losses, working capital deficiencies and negative operating cash flow, while a significant amount of our short-term borrowings needs to be refinanced. In addition, we experienced a significant decline in sales in the United States starting in 2009 due to the anti-dumping and countervailing duties on seamless pipes made in China, which resulted in a low capacity utilization of our production facilities. In connection with the recent global credit and economic crisis, some of our customers experienced reduction in cash flows and reduced availability of credit and increased costs of borrowing due to tightening of the credit markets, which had significant adverse effects on the their financial conditions. This may result in project modifications, delays or cancellations, general business disruptions, and delays in, or nonpayment of, amounts that are owed to us, which could have a significant adverse effect on our results of operations and cash flows. Moreover, we depend on a limited number of customers, and therefore, any decline in our major customers’ businesses could lead to a decline in purchase orders from these customers, which may materially and adversely affect our business, results of operations and financial condition.

We rely largely on operating cash flow and short-term borrowings for the working capital needs of our operations. As of December 31, 2011, our total bank and other borrowings amounted to $852.9 million, of which $773.5 million were short-term bank borrowings. Our substantial indebtedness could have important consequences to our investors. For example, it could:

  limit our ability to satisfy our obligations under our debt;

  increase our vulnerability to adverse general economic and industry conditions;

  require us to dedicate a substantial portion of our cash flow from operations to servicing and repaying our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

  limit our flexibility in planning for or reacting to changes in our businesses and the industry in which we operate;

  place us at a competitive disadvantage compared to our competitors that have less debt;

  impair our ability to develop business opportunities or make strategic acquisitions; and

  increase the cost of additional financing.

3



In addition, our facility agreements with certain commercial banks contain various covenants. A failure to maintain the financial covenants, or a breach of any of the other restrictive covenants, would result in a default under the relevant facility agreements. If the lender accelerates the repayment of borrowings, we may not have sufficient cash or assets to repay the loans under the facility agreements. The existence of these conditions may raise the issue about our ability to continue as a going concern. We cannot assure you that our business will generate sufficient cash flow from operations in the future to service our debts and make necessary capital expenditures, in which case we may (i) seek additional financing, (ii) seek to refinance some or all of our debts or (iii) dispose of certain assets. See “—Restrictive covenants under our facility agreements and any future indebtedness may limit the manner in which we operate and an event of default under any of our facility agreements and any future indebtedness may adversely affect our operations; and our financial leverage may hinder our ability to expand and materially affect our results of operations.” The existence of a going concern uncertainty could affect our ability to obtain financing from third parties or could result in increased costs of such financing. See Note 2(a) to our financial statements included in this annual report for more details. Although we believe that we will be able to renew a substantial portion of our bank borrowings and bank credit facilities when they fall due, any additional financing may not be available in the amounts we need or on terms acceptable to us, if at all. 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. We may not be able to refinance some or all of our existing facilities on commercially reasonable terms and in a timely manner. Our ability to refinance existing facilities and borrow additional funds is affected by a variety of factors, including (i) limitations imposed on us under the financing agreements that contain restrictive covenants and borrowing conditions that may limit our ability to raise additional debt, (ii) the decline in liquidity in the credit markets, (iii) prevailing interest rates, (iv) the strength of the lenders from whom we borrow, and (v) changes in the PRC government’s policies in connection with commercial loans. An event of default, any material negative change of our operation and financial conditions, an adverse action by a regulatory authority or a general deterioration in the economy that constricts the availability of credit may increase our cost of funds and make it difficult for us to renew existing credit facilities and obtain new loans. In the event that we are unable to meet our liabilities when they become due or if our creditors take legal actions against us for payment, we may have to liquidate long-term assets to repay our creditors. We may have difficulty converting our long-term assets into current assets in such a situation and may suffer material losses upon the sale of our long-term assets.

Restrictive covenants under our facility agreements and any future indebtedness may limit the manner in which we operate and an event of default under any of our facility agreements and any future indebtedness may adversely affect our operations; and our financial leverage may hinder our ability to expand and materially affect our results of operations.

Our facility agreements with certain commercial banks contain, and any future indebtedness we incur may contain, various covenants and conditions that limit our ability to, among other things:

  incur or guarantee additional debt;

  secure loans, make capital expenditures or engage in investments and acquisitions;

  enter into transactions with affiliates;

  create liens;

  announce cash dividends;

  make major investments;

  merge or consolidate with other companies, implement any divesture, reorganization, restructuring, discontinuance of business, receivership, bankruptcy, dissolution or other similar proceedings; and

  dispose of, lease, transfer or sell more than 10% of our assets.

As a result of these covenants, we are limited in the manner in which we conduct our business and may be unable to engage in certain business activities. Some of the facility agreements also include certain financial covenants including, but not limited to, specified financial ratios that we must comply over the term of the borrowings. In August 2011, one of our subsidiaries entered into a syndicated bank credit facility agreement with two major lead commercial banks and six other participating commercial banks that provided us with a syndicated bank credit facility of up to RMB3.5 billion ($556.1 million), with an initial commitment of RMB2.86 billion ($453.9 million) for a term up to three years from the first drawdown date. This agreement contains financial covenants applicable to one of our major subsidiaries, including maintenance of debt to asset ratio not exceeding 72% in 2011, 71% in 2012 and 67% in 2013, minimum sales of RMB4 billion in 2011, RMB4.5 billion in 2012 and RMB5.5 billion in 2013, minimum net income of RMB80 million in 2011, RMB150 million in 2012 and RMB350 million in 2013, minimum current ratios of 170% in 2011, 180% in 2012 and 180% in 2013, and minimum quick ratios of 120% in 2011, 130% in 2012 and 130% in 2013. Additionally, we must also meet certain ratios and thresholds at the end of a one-year special observation period from July 1, 2011 to June 30, 2012. These ratios and thresholds include maximum debt to asset ratio of 70%, minimum sales of RMB4.2 billion, minimum net income of RMB100 million, minimum current ratio of 170% and minimum quick ratio of 120%.

4



A failure to maintain the financial covenants, or a breach of any of the other restrictive covenants, would result in a default under the relevant facility agreements. Upon the occurrence of any default under any of the facility agreements, the lender could elect to declare all borrowings outstanding, together with accrued and unpaid interests and fees, to be due and payable, or could require us to apply all of our available cash to repay these borrowings. If the lender accelerates the repayment of borrowings, we may not have sufficient cash or assets to repay the loans under the facility agreements. Even if we are able to obtain new financing, we may not be on commercially reasonable terms, or terms that are acceptable to us.

Our failure to comply with the financial or other covenants under our facility agreements could lead us to seek a waiver or an amendment of the covenants contained in the facility agreements, or alternative financing. Any waiver of the covenants in or amendment of the terms of our facility agreements may involve upfront fees, higher annual interest costs and other terms less favorable to us than those currently offered by the existing facilities. Additionally, we may not be able to obtain alternative financing on commercially reasonable terms or terms accepted to us, if at all.

For example, we did not meet certain ratios and thresholds for the year ended December 31, 2011 set forth in the financial covenants in our syndicated bank credit facility agreement. Additionally, we do not expect to meet certain ratio and thresholds for the special observation period set forth in the financial covenants in this facility agreement. We have informed our lenders about our non-compliance with the 2011 financial covenants and our expected non-compliance with the special observation period covenants. We are currently in discussion with these lenders regarding our non-compliance and finding an adequate resolution. Furthermore, as of and for the year ended December 31, 2009, one of our subsidiaries failed to meet maximum debt to asset ratio financial covenants under its facility agreements with two banks. We agreed to implement measures to address these breaches and obtained waivers for these breaches from the two banks. Nonetheless, there was a delay in implementing certain remedial measures required by one bank and we remained non-compliant with relevant financial covenant in 2010, which gave the bank the right to accelerate repayment of the outstanding amount under the relevant facility agreement. The breach of covenant was rectified in April 2011. Additionally, another of our subsidiaries, which commenced commercial production in the second half of 2011, is also in breach of its financial covenants under a project loan. We have started discussions with this lender regarding our subsidiary’s breach under this loan.

Our lenders have not accelerated the repayment of their borrowings under the aforementioned credit facilities. However, in the event that we are unable to reach an agreement with these lenders, they may accelerate the repayment of these loans and our ability to draw down further under these credit facilities may be affected, which would adversely affect our financial condition and results of operations.

We have complied with the financial covenants under our other loan facility agreements as of December 31, 2011. However, we may not be able to comply with the covenants contained in our facility agreements in the future, and if we breach the covenants, we may not be able to obtain waivers for the breaches or obtain alternative financing at commercially reasonable terms. Furthermore, defaults under our existing facility agreements may result in cross-defaults under our other loans with banks in China. Such events of default may result in a substantial amount of our debt becoming immediately due, which would have a material adverse effect on our financial condition and results of operations.

Our ability to make scheduled payments under our financing agreements and any future financing transactions and our ability to refinance our debts, if necessary, will depend, among other things, on our future operating performance. See above for a discussion on the risks regarding our ability to service our debt.

Declines in domestic and international oil and natural gas prices, or domestic and international exploration, drilling and production activities, would adversely affect our profitability.

Demand for our OCTG products depends significantly on the number of domestic and worldwide oil and gas wells drilled, completed and reworked, as well as the depth and drilling conditions of these wells. The level of such drilling activities in turn depends on the level of capital spending by major oil and gas companies. A decline in domestic and worldwide oil and gas exploration, drilling and production activities would adversely affect our results of operations. Capital spending on OCTG used for oil and natural gas exploration, drilling and production activities is driven in part by the prevailing prices for oil and natural gas and the perceived stability and sustainability of those prices. Although the prices of crude oil and natural gas rose in 2011, the global credit and economic crisis have in the past reduced worldwide demand for energy and resulted in significantly lower crude oil and natural gas prices. A substantial or extended decline in oil and natural gas prices can reduce our customers’ activities and their spending on our products. If the current global economic conditions and the availability of credit worsen or continue for an extended period, this could reduce our customers’ levels of expenditures and have a significant adverse effect on our revenue and operating results.

The reduction in cash flows being experienced by our customers resulting from declines in commodity prices, together with reduced availability of credit and increased costs of borrowing due to tightening of the credit markets, could have significant adverse effects on the financial conditions of some of our customers. This could result in project modifications, delays or cancellations, general business disruptions, and delays in, or nonpayment of, amounts that are owed to us, which could have a significant adverse effect on our results of operations and cash flows.

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In addition, oil and natural gas prices are subject to significant volatility due to numerous factors beyond our control, including, but not limited to, changes in the supply and demand for oil and natural gas, market uncertainty, world events, regulatory control (including by the PRC government), political developments in petroleum producing regions and the price and availability of alternative energy sources. We cannot assure you that oil and natural gas prices will not decline further or that such prices will remain at sufficiently high levels to support levels of investment in exploration, drilling and production activities that will sustain demand for our products. Any further decline in the price of oil and natural gas, even for a short period of time, may reduce or curtail expenditures by oil and gas companies in connection with exploration, drilling and production activities, which may result in lower sales volumes and prices for our products in China and overseas and materially and adversely affect our results of operations and financial condition.

Our results of operations may be adversely affected by increases in raw material prices.

Steel is the principal raw material for our products. Cost for raw materials accounted for 74.4%, 73.4% and 78.3% of our cost of revenues in 2009, 2010 and 2011, respectively. Any increase in the price of steel could reduce our profit margin if we are unable to pass such increased costs on to our customers. From the end of 2003 to mid-2008, the price of steel increased substantially due in part to increasing demand, which significantly affected our gross margin. Since 2009, the price of steel has shown increasing volatility, although it exhibited a general upward trend through 2010 and the first half of 2011 before declining toward the end of 2011. We expect the volatility of price of steel to persist in the short to medium term. The price of steel has had, and will continue to have, a significant impact on our cost of revenues. If we are unable to manage our purchases of steel at prices acceptable to us or if the price of steel increase significantly and we are not able to pass on all or part of any such price increases to our customers, our profit margins may decrease and our results of operations would be materially and adversely affected.

Measures such as initiation of anti-dumping and anti-subsidy proceedings and imposition of anti-dumping and/or countervailing duties by governments in our overseas markets could materially and adversely affect our export sales.

Anti-dumping and anti-subsidy proceedings have been initiated by some countries in relation to steel products, resulting in anti-dumping and/or countervailing duties being imposed by those countries on steel products. Those and other similar measures could trigger trade disputes in the international steel product markets that could adversely affect our exports.

In April 2009, seven U.S. companies and the United Steelworkers Union filed a petition with the U.S. International Trade Commission, or the ITC, and the U.S. Department of Commerce, or the DOC, alleging that China-based OCTG manufacturers unfairly dumped OCTG products in the U.S. market and that Chinese producers were benefitting from massive government subsidies. Wuxi Seamless Oil Pipes Company Limited, or WSP China, was named as one of the major exporters of OCTG products from China. In June 2009, we were included as one of the mandatory respondent companies to the United States government’s countervailing duty investigation. On September 8, 2009, a preliminary determination was issued with a countervailing duty rate of 24.92% assigned to WSP China. On December 7, 2009, the DOC published its final determination in the countervailing duties investigation with a rate of 14.61% assigned to WSP China. The rate was subsequently changed to 14.95% in January 2010 due to certain ministerial errors made by the DOC. We were not selected as a mandatory respondent to the anti-dumping investigation and participated in this case as a separate rate respondent. In November 2009, we received a preliminary dumping rate of 36.53%, which was based on the average dumping rates of other OCTG producers that were selected as mandatory respondents. In December 2009, this rate was amended to 96.51% due to certain ministerial errors made by the DOC. On April 9, 2010, the DOC announced its final determination in the anti-dumping investigation with a rate of 29.94% assigned to WSP China. In May 2010, the ITC made a final ruling which requires all Chinese exports of OCTG products to the United States, including WSP China’s products, be subject up to approximately 32.07% of anti-dumping duties and 14.95% of countervailing duties. The anti-dumping and countervailing duties are applied to all Chinese exports of OCTG products to the United States starting from the date of the DOC’s preliminary determinations. WSP China did not export OCTG products to the United States after the date of the DOC’s preliminary determinations. The anti-dumping and countervailing duties will apply to us if WSP China exports OCTG products to the United States in the future and we are not subject to any other penalties or fines. In 2009, 2010 and 2011, products sold to the United States by our subsidiaries accounted for 9.0%, 9.7% and 6.3% of our net revenues, respectively. The decrease in export revenue of products sold to the United States as a percentage of our net revenues mainly was attributable to the effect of anti-dumping and countervailing duties on the subject goods. As a result of the proceedings, our sales in the U.S. suffered and our results of operations have been materially and adversely affected.

There may be similar actions taken in the future in other countries against PRC-made seamless OCTG products. Any actions filed against us with respect to the products we sell, even without merit, may divert significant company resources and management attention, have an adverse impact on the prices and sales of our products in the relevant countries and adversely affect our business prospects and results of operations. If any decision is entered against us in such an action, we may be subject to additional tariff liabilities and our overseas sales may be materially and adversely affected.

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We depend on a limited number of customers, and any loss of these customers could materially and adversely affect our revenue and profitability.

Our customers include oil and gas companies in China and abroad. Aggregate sales attributable to our five largest customers represented approximately 61.7%, 46.5% and 69.5% of our net revenues for the years ended December 31, 2009, 2010 and 2011, respectively. We cannot assure you that we will be able to maintain or improve our relationships with these customers, or that we will be able to continue to supply products to these customers at current levels or at all. In addition, our business is affected by competition in the oil and gas industry, and any decline in our major customers’ businesses in these markets could lead to a decline in purchase orders from these customers. If any of our key customers were to substantially reduce the size or amount of the orders they place with us or were to terminate their business relationship with us entirely, we cannot assure you that we would be able to obtain orders from other customers to replace any such lost sales on comparable terms or at all. If any of these relationships were to be so altered and we were unable to obtain replacement orders, our business, results of operations and financial condition would be materially and adversely affected.

Our sales contracts typically have a term of less than six months and, as a result, customers may reduce their orders or terminate their relationships with us almost immediately.

Sales of our products are typically conducted through sales contracts with a term of less than six months. As a result, our customers may choose to terminate their relationship with us after completion of the shipment or expiration of the contract, as the case may be. Our customers are also not obligated to continue placing orders with us at historical levels or at all. If any of our customers, particularly our key customers, were to materially reduce their orders with us or were to terminate entirely their business relationship with us with short notice, we might not have sufficient time to locate alternative customers and our business and results of operations could be materially and adversely affected.

We cannot assure you that our products will pass periodic inspection by the American Petroleum Institute or the qualification processes of potential customers, and any failure by us to pass such inspection or qualifications would adversely affect our business prospects and results of operations.

We have obtained certificates from the American Petroleum Institute, or API, to use the official API monogram on our products to demonstrate that our products meet API standards. These certificates are subject to periodic inspections by API. Furthermore, our growth strategies include increasing our sales in the PRC domestic market, as well as expanding into international markets such as North America, South America, the Middle East, Asia, Africa and Russia. It is standard industry practice that an OCTG manufacturer must first pass a qualification process to become an approved supplier of an oil and gas company before providing OCTG products to that company. We cannot assure you that we will be able to obtain the necessary certifications from API or approvals for new products from our existing customers or approvals from any new customers. Even if we can ultimately secure such approvals or certifications, we cannot assure you that such certifications and approvals can be obtained in a timely manner or can be maintained. If we fail to become an approved supplier of our potential customers, or if we are unable to obtain or maintain such approval in a timely manner, we may not be able to execute our expansion plans and our business prospects and results of operations may be materially and adversely affected.

If we are unable to compete effectively in the OCTG industry, our revenues may decrease and losses may increase.

We face intense competition in the domestic and international markets in which we operate. Domestically, we face competition from a number of manufacturers that produce OCTG that are similar to ours. Our major domestic competitors include Tianjin Pipe (Group) Corporation, Shanghai Baosteel Group Corporation and Pangang Group Chengdu Iron & Steel Co., Ltd., which are mostly state-owned enterprises. We also face competition from international manufacturers, such as JFE Steel Corporation in Japan, US Steel in the United States, Tenaris in Argentina, Vallourec & Mannesmann Tubes in France, TMK in Russia and Sumitomo in Japan. Our major competitors may have longer operating history, larger customer base, stronger customer relationships, greater brand or name recognition and greater financial, technical, marketing and public relations resources than we do. Some of our competitors may also be better positioned to develop superior product features and technological innovations and be able to better adapt to market trends than we are.

Our ability to compete depends on, among other things, high product quality, short lead-time, timely delivery, competitive pricing, wide range of product offerings and superior customer service and support. Increased competition may require us to reduce our prices or increase our costs and may have a material adverse effect on our financial condition and results of operations. Any decrease in the quality of our products or the level of our service to our customers or any occurrence of a price war among our competitors and us may adversely affect our business and results of operations. If we are unable to remain competitive, we may not be able to increase or even maintain our current share of the OCTG market in China or overseas.

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We cannot assure you that we will be successful in implementing our future expansion plans, in particular our plans for international expansion, or in managing our growth.

Historically, we have expanded our production capacity and developed our overseas sales as part of our growth strategy. For example, as a part of our international expansion strategy, in April 2008, we established our wholly-owned subsidiary, Houston OCTG Group, Inc., in Houston, Texas. In April 2009, WSP China established Chaoyang Seamless Oil Steel Casting Pipes Co., Ltd., or Chaoyang Seamless, in Chaoyang, Liaoning Province, China. In February 2010, we acquired WSP Pipe Company Limited, or WSP Pipe, a company in the Thai-Chinese Rayong Industrial Zone, Thailand from Mr. Longhua Piao, our chairman and chief executive officer. In February 2010, Bazhou Seamless Oil Pipes Co., Ltd., or Bazhou Seamless, established a wholly-owned subsidiary, Kuitun Seamless Special Steel Company Co., Ltd. or Kuitun Seamless, in Kuitun, Xinjiang Autonomous Region, China. Although we disposed of Kuitun Seamless and Chaoyang Seamless in 2011 and 2012, we may expand through organic growth and selective acquisitions in the future. Furthermore, we may continue to be exposed to liabilities of a disposal entity after its disposal.  In January 2012, we disposed of our entire 51% equity interest in Chaoyang Seamless for nominal cash consideration.  WSP China, our wholly-owned subsidiary, has provided and may continue to provide guarantees for certain of Chaoyang Seamless’ bank loans until their maturity.  These guarantees are counter-guaranteed by the personal assets of the current shareholders of Chaoyang Seamless.  As a result, we are exposed to Chaoyang Seamless’ liabilities to its lenders, particularly that we may be held liable if Chaoyang Seamless does not repay its loans and the current shareholders of Chaoyang Seamless do not have sufficient assets to cover under their counter-guarantees. Our future growth will depend on a number of factors, including but not limited to, our ability to manage expansion and overseas operations, obtain any required financing, achieve operational efficiency, and secure sufficient access to raw materials. Some of these factors are beyond our control. As a result, we may not be able to successfully manage our growth, expand our operations or achieve a satisfactory return on our investments in the expansion of our production capacity and international expansion, which could have a material adverse effect on our business, financial condition and results of operations.

In addition, we may need to increase the number of our employees and enhance our operational and financial systems to manage the increased complexity and the expanded geographical coverage of our operations associated with our growth. We cannot assure you that we will be able to attract and retain qualified management staff and employees or that our current operational and financial systems and controls will be adequate to accommodate future growth. This could have a material adverse effect on our business, financial condition and results of operations.

We face risks associated with the marketing, distribution and sale of our products internationally, and if we are unable to manage these risks effectively, they could impair our ability to expand our business overseas.

We have focused on international expansion in certain mature OCTG markets. In order to succeed, we need to take market share away from the existing suppliers of seamless OCTG in these markets. We cannot assure you that we will be able to do so in these competitive markets.

Moreover, our plans for international expansion may be hindered by the following:

  cultural differences and other difficulties in staffing and managing overseas operations;

  inherent difficulties and delays in contract enforcement and collection of receivables through the use of foreign legal systems;

  volatility in currency exchange rates;

  the risk that foreign countries may impose withholding taxes (or otherwise tax our foreign income or place restrictions on repatriation of profit);

  the risk of barriers, such as anti-dumping and other tariffs or other restrictions being imposed on foreign trade;

  changes in the political, regulatory, or economic conditions in a foreign country or region; and

  the burden of complying with foreign laws and regulations.

If we are unable to manage these risks effectively, our ability to conduct or expand our business overseas would be impaired, which may in turn materially and adversely affect our business, financial condition, results of operations and prospects.

Our business depends on our ability to attract and retain members of our senior management team and other key personnel.

Our future success is dependent on the efforts, performance and abilities of key members of our management team, particularly Mr. Longhua Piao, our chairman and chief executive officer. Mr. Piao founded our company and has extensive industry experience. We do not maintain key person insurance on any of our management personnel. As the OCTG industry in China becomes more competitive, we expect the competition for management and other skilled personnel to intensify. Failure to attract and retain qualified employees or the loss of any member of our senior management may result in a loss of organizational focus, poor operating execution or an inability to identify and execute potential strategic initiatives such as overseas expansion and new product offerings. This could, in turn, materially and adversely affect our business, financial condition and results of operations.

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Our business relies on our ability to retain and attract experienced sales staff and our ability to maintain and expand our existing sales networks both domestically and overseas.

Our experienced sales staff constitutes an essential part of our business. In the domestic PRC market, our sales staff possesses strong technical backgrounds in the OCTG industry, which enable them to provide and deliver on-site technical support to our customers. We rely on our four sales offices located in the Daqing, Changqing, Xinjiang and Sichuan oilfields to directly sell our products to the major oilfields in China. In addition to providing on-site services to our customers throughout the sales process and after-sales support, our sales staff also helps us maintain good relationships with our customers. Internationally, we sell our products through our distributors and sales agents. The loss of services of any of our experienced sales staff without timely replacement, the inability to attract and retain sales personnel, or the loss of any of our major distributors or sales agents may have an adverse effect on our business. If we are unable to maintain our existing sales network, our operations may be materially and adversely affected.

We depend on a limited number of suppliers for a majority of our raw material requirements, and interruption of raw material delivery could prevent us from delivering our products in a timely manner to our customers in the required quantities, and in turn result in order cancellations, decreased revenue and loss of market share.

Our operations depend on our ability to obtain adequate and quality supplies of our primary raw materials, namely, round steel billets and green pipes, in a timely manner. If our suppliers fail to meet our quality standards or our quantity demands, our production and sales volume and our results of operation may be adversely affected. Through our upstream acquisition of Tuoketuo County Mengfeng Special Steel Co., Ltd., or Mengfeng, from Hebei Bishi Industry Group Co., Ltd., or Hebei Bishi, in July 2008, we aim to stabilize the supply, quality and cost of our raw materials.

Before our own steel manufacturing facilities are substantially utilized, we will continue to rely on major suppliers to supply round billets to us. See “Item 4. Information on the Company—B. Business Overview—Manufacturing—Suppliers of raw materials.” We cannot guarantee that our long-term arrangements with these suppliers will provide us with a reliable supply of raw materials. If there is any supply shortage, we may be unable to deliver our products in a timely manner to our customers in the required quantities, which in turn could result in order cancellations, decreased revenue and loss of market share.

Significant product liability claims made against us, regardless of their success, could harm our business reputation, results of operations and financial condition.

Our OCTG products are sold primarily for use in oil and gas exploration, drilling and extraction activities. These activities are subject to inherent risks, including well failures, line pipe leaks and fires that could result in death, personal injury, property damage, pollution or loss of production, all of which could result in liability claims being made against us. We typically offer warranties on our products for a period of up to one year. During the warranty period, faulty products will be repaired or replaced by us, or returned to us. Actual defects or allegations of defects in our products may give rise to claims against us for losses and expose us to claims for damages. For instance, we are subject to multiple lawsuits alleging defective casing pipes used in oil and gas well operations the United States. See “—We are subject to litigation proceedings brought by third-parties. If any of the proceedings against us is successful, it may have an adverse effect on our financial condition and operating results.” and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal proceedings” for further information about the lawsuits. Any such claim, regardless of merit, could cause us to incur significant costs, divert our management’s attention, harm our business reputation or cause significant disruption to our operations. Furthermore, we can provide no assurance that we will be able to successfully defend against such claims. We do not have any product liability insurance covering our products sold outside of North America, and limited product liability insurance for most of our products sold inside North America. If any such claims were successful, we could be subject to substantial liabilities, which could materially and adversely affect our results of operations and our financial condition.

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We may be unable to prevent possible resales or transfers of our products to countries, governments, entities, or persons targeted by United States economic sanctions, especially when we sell our products to distributors over which we have limited control.

The U.S. Department of the Treasury’s Office of Foreign Assets Control, or OFAC, administers certain laws and regulations, or U.S. Economic Sanctions Laws, that impose restrictions upon U.S. persons and, in some instances, foreign entities owned or controlled by U.S. persons, with respect to activities or transactions with certain countries, including the Western Balkans, Belarus, Burma (Myanmar), Cote d’Ivoire (Ivory Coast), Cuba, Democratic Republic of the Congo, Iran, Iraq, Lebanon, Liberia (former Taylor regime), Libya, North Korea, Somalia, Sudan, Syria and Zimbabwe, and governments, entities and individuals that are the subject of U.S. Economic Sanctions Laws, or Sanctions Targets. U.S. persons are also generally prohibited from facilitating such activities or transactions. We believe that U.S. Economic Sanctions Laws under their current terms are not applicable to our activities, however, we have nonetheless decided to adopt commercially reasonable measures to prevent any sales of our products to Sanctions Targets. If we become subject to U.S. Economic Sanctions Laws, a violation of these laws and regulations could subject us to fines, penalties and other sanctions. In the three years ended December 31, 2011, we did not have any direct sales to Sanctions Targets. However, we sell our products in international markets primarily through independent non-U.S. distributors who are responsible for interacting with the end customers of our products. We have limited control over these independent non-U.S. distributors, and these distributors may breach their covenant to us not to resell our products to Sanctions Targets. In addition, we do not always know the end customers to whom our distributors resell our products. We are aware of an insignificant amount of resales of our products by two non-U.S. and non-affiliated distributor customers to Sudan, a Sanctions Target, during the three years ended December 31, 2011. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Internal control over distribution of our products.” Although we have adopted a written policy to prevent future direct or indirect sales to Sanctions Targets and have begun to implement internal control mechanisms to enforce such policy when possible, we cannot assure you that our measures will be able to prevent future sales or resales of our products, directly or indirectly, to Sanctions Targets.

If our products are sold or re-sold, directly or indirectly, to Sanctions Targets, we may fail to comply with U.S. Economic Sanctions Laws and we may be subject to civil or criminal penalties and other remedial measures, which could have an adverse impact on our business, results of operations, financial conditions, liquidity and reputation. Additionally, we act as suppliers to leading Chinese oil companies, such as China National Petroleum Corporation, or CNPC, and China Petroleum & Chemical Corporation, or Sinopec. These companies currently and have in the past had business transactions and relationships with Sanctions Targets. As a result of these transactions and relationships with U.S.-designated state sponsors of terrorism, CNPC and Sinopec have received negative publicity and been the target of divestment or similar initiatives by state and municipal governments, universities and other investors. As a supplier to CNPC, Sinopec and other companies with relations to Sanctions Targets, we have no control over their business or operations. We do not believe that our products sold to these companies have been used outside of China. However, our relationships with such companies may nevertheless harm our reputation. Some of our U.S. investors may be required to sell their interests in our company under the laws of certain U.S. states or under internal investment policies or may decide for reputational reasons to sell such interests, and some U.S. institutional investors may forego the purchase of our ADSs, all of which could materially and adversely affect the value of our ADSs and your investment in us.

If we are unable to continue developing our production technology or adopt new production technology, our business and prospects may be harmed.

The OCTG industry is competitive and the production technology underlying the industry is evolving. As customers’ needs, related technologies and market trends are subject to change, we cannot assure you that we will be able to correctly predict the trends in a timely manner, develop or adopt competitive technology on a timely basis, or respond effectively to competitive industry conditions and changing customer demands.

Responding and adapting to technological developments and changes in the OCTG industry and the integration of new technologies or industry standards may require substantial investment of resources, time and capital. Even if we implement such measures, there can be no assurance that we will succeed in adequately responding and adapting to such technological and industry changes. In the event that we are unable to respond successfully to technological and industry changes, our business, results of operations and competitiveness may be materially and adversely affected.

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Failure to protect our intellectual property rights may materially and adversely affect our competitive position and operations, and we may be exposed to infringement or misappropriation claims by third parties.

Our success is in part attributable to the technologies, know-how and other intellectual properties that we have developed or acquired. See “Item 4. Information on the Company—B. Business Overview—Intellectual property rights” for information relating to our patents and trademarks. Although we rely upon a combination of trade secrets, confidentiality policies, non-disclosure and other contractual arrangements, and patent and trademark laws to protect our intellectual property rights, there can be no assurance that the steps we have taken to protect our intellectual property rights are adequate to prevent or deter infringement or other misappropriation of our intellectual property. We may not be able to detect unauthorized uses or take appropriate and timely steps to enforce our intellectual property rights. Any significant infringement of our proprietary technologies and processes or our intellectual property rights could weaken our competitive position and have an adverse effect on our operations. To protect our intellectual property rights, we may have to commence legal proceedings against any misappropriation or infringement. However, there can be no assurance that we will prevail in such proceedings. Furthermore, as we only hold PRC patents, if third parties manufacture and sell products using our technology outside of China in competition against us, we would not have a legal cause of action against them.

Furthermore, we may be subject to litigation involving claims of patent infringement or the violation of other intellectual property rights of third parties. The defense of intellectual property suits, patent opposition proceedings 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. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties, to pay ongoing royalties, or to redesign our products or subject us to injunctions prohibiting the manufacture and sale of our products or the use of our technologies, which could materially and adversely affect our business, financial condition or results of operations. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation, which could adversely affect our business.

Failure to maintain an effective quality control system at our manufacturing facilities could have a material adverse effect on our business and operations.

The performance, quality and safety of our products are critical to the success of our business. These factors depend significantly on the effectiveness of our quality control systems, which in turn depend on a number of factors, including the design of our quality control systems, our quality-training program, and our ability to ensure that our employees adhere to the quality control policies and guidelines. Any significant failure or deterioration of our quality control systems could have a material adverse effect on our business reputation, results of operations and financial condition.

If disruptions in our transportation network occur or our shipping costs substantially increase, we may be unable to deliver our products in a timely manner and our cost of revenues could increase.

We are highly dependent upon transportation systems, including train, truck and ocean shipping, to deliver our products. The transportation network is potentially exposed to disruption from a variety of causes, including labor disputes or port strikes, acts of war or terrorism and natural disasters. If our delivery times or our shipping costs increase unexpectedly for any reasons, our revenues and results of operation could be materially and adversely affected.

Our growth strategies require significant capital investments and may require us to seek external financing, which may not be available on terms favorable to us.

Our business operations and growth strategies require substantial capital investments, the availability of which depends on our ability to generate cash flow from operations, borrow funds on satisfactory terms and raise funds in the capital markets. Our ability to arrange for financing to support our capital expenditures and the cost of such financing are dependent on numerous factors, including general economic and capital markets conditions, interest rates and credit availability from banks or other lenders, many of which are beyond our control. In addition, increases in interest rates or failure to obtain external financing on terms favorable to us will affect our financing costs and our results of operations. We may not be able to obtain financing in amounts or on terms acceptable to us, if at all, especially in the current global credit and economic crisis, which may have an adverse effect on our operating results and financial condition.

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We may not be successful in our future acquisitions and investments.

If we are presented with appropriate opportunities, we may acquire additional businesses or assets as part of our growth strategy. Future acquisitions, investments and joint ventures may expose us to potential risks, and the success of our acquisitions, investments and joint ventures depend on a number of factors, including:

  our ability to identify suitable opportunities for acquisitions, investments or joint ventures;

  whether we are able to reach an acquisition, investment or joint venture agreement on terms that are satisfactory to us;

  the extent to which we are able to exercise control over the acquired company or business;

  the economic, business or other strategic objectives and goals of the acquired company or business compared to those of our company;

  the diversion of management attention and resources from our existing business;

  our ability to finance the acquisition, investment or joint venture; and

  our ability to integrate successfully the acquired company or business.

If we fail to make acquisitions or investments or form joint ventures that are strategically important to us, our growth and business prospects may be limited. If we encounter difficulties in integrating the business we acquired, our financial condition and results of operations may be materially and adversely affected.

We entered into certain bill financing arrangements which were not in compliance with relevant PRC laws and regulations, and we cannot assure you that there will not be any legal or regulatory action taken against us which would result in material adverse effect on our business conditions and cash flows.

In the years ended December 31, 2009, 2010 and 2011 and to date in 2012, we have used a portion of our credit facilities from certain banks as bill financing to fund a portion of our working capital requirements and business operational needs. In addition to serving as a source of capital for our business, bill financing allows us to pass on certain financing costs to our suppliers.

Under their terms, the bill financing facilities should be used to finance trade purchases. However, we entered into certain bill financing arrangements where the amounts of bank and commercial acceptance notes drawn down on the banks under the facilities were greater than our real expectation of purchasing needs from suppliers, which included both our subsidiaries and third parties. Moreover, on some occasions, the same purchase contracts (required for the issuance of bank acceptance notes under the bill financing facilities) were presented to two or more different banks to obtain financing. A portion of the notes we issued to our subsidiaries and third-party suppliers were then presented by the relevant suppliers to the banks for collection of an amount equal to the face value of the notes after deducting interest. Cash received from the notes presented in excess of the actual amount of purchases was then provided to us and utilized for operational purposes.

These bill financing arrangements were and are not in compliance with the general principles under the PRC Negotiable Instruments Law. Our management has conducted an assessment, including testing of the design and the effectiveness of our internal control over financial reporting as of December 31, 2011 and identified a material weakness that the control procedures designed to ensure bill financing transactions are in compliance with relevant PRC laws and regulations have not been operating effectively. See “Item 15. Controls and Procedures—Management’s Annual Report on Internal Control over Financial Reporting”.

We have sought legal advice from our PRC legal advisor. Considering the relevant factors including, in particular, that we have settled in the past these notes when they were due, and under the assumption that we are able to settle the outstanding notes when they become due, our PRC legal advisor subsequently issued a legal opinion stating that such bill financing arrangements would not result in any criminal or administrative liabilities on us or our senior management or directors, and there would not be any civil liabilities. We have also obtained written confirmations from all endorsing banks that they will not take any legal action against us in connection with the bank and commercial acceptance notes that have been duly settled. We have settled all of the bank and commercial acceptance notes involved in the bill financing transactions in 2009, 2010 and 2011 that have become due. We expect to settle the notes from bill financing transactions that are outstanding on the date of this annual report when they become due.

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In light of the current financial environment and our capital needs, we may continue to rely on such bill financing arrangements as a source of capital for the remainder of 2012. However, notwithstanding the opinion we received from our PRC legal advisor, relevant governmental agencies may decide to take actions or impose penalties on us contrary to the legal advice we have obtained. Any actions by regulators could cause a disruption to our business operations and impact future bill financing arrangements by us with commercial banks, which may have an adverse effect on our business conditions and cash flows. We have also obtained the written confirmations from all endorsing banks that they will not take any legal action against us in connection with the bank and commercial acceptance notes that have been duly settled. However, we cannot assure you that the endorsing banks will not take any legal action regarding notes that we have settled despite the confirmations we received due to unforeseen reasons. Additionally, the endorsing banks may take legal action against us if we fail to settle outstanding bank and commercial acceptance notes when they become due, which may disrupt our business and impact our long-term relationships with the banks and future financing plans.

If we fail to establish or maintain an effective system of internal controls, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our ADSs may be adversely impacted.

We are subject to reporting obligations under the U.S. securities law. The Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, has adopted rules requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which must also contain management’s assessment of the effectiveness of the company’s internal control over financial reporting. Additionally, Section 404 of the Sarbanes-Oxley Act also requires an independent registered public accounting firm to attest to the effectiveness of the company’s internal control over financial reporting. As a non-accelerated filer under Rule 12b-2 of the Securities Exchange Act of 1934, we are exempt from the auditor attestation requirement. However, if we become an accelerated filer or a large accelerated filer, we will once again be subject to this requirement.

In connection with the preparation of this annual report on Form 20-F, we carried out an evaluation of the effectiveness of our internal control over financial reporting. Based on this evaluation, our chief executive officer and chief financial officer concluded that our internal control over financial reporting was not effective due to material weaknesses, as defined by Auditing Standard 5, “An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements.” See “Item 15. Control and Procedures.” The material weaknesses identified were: (1) that the control procedures to ensure that a type of sales transaction involving trading in iron ore is appropriately communicated internally and in a timely manner and approved by senior management have not been designed and implemented, (2) that the control procedures designed to ensure bill financing transactions are in compliance with relevant PRC laws and regulations have not been operating effectively and (3) that we did not have sufficient skilled resources available for the purposes of financial reporting and internal audit.

We have designed certain control measures for proper implementation to address these material weaknesses. If we fail to maintain effective internal control over financial reporting in the future, we may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. This could in turn result in the loss of investor confidence in the reliability of our financial statements and negatively impact the trading price of our ADSs. Furthermore, we have incurred and anticipate that we will continue to incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

We may be required to strictly perform under a long-term supply agreement to purchase iron ore pellets, which could materially and adversely affect our financial condition and results of operations.

In November 2009, we entered into a five-year supply agreement with an iron ore supplier in Brazil to purchase iron ore pellets. Under this agreement, we have committed to purchase a minimum amount of 300,000 tonnes of iron ore pellets to be delivered by separate shipments on a yearly basis from 2010 through 2014. However, the contractual terms of this supply agreement were not strictly performed by us and the supplier in 2010 and 2011. We and the supplier adopted a more flexible approach regarding the performance of the agreement in 2010. When we could not agree on the pricing terms of the iron ore pellets for one shipment, we agreed that the tonnage to be delivered by the shipment is deemed to be cancelled. As a result, we purchased less than 300,000 tonnes of iron ore pellets in 2010, and none in 2011, primarily due to our internal lack of iron ore pellet requirements and low market demand for sales of iron ore pellets. Nonetheless, if the supplier chooses to enforce our obligations strictly in accordance with the contractual terms under this supply agreement in the future, absent any express modification of the terms, we may be obliged to comply with our purchase obligations under this supply agreement. We may not be able to perform strictly in accordance with the terms under the agreements or enter into a satisfactory arrangement with this supplier. If we encounter problems with this supplier, we may expend additional resources in resolving disputes that may arise under this agreement.

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We have previously resold some of the iron ore pellets that we purchased under the supply agreement, as in past years the prices for iron ore pellets imported under multi-year supply agreements have generally been lower than the prices on the spot market. However, if in the future we are not able to resell iron ore pellets that we purchase in excess of the demand of our steel billet manufacturing subsidiaries or generate sufficient profit from the resale of the iron ore pellets, we may overstock our inventory of iron ore pellets or be unable to recover our costs of purchasing the iron ore pellets. If the price of iron pellets rapidly declines and we are forced to provide an impairment charge on our inventory of iron ore pellets, or if we are forced to sell our stock at a reduced price to improve the aging of our inventory, our results of operations would be materially and adversely affected.

Our ability to distribute future dividends will be subject to various factors, some of which are beyond our control, and we may not be able to fulfill our dividend policy in the future.

In March 2009, we declared a cash dividend in the amount of $0.15 per ordinary share and a one-time special cash dividend in the amount of $0.225 per ordinary share out of our annual profits for the years ended December 31, 2007 and 2008. Our ability to distribute future dividends will be subject to various factors including, but not limited to, available cash and distributable reserves, investment requirements, and cash flow and working capital requirements, as well as the withholding tax obligations for dividend distribution under the PRC tax law. These factors depend on other factors that are beyond our control, including a possible economic downturn and delays in the payments made by customers. If we encounter any of these problems or others, we may not be able to declare and pay dividends in the future as currently planned.

We are not required to pay dividends. Our shareholders or ADS holders also do not have contractual or other rights to require us to pay dividends. Our board may decide at any time, in its discretion, to change the amount of dividends under the dividend policy, change or revoke our dividend policy, or discontinue any payment of dividends.

Our ability to make distributions or other payments to our shareholders depends primarily on payments from WSP China, whose ability to make such payments is subject to PRC regulations. Under PRC laws and accounting rules, dividends may be paid only out of distributable profits. Distributable profits with respect to WSP China refers to its after-tax profits as determined under PRC accounting standards, less any recovery of accumulated losses and allocations to statutory funds that it is required to make. For example, it is required to allocate 10% of its after-tax profit to statutory reserves until such reserves reach 50% of WSP China’s registered capital. Allocations to these statutory reserves and funds can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. As a result, WSP China may not be able to pay dividends to us in any given year if it does not have distributable profits as determined under PRC accounting standards, even if we have profits for the relevant year as determined under U.S. GAAP. Accordingly, if we do not receive dividend distributions from WSP China, our liquidity, financial condition and ability to make dividend distributions will be materially and adversely affected.

Further, our dividend policy, to the extent implemented, will significantly restrict our cash reserves and may adversely affect our ability to fund unexpected capital expenditures. We may be required to borrow money or raise capital by issuing equity securities, which we may not be able to do so on attractive terms or at all. If we are unable to fulfill our dividend policy, or pay dividends at levels anticipated by investors, the market price of our ADSs may be negatively affected and the value of your investment may be reduced.

Our business is substantially dependent on the continuing devotion of our chairman and chief executive officer, and our business may be materially and adversely affected if we lose his service.

Mr. Longhua Piao, our chairman and chief executive officer, is a director and controlling shareholder of several private companies, including Eastar Industries, Inc., Expert Master Holdings Limited, or EMH, Lianyungang Eastar Photonics Technologies Co., Ltd., Regalia Investments Holdings Ltd., WSP Pipe LLC, Wuxi Huayi Investment Company Limited, Wuxi Longhua Steel Pipes Company Limited, or Wuxi Longhua and Cambodian WS Mining Industry Holding Ltd. The changing business environment may demand more of Mr. Piao’s time outside of our company. Mr. Piao may not be able to devote substantially all of his time to our business given his duties to other companies. In addition, although none of these companies currently engage in the production and sale of OCTG products, they may enter into such business in the future. See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Code of business conduct and ethics” for more details on our code of business conduct and ethics with respect to conflict of interests. If Mr. Piao is not able to devote a substantial amount of his time to our business, or if any dispute arises between Mr. Piao and us, we may not be able to find a suitable replacement in a timely manner or at all, and our business may be adversely and materially affected.

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Control or significant influence by our existing shareholders may limit your ability to affect the outcome of decisions requiring the approval of shareholders.

EMH owns approximately 50.9% of our issued share capital as of the date of this annual report. Mr. Piao, our chairman and chief executive officer, is the sole shareholder of EMH, and has control over our business, including matters relating to our management and policies and certain matters requiring the approval of our shareholders, such as election of directors, approval of significant corporate transactions and the timing and distribution of dividends. Furthermore, our articles of association contain a quorum requirement of at least a majority of our total outstanding shares present in person or by proxy. EMH, with an aggregate shareholding sufficient to constitute a quorum, could approve by itself actions that require a majority vote at shareholder meetings, which may not be in the best interest of our other shareholders. Furthermore, UMW China Ventures (L) Ltd., or UMW Ventures, which beneficially owns approximately 22.5% of our issued share capital as of the date of this annual report will have significant influence over our business. UMW Ventures is a wholly-owned subsidiary of UMW Holdings Berhad, or UMW. Our vice chairman, Datuk Syed Hisham bin Syed Wasir, was nominated by UMW. To the extent the interests of EMH or UMW conflict with the interests of other shareholders, the interests of other shareholders may be disadvantaged and harmed. Moreover, we have in the past entered into related party transactions with affiliates of EMH and UMW, and we expect to continue to enter into related party transactions, subject to our audit committee’s review and approval, if applicable.

We have limited insurance coverage in China.

The insurance industry in China is still at a relatively early stage of development. We have determined that balancing the risks of disruption or liability from our business, or the loss or damage to our property, including our facilities, equipment and office furniture, the cost of insuring for these risks on the one hand, and the difficulties associated with acquiring such insurance on commercially reasonable terms on the other hand, makes it impractical for us to have such insurance. As a result, we only maintain property insurance with respect to our operations that covers general property, plant and equipment, and shipping and transportation.

We do not have any product liability insurance covering our products, except for limited product liability insurance covering our products sold in North America by Houston OCTG. A large number of our product liability insurance policies for products sold by Houston OCTG have reached their maximum payouts. We do not maintain business interruption or key-man insurance in China. Consequently, any uninsured occurrence of loss or damage to property, litigation or business disruption may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our operating results. The occurrence of certain incidents including fire, severe weather, earthquake, war, flooding, power outages and the consequences resulting from them may not be covered adequately, or may not be covered at all, by our insurance policies. If we were to incur substantial liabilities that were not covered by our insurance, or if our business operations were interrupted for more than a short period of time, we could incur costs and losses that could materially and adversely affect our results of operations.

We may not be able to obtain the necessary PRC government authorizations, land use rights certificates or building ownership certificates for some of our properties and plants.

Pursuant to an agreement entered into in July 2008 with Hebei Bishi, WSP China acquired Mengfeng, a company located in Inner Mongolia, China. However, we have not obtained the necessary PRC government authorizations for Mengfeng’s blast furnace project, the land use rights certificate for a piece of property of approximately 344,631 square meters and any of the ownership certificates for Mengfeng’s buildings. In addition, we do not have the land use rights certificates or building ownership certificates for certain plants or facilities owned by five of our other subsidiaries. We are in the process of obtaining PRC government authorizations, land use rights certificates and building ownership certificate for these properties. However, we may not be able to obtain them. If we fail to obtain such authorization or certificates in a timely manner, or at all, we may be subject to severe penalties and fines, which could materially and adversely affect our financial condition and results of operations.

Economic and political conditions and instability in Thailand may adversely affect our operations.

WSP Pipe’s operations are subject to the changing economic and political conditions in Thailand. Our results of operations may be influenced in part by the political situation in Thailand, which is unstable. The political upheavals may have a severe adverse effect on Thailand’s economic and democratic development. Current and future political instability in Thailand could have a material adverse effect on our businesses and operations. In addition, we cannot assure you that the Thai government would not amend foreign ownership rules or impose additional restrictions on foreign ownership that would have an adverse effect on our business.

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We are subject to litigation proceedings brought by third-parties. If any of the proceedings against us is successful, it may have an adverse effect on our financial condition and operating results.

We are subject to litigation proceedings brought by third-parties. For instance, in August 2009, Western Oil Gas Development Corp. brought a lawsuit against us in a district court in Canadian County, Oklahoma, alleged that a casing pipe provided by us caused damages to its well. In May 2010, WSP China was subject to a lawsuit in a district court in Desoto Parish, Louisiana, as the manufacturer of a casing pipe used in an alleged oil and gas well operation failure. In August 2010, WSP China was subject to a third-party petition in the District Court of Lipscomb County, Texas, as the manufacturer of a casing pipe in an alleged oil and gas well operation failure. In March 2011, Cimarex Energy Co. filed a lawsuit against us, WSP China, Houston OCTG and other defendants in Nueces County, Texas, seeking total damages in the amount of $11.0 million resulting from defects in casing pipes provided by us. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal proceedings” for further information about the lawsuits. In addition, we are also subject to some other litigation proceedings brought by third-parties, which we believe are not material. We believe that the allegations in these cases are without merit and we intend to vigorously defend ourselves against the claims. The outcome of these cases, like other litigation proceedings, is uncertain. We cannot assure you that in the future we will not be subject to litigation proceedings brought by third-parties arising from our operations or products. Regardless of their merit, litigation and other preparations undertaken to defend such cases can be costly, and we may incur substantial costs and expenses in doing so. They may also divert the attention of our management from our business and operations. If any of the cases against us is successful, it may result in substantial monetary liabilities, which may have a material adverse effect on our financial condition and operating results.

Risks related to doing business in China

China’s economic, political and social conditions, as well as governmental policies, could affect the financial markets in China, our liquidity and access to capital and our ability to operate our business.

Substantially all of our business operations are conducted in China. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 30 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may 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. More generally, if the business environment in China deteriorates from the perspective of domestic or international investors, our business in China may also be adversely affected.

Uncertainties with respect to the PRC legal system could materially and adversely affect us.

We conduct our business primarily through our subsidiaries in China. PRC laws and regulations govern our operations in China. Our subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. The PRC legal system is based on written statutes. 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, China has not developed a fully integrated legal system and recently enacted laws and regulations that may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations, including those related to bill financing arrangements (See “Item 4. Information on the Company—B. Business Overview— Regulations— Regulations on Negotiable Instruments” and “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources— Bill financing”), involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in China, regardless of outcome, may be protracted and result in substantial costs and diversion of resources and management attention.

PRC regulations relating to offshore investment activities by PRC residents may increase our administrative burden and restrict our domestic, overseas and cross-border investment activity. If our shareholders who are PRC residents fail to make any required applications and filings under such regulations, we may be unable to distribute profits and may become subject to liability under PRC laws.

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In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular 75. To further clarify and simplify the implementation of SAFE Circular 75, SAFE issued the Implementing Rules Relating to the Administration of Foreign Exchange in Fund-Raising and Round-trip Investment Activities of the Domestic Residents Conducted via Offshore Special Purpose Companies, or Circular 19, effective on July 1, 2011. According to SAFE Circular 75 and Circular 19, prior to establishing or assuming control of an offshore enterprise for the purpose of financing that offshore enterprise with assets or equity interests in an onshore enterprise in China, each PRC resident, whether a natural or legal person, must complete certain overseas investment foreign exchange registration procedures with the relevant local SAFE branch. An amendment to the registration with the local SAFE branch is required to be filed upon certain prescribed events. If our shareholders who are PRC citizens or residents do not complete their registration with the local SAFE authorities, our PRC subsidiaries will be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries.

We are committed to complying, and to ensuring that our shareholders who are PRC citizens or residents, comply with the SAFE Circular 75 requirements. However, we may not at all times be fully aware or informed of the identities of all our beneficial owners who are PRC citizens or residents, and we may not always be able to compel our beneficial owners to comply with the SAFE Circular 75 requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC citizens or residents will at all times comply with, or in the future make or obtain any applicable registrations or approvals required by, SAFE Circular 75 or other related regulations. In the event that a PRC shareholder with a direct or indirect stake in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of that offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion.

One of our current beneficial owners, Mr. Longhua Piao, who is a PRC resident, has registered with the local SAFE branch as required under these regulations relating to offshore investment activities. However, if Mr. Piao does not timely amend his SAFE registrations pursuant to regulations or if future beneficial owners of our company who are PRC residents do not comply with the registration procedures, such beneficial owners may be subject to fines and legal sanctions, our ability to contribute additional capital into our PRC subsidiaries and our PRC subsidiaries’ ability to distribute dividends to our company may be limited and our business may be adversely affected.

The regulations on mergers and acquisitions of PRC enterprises may delay or inhibit our ability to complete certain mergers and acquisitions which could affect our ability to expand our business or maintain our market shares.

On August 8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, the State Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or CSRC, and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule which became effective on September 8, 2006 and was amended on June 22, 2009. Among other things, this New M&A Rule, established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. In the future, we may grow our business in part by acquiring complementary businesses. Complying with the requirements of the New M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

Restrictions on currency exchange may limit our ability to utilize our revenues effectively.

The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive much of our revenues in Renminbi. Under our current structure, our income is primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or make other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under the existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

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Fluctuations in exchange rates could adversely affect our business as well as result in foreign currency exchange losses.

Our financial statements are expressed in U.S. dollars. The functional currency of WSP Holdings is U.S. dollars and the functional currency of our PRC operating subsidiaries is Renminbi. The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. 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 was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Between July 21, 2005 and March 23, 2012, the RMB appreciated by approximately 23.9% against the U.S. dollar, although the pace of appreciation was uneven during the period. It is difficult to predict the future movement of the Renminbi against the U.S. dollar.

A substantial portion of our sales is denominated in U.S. dollars and Renminbi, while substantially all of our costs and expenses are denominated in Renminbi. As a result, appreciation of Renminbi could increase our costs. If we were to increase our prices to compensate for the increased costs, we may decrease the market competitiveness of our products. This could result in a decrease in our international sales and materially and adversely affect our business.

In addition, as we rely primarily on dividends paid to us by WSP China, our operating subsidiary in China for our cash requirement, 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, 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. Conversely, when converting the U.S. dollars we received from our financing activities and oversea sales 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.

There are only limited hedging transactions available in China to reduce our exposure to exchange rate fluctuations. From time to time, we entered into foreign currency forward contracts to limit the effects of foreign exchange rate fluctuations on our financial results. However, the availability and effectiveness of these transactions may be limited and we may not be able to successfully hedge our exposure.

Our business benefits from certain PRC government incentives, and expiration of, or changes to, these incentives could have a material adverse effect on our results of operations.

The PRC government has provided various incentives to foreign invested enterprises. Based on an approval in September 2008 and effective retrospectively from January 1, 2008, WSP China was classified as a “high and new technology enterprise” by the Chinese government. This classification allows WSP China to enjoy a preferential tax rate of 15% instead of the general 25% income tax rate until December 31, 2010. In September 2011, we obtained an approval from the PRC government for a renewal of the “high and new technology enterprise” status, effective retrospectively from January 1, 2011. When our current preferential income tax rate treatment expires in December 2013, WSP China may not continue to qualify as a “high and new technology enterprise” and enjoy the benefit from the preferential tax rate. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Taxation” for more details.

Furthermore, value-added tax, or VAT, in China is charged on sales based on the sales price of our products to customers at a general rate of 17%. We are deemed to have paid a 4% VAT tax based on the general rate minus a 13% VAT refund on export sales, which we are entitled to receive upon filing the VAT returns. In July 2007, the PRC tax authorities have reduced such refund to 5% for certain steel products, which did not include seamless OCTG products. However, there is no assurance that the rate of refund for seamless OCTG products will not be reduced by the PRC tax authorities in the future, and a decrease of the refund will have a material adverse effect on our results of operations.

We may be treated as a resident enterprise for PRC tax purposes under the New EIT Law, which may subject us to PRC income tax for our income originated both within and outside the PRC and PRC income tax withholding for any dividends we pay to our non-PRC shareholders.

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Under the New Enterprise Income Tax Law, or the New EIT law, enterprises established under the laws of non-PRC jurisdictions, but whose de facto management body is located in the PRC, may be treated as “resident enterprises” for PRC tax purposes. The implementing rules of the New EIT Law define de facto management as having substantial and overall management and control over the production and operations, personnel, accounting, and properties of the enterprise. Based on our analysis of the current facts, we believe that WSP Holdings and its subsidiary, First Space Holdings Limited, or FSHL, should not be treated as resident enterprises for PRC tax purposes. However, the New EIT Law and its implementing rules are ambiguous in terms of some definitions, requirements and detailed procedures, and currently no official interpretation or application of this new resident enterprise classification is available. Therefore, it is unclear as to how tax authorities will determine tax residency based on the facts of each case. For the years ended December 31, 2009, 2010 and 2011, our calculation of income taxes generally reflects our status as a non-China tax resident company. If the PRC governmental authorities hold that WSP Holdings or FSHL should be treated as a resident enterprise for PRC tax purposes after January 1, 2008, the effective date of the New EIT Law, our worldwide income will be subject to PRC income tax at the 25% uniform tax rate, which will include any dividend income we receive from our subsidiaries, unless such dividend income is otherwise exempted from taxable income under the New EIT Law. If we are required to pay income tax for dividends we receive from our subsidiaries, it will materially and adversely affect our financial condition and results of operations.

Moreover, unlike the previous PRC tax law, which specifically exempts withholding tax on any dividends payable to non-PRC shareholders, the New EIT Law and its implementing rules provide that a withholding tax rate of 10% will be applicable to dividends payable to non-PRC shareholders that are derived from sources within the PRC, unless a tax treaty exists between the PRC and the relevant jurisdictions where such non-PRC shareholders reside and such treaty provides for a reduction or exemption of the relevant tax. We are a Cayman Islands holding company and our income mainly comes from dividends we receive from our subsidiaries, primarily from those located in China. In 2009, FSHL was recognized by the relevant tax authorities as a tax resident company in the Hong Kong Special Administrative Region, a withholding tax at 5% will be applicable on PRC dividends paid to FSHL. The relevant tax authorities may evaluate FSHL China’s qualification as a tax resident company in the Hong Kong Special Administrative Region. We cannot assure you that FSHL will continue to qualify for such status under evaluations by the tax authorities in the future. In the event the status of FSHL as a tax resident company in the Hong Kong Special Administrative Region is discontinued, dividends payable to FSHL will become subject to the standard PRC enterprise income tax rate, which could materially increase our tax obligations, which could have a material adverse effect on our financial condition and results of operations.

As uncertainties remain regarding the interpretation and implementation of the New EIT Law and its implementation rules, we cannot assure you that if we are regarded as a PRC resident enterprise, any dividends to be distributed by us to our non-PRC shareholders and ADS holders would not be subject to any PRC withholding tax at a rate of up to 10%. Similarly, any gain realized on the transfer of ADSs or shares by non-PRC investors may be also subject to a 10% withholding tax if such gain is regarded as income derived from sources within China. We are a Cayman Islands holding company and our income mainly comes from dividends we receive from our subsidiaries, primarily from those located in China. Due to the lack of publicly available interpretations on this subject, there is uncertainty as to whether the dividends we pay to our non-PRC shareholders or the gain you may realize from the transfer of our ordinary shares or ADSs will be subject to the 10% withholding tax. If we are required under the New EIT Law to withhold PRC income tax on such dividends, your investment in our ADSs may be materially and adversely affected.

We face risks related to natural calamities or health epidemics, which could disrupt our operations.

Our business could be materially and adversely affected by natural calamities or health epidemics such as swine influenza, avian influenza, severe acute respiratory syndrome or other epidemics. Any recurrence of natural calamities or epidemics in China or elsewhere may have a material and adverse effect on our business operations. Such recurrence may restrict our ability to travel or ship our products inside or outside of China, or may require us to temporary close our manufacturing facilities. Such closures or travel or shipment restrictions would severely disrupt our business operations and adversely affect our results of operations. We have not adopted any written preventive measures or contingency plans to combat any future outbreak of swine influenza, avian influenza or any other epidemics.

Labor laws in China may adversely affect our results of operations.

On June 29, 2007, the PRC government promulgated the Labor Contract Law of the PRC, or the Labor Contract Law, which became effective on January 1, 2008. The Labor Contract Law imposes greater liabilities on employers and significantly impacts the cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations to be based upon seniority and not the merits of employees. In the event we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost effective manner, thus materially and adversely affecting our financial condition and results of operations.

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Risks related to the ADSs

Substantial future sales or perceived sales of our ADSs in the public market could cause the price of our ADSs to decline.

Additional sales of our ordinary shares in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. In addition, certain holders of our ordinary shares have the right to cause us to register the sale of a certain number of our shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market could cause the price of our ADSs to decline.

You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.

Except as described in this annual report and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares represented by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee to vote the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. Upon our written request, the depositary will mail to you a shareholder meeting notice which contains, among other things, a statement as to the manner in which your voting instructions may be given, including an express indication that such instructions may be given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no instructions are received by the depositary from you on or before the response date established by the depositary. However, no voting instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter as to which we inform the depositary that (i) we do not wish such proxy to be given, (ii) substantial opposition exists, or (iii) such matter materially and adversely affect the rights of shareholders.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings and you may not receive cash dividends if it is impractical to make them available to you.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, 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 bank 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, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

In addition, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute that property and you will not receive that distribution.

We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than that under U.S. law, 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.

As a result of all of the above, public shareholders of our company may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or the controlling shareholder of our company than they would as shareholders of a U.S. public company.

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You may have difficulty enforcing judgments obtained against us.

We are a Cayman Islands company and most of our assets are located outside of the United States. Most of our current operations are conducted in China. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside of the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or China would recognize or enforce judgments of U.S. courts.

We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or ordinary shares.

Based on the market price of our ADSs, the value of our assets and the composition of our income and assets, we do not believe we were a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for our taxable year ended December 31, 2011. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you the U.S. Internal Revenue Service will not take a contrary position. A non-U.S. corporation will be considered a PFIC for any taxable year if either (i) at least 75% of its gross income is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) is attributable to assets that produce or are held for the production of passive income. We must make a separate determination each year as to whether we are a PFIC, and accordingly, even if we were not a PFIC for the taxable year that ended December 31, 2011, our PFIC status may change in the current taxable year or a future taxable year. If we are treated as a PFIC for any taxable year during which a U.S. person held an ADS or an ordinary share, certain adverse U.S. federal income tax consequences could apply to that U.S. person. See “Item 10. Additional Information — E. Taxation — United States federal income taxation — Passive foreign investment company.”

Our ADSs may not comply with the minimum listing requirements of the New York Stock Exchange. Delisting could adversely affect the liquidity of our ADSs and the market price of our ADSs could decrease, and our ability to obtain adequate financing for the continuation of our operations would be substantially impaired.

Our ADSs are currently listed on the New York Stock Exchange. The New York Stock Exchange has minimum requirements that a company must meet in order to remain listed on the New York Stock Exchange. These requirements include maintaining a minimum average closing price of $1.00 per share over a period of consecutive 30 trading days. On August 1, 2011, we received notice from the NYSE that the price of our ADSs was below listing requirements. To regain compliance with this requirement, we implemented a change in the ratio of our ADSs to ordinary shares from one ADS representing two ordinary shares to one ADS representing ten ordinary shares, effective as of February 15, 2012. For our ADSs holders, this ratio change has the same effect of a five-for-one ADS reverse split. However, this ratio change may not ensure our future compliance with the New York Stock Exchange continued listing standards relating to minimum average closing price if our ADS price continues to decline. If our ADSs are delisted as a result of our failure to comply with any of the New York Stock Exchange’s minimum listing requirements, the liquidity of our ADSs would be adversely affected, the market price of our ADSs could further decrease, and our ability to obtain adequate financing for the continuation of our operations would be substantially impaired, which could have a material adverse effect on our financial condition and results of operations.

Item 4.
  Information on the Company

A.
  History and Development of the Company

Our legal and commercial name is WSP Holdings Limited. We are a holding company incorporated in the Cayman Islands and conduct substantially all of our operations through our subsidiaries in China. Wuxi Seamless Oil Pipes Company Limited, or WSP China, was initially set up as a PRC-foreign joint venture under PRC laws in November 1999. WSP China underwent a series of corporate reorganizations and, in August 2006, became a wholly-owned subsidiary of First Space Holdings Limited, or FSHL, a company incorporated in the British Virgin Islands. In preparation for our initial public offering, WSP Holdings Limited was incorporated in the Cayman Islands in November 2006. WSP Holdings Limited was owned 69.4% and 30.6% by EMH, and UMW China Ventures (L) Ltd., or UMW Ventures, respectively, at the time of its incorporation. EMH is wholly-owned by our chairman and chief executive officer, Mr. Longhua Piao, and UMW Ventures is an indirect wholly-owned subsidiary of UMW Holdings Berhad, or UMW. In December 2006, WSP Holdings acquired the entire share capital of FSHL from its shareholders through a share exchange, and WSP Holdings became the ultimate holding company of our businesses.

In January 2007, we and three other investors established WSP Industries Canada Inc., or WSP Industries, in British Columbia, Canada. As part of our international expansion strategy review, we dissolved and liquidated WSP Industries in May 2009.

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In April 2008, FSHL and Liaoning Steel Pipe Co., Ltd., or Liaoning Pipe, established Liaoyang Seamless Oil Pipes Co., Ltd., or Liaoyang Seamless, a limited liability company with registered capital in the amount of $40 million, in Liaoyang, Liaoning province, China. FSHL holds a 70% equity interest in Liaoyang Seamless. The purpose of Liaoyang Seamless is to manufacture finished OCTG products.

In April 2008, WSP China established a wholly-owned subsidiary, Songyuan Seamless Oil Pipes Co., Ltd., or Songyuan Seamless, in Songyuan, Jilin province, China. The purpose of Songyuan Seamless is to manufacture finished OCTG products.

In April 2008, FSHL established a wholly-owned subsidiary, Houston OCTG Group, Inc., or Houston OCTG, in Houston, Texas, United States. The purpose of Houston OCTG was to serve as our sales office for the North and South American markets. Following the imposition of countervailing and anti-dumping duties by the U.S. government, we completed construction of one threading line with an annual production capacity of 120,000 tonnes in July 2010 and another heat treatment line with an annual production capacity of 100,000 tonnes in April 2011 through Houston OCTG to counteract the impact.

In July 2008, WSP China entered into an agreement with Hebei Bishi to acquire 100% equity ownership of Mengfeng, in Tuoketuo county, Inner Mongolia Autonomous Region, China, with a total consideration of approximately $40.5 million. Mengfeng was approved as a seamless steel pipe manufacturer and its current primary business is to provide raw materials for our subsidiaries in China. As of the date of this annual report, WSP China has paid a total of approximately $38.2 million to Hebei Bishi under this agreement.

In October 2008, WSP China established two new wholly-owned subsidiaries, Bazhou Seamless Oil Pipes Co., Ltd., or Bazhou Seamless, and Luntai County Longhua Mining Industrial Co., Ltd., or Luntai Mining, in Kuerle, Xinjiang Autonomous Region, China. The purpose of these two companies is to manufacture finished OCTG products. In November 2010, we dissolved and liquidated Luntai Mining due to change of operational strategy.

In April 2009, WSP China, together with two unrelated individuals, established Chaoyang Seamless. Chaoyang Seamless is a limited liability company with a registered capital of $14.6 million, located in Chaoyang, Liaoning Province, China. WSP China holds a 51% equity interest in Chaoyang Seamless. In January 2012, WSP China entered into an agreement with a PRC individual to dispose of its entire 51% equity interest in Chaoyang Seamless.

Jiangsu Fanli Pipe Co., Ltd., or Jiangsu Fanli, was established in China on April 16, 2004 as a limited liability company with a registered capital of $1.5 million. In April 2006, the registered capital of Jiangsu Fanli was increased to $7.3 million and WSP China acquired 70% equity interest in Jiangsu Fanli through capital injection. The remaining equity interest was owned 24%, 4% and 2% by Mr. Cheng Huang, Mr. Xiang Huang and Mr. Jianming Gu, respectively, all of whom are independent third parties. In February 2010, WSP China, together with three non-controlling shareholders entered into an agreement with Zhejiang Jianli Company Limited, or Zhejiang Jianli, to transfer their entire equity interests in Jiangsu Fanli to Zhejiang Jianli. Pursuant to the agreement, WSP China retained certain assets of Jiangsu Fanli, including current assets, and assumed all liabilities incurred before the disposal. On the same date, WSP China entered into another agreement with Zhejiang Jianli to purchase certain hot-rolling production assets from Zhejiang Jianli. These two transactions have been accounted as nonmonetary exchange transactions in accordance with an authoritative guidance and, accordingly, the exchanges of nonmonetary assets between WSP China and Zhejiang Jianli are recorded based on the fair value of the assets exchanged. The transactions were completed in February 2010.

In February 2010, through our wholly-owned subsidiary FSHL, we acquired WSP Pipe from Mr. Longhua Piao, our chairman and chief executive officer for no monetary consideration. WSP Pipe was a shell company incorporated in the Thai-Chinese Rayong Industrial Zone, Thailand. In 2011, we completed the construction of an OCTG pipe manufacturing and sales facility through WSP Pipe, which consists of two hot-rolling production lines with a combined annual production capacity of 180,000 tonnes. We completed the construction of and began trial production on one hot-rolling production line in May 2011 and the other in September 2011. We also completed the construction of one threading line with an annual production capacity of 50,000 tonnes in October 2011.

In February 2010, Bazhou Seamless established a wholly-owned subsidiary, Kuitun Seamless, in Kuitun, Xinjiang Autonomous Region, China. The purpose of Kuitun Seamless is to provide raw materials for Bazhou Seamless. In July 2011, we disposed of our entire equity interest in Kuitun Seamless to Shandong Shiheng Special Steel Co., Ltd. for a cash consideration of $9.8 million.

In January 2012, we disposed of our entire 51% equity interest in Chaoyang Seamless for nominal cash consideration, as Chaoyang Seamless’s liabilities exceeded its assets at the time of sale. WSP China, the former shareholder of Chaoyang Seamless, has provided and continues to provide guarantees for certain of Chaoyang Seamless’s bank loans until the maturity of these bank loans. These guarantees are counter-guaranteed by the current shareholders of Chaoyang Seamless.

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The following diagram illustrates our corporate structure as of the date of this annual report.

 

(1)
  The remaining 30% of Liaoyang Seamless is owned by Liaoning Steel Pipe Co., Ltd., or Liaoning Pipe.

(2)
  In July 2008, WSP China entered into an agreement with Hebei Bishi to acquire 100% equity ownership of Mengfeng with a total consideration of approximately $40.5 million. As of the date of this annual report, WSP China has paid a total of approximately $38.2 million to Hebei Bishi.

Our principal executive offices are located at No. 38 Zhujiang Road, Xinqu, Wuxi, Jiangsu Province, People’s Republic of China. Our telephone number at this address is (86 510) 8522 6351 and our fax number is (86 510) 8522 6351. Our registered office in the Cayman Islands is located at the offices of Codan Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, 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 address is http://www.wsphl.com. The information contained on our website does not form part of this annual report. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, 13th Floor, New York, New York 10011, the United States.

Proposal relating to going private transaction

In December 2011, our board of directors formed a special committee of independent directors consisting of Messrs. Dennis D. Zhu, Weidong Wang and Michael Muhan Liu after receiving a non-binding proposal letter from H.D.S. Investments LL, or HDS, notifying the board of its interest in acquiring all of our shares in a possible going private transaction for US$0.60 per ADS (before the effectiveness of our ADS to ordinary share ratio change in February 2012) in cash, subject to certain conditions.

According to the proposal letter, HDS has had preliminary and informal communications with EMH and certain other significant shareholders of our company, and HDS believes that EMH and certain other significant shareholders would be interested in pursuing a potential transaction pursuant to which an HDS special purpose vehicle would (i) acquire all of the publicly held shares of our company for cash and (ii) exchange shares of an HDS special purpose vehicle for shares of our company held by EMH and certain other significant shareholders. EMH is wholly-owned by Mr. Longhua Piao, our chairman and chief executive officer, and is currently the majority shareholder of our company owning 50.9% of the total outstanding shares. The proposal letter indicates that funding for the proposed transaction would come from HDS’s own capital. The special committee has retained Kirkland & Ellis and Conyers Dill & Pearman (Cayman) Limited to act as its U.S. and Cayman legal counsel, respectively, and has retained Houlihan Lokey as its independent financial advisor to assist it in its work. The special committee, working with its advisors, intends to proceed in a timely and orderly manner, but has not set a definitive timetable for completion of its evaluation and does not currently intend to announce developments unless and until a definitive transaction or strategic option has been approved.

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B.
  Business Overview

We are a leading Chinese manufacturer of seamless OCTG, including casing, tubing and drill pipes used for oil and natural gas exploration, drilling and extraction. We sell our products in both domestic and international markets. In China, we target sales of our products primarily at leading Chinese oil companies. For instance, in 2011, we were one of the three largest OCTG suppliers to CNPC and one of the two PRC-based non-API OCTG suppliers to Sinopec. In the international markets, we have established an extensive overseas customer base, covering oilfields in North and South America, the Middle East, Asia, Africa and Russia.

We offer a comprehensive range of seamless OCTG products to our customers. Our product portfolio can generally be divided into two categories:

  API products, which are products manufactured according to the standards formulated by the API; and

  non-API products, which are products tailor-made to meet our customers’ specifications, and that are generally manufactured to a higher standard than API products.

To offer our customers a one-stop-shop solution for their OCTG requirements for oil and gas drilling and extraction, we focus our research and development efforts on producing higher margin, higher value-added non-API products. We have developed nine series of non-API products that are suitable for challenging drilling conditions, including deep or super-deep wells, high temperature, highly pressurized and highly corrosive conditions. For example, our non-API products have been used in wells with a depth of over 7,800 meters in Puguang gas fields in Sichuan Province, China. In addition to our seamless OCTG products, we also sell green pipes to our customers upon request. In 2009, 2010 and 2011, we sold steel billets and other unfinished products to meet our customers’ production requirements. We also sold iron ore pellets in 2009 and 2010.

In 2009 and 2010, we experienced a decrease in both sales of API and non-API products primarily due to decreased demand for our OCTG products as a result of the worldwide economic slump, anti-dumping and countervailing duties imposed on Chinese OCTG products by the United States government as well as oversupply condition in domestic market. In 2011, we experienced an increase in both sales of API and non-API products primarily due to increased demand for our OCTG products from the international markets such as South America, Middle East and Central Asia. Sales of our non-API products as a percentage of net revenues decreased from 17.7% in 2009 to 14.9% in 2010, and increased to 21.1% in 2011. For the same periods, sales of API products accounted for 71.8%, 58.9% and 65.0%, respectively, of our net revenues. The decreases in both the sales of non-API and API products as a percentage of our net revenues in 2010 compared to 2009 were primarily due to decreases in sales volume of non-API and API products and an increase in sales of our other products. The increases in both the sales of non-API and API products as a percentage of our net revenues in 2011 compared to 2010 were primarily due to increases in sales volume and average sales prices of non-API and API products. Additionally, in 2009, we entered into a five-year agreement to purchase iron ore pellets from a supplier in Brazil, on a yearly basis from 2010 through 2014. In 2010, we purchased 175,000 tonnes of iron ore pellets and sold them to a domestic steel company. Sales of iron ore pellets as a percentage of our net revenues was 6.8% in 2010. In 2011, we did not purchase any iron ore pellets due to our internal lack of iron ore pellet requirements and low market demand for sales of iron ore pellets.

As of December 31, 2011, our key operating assets included eighteen threading lines and two drill pipe production lines with an aggregate annual production capacity of approximately 1,394,000 tonnes of seamless OCTG. In addition, we have five production lines with an aggregate annual production capacity of 1,430,000 tonnes for the manufacturing of green pipes, which are semi-finished pipes that can be further processed into end-products. We have expanded our hot-rolling OCTG pipe production capacity and pipe threading capacity with the construction of production facilities in Houston, Texas and Thailand and additional production facilities in China.

We believe that we have a strong reputation in the OCTG industry in China and have been building a growing reputation internationally. We distinguish ourselves by the quality of our products, our customer-oriented research and development capabilities, our long-standing and strong customer relationship, our experienced management team, our ability to timely meet customers’ production requirements, and the quality of our after-sales support. We strive to provide our customers located in China with on-site support that includes engineering assistance to address any technical difficulties that may arise during the installation or operation of our products.

We have grown significantly since our inception until 2009. However, our business was adversely affected in 2009 and 2010 due to decreased demand for our products resulted from the worldwide economic slump, anti-dumping and countervailing duties imposed on Chinese OCTG products by the United States government as well as oversupply condition in domestic market. Our business prospectus and financial results improved in 2011, primarily due to increases in both the sales of non-API and API products. In 2009, 2010 and 2011, our net revenues were $577.0 million, $470.5 million and $686.1 million, respectively. We had net income of $1.6 million in 2009, net loss of $132.8 million in 2010 and net loss of $76.8 million in 2011.

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Our industry

Overview of seamless OCTG

OCTG refers to a group of pipe and other tubular products used in the exploration, drilling and extraction of oil, gas and other hydrocarbon products. OCTG mainly consist of casing, tubing and drill pipes. Unless otherwise indicated, discussions relating to OCTG in this annual report are limited to these three types of OCTG:

  Casing. Casing pipes serve as the structural retainer for the walls of oil and gas wells, or wellbore. Casing pipes are ordinarily produced with outside diameter sizes of 114.3 mm to 508.0 mm. Casing pipes are inserted into a well bore and cemented in place to protect both subsurface formations and the wellbore.

  Tubing. Tubing pipes are steel tubes suspended inside casing pipes that are used to convey oil or gas to the surface. Tubing pipes typically have diameters of 60.3 mm to 114.3 mm.

  Drill pipes. Drill pipes are pipes used to drill wells. Drill pipes are the conduit between the wellhead motor and the drill bit. Drill pipes, typically around nine meters in length, are screwed together to form a continuous pipe extending from the drilling rig to the drill bit at the bottom of the well. Rotation of the drill pipe, and the resulting rotation of the drill bit, causes the bit to bore through the rock formation. Drill pipes are reusable and not considered regular consumables.

Two basic processes are used in the manufacturing of OCTG. The seamless process involves heating a solid round bar of steel, or billet, cross-rolling or piercing the heated billet to produce a short hollow shell, then elongating and sizing the shell into a finished tube. OCTG manufactured through this process are normally referred to as seamless OCTG. The other process is a welded process, in which tubes are produced from a piece of flat steel, either coil or strip, that is formed into a tubular shape through rolling. Seamless OCTG are generally considered to represent a higher value product compared to OCTG produced by the welded process due to the higher strength of seamless OCTG and its ability to operate under more difficult operating environments.

Our products

Our products are key components in the oil and natural gas drilling and extraction process and are widely used in oil and gas wells in major oilfields throughout China and increasingly in overseas oil fields. The drilling process involves drilling a well to connect the oil or gas layer to the surface by casing and tubing. As the depth of the oil or natural gas layer varies from several hundred to several thousand meters, the oil extraction process requires special casing designed for the depth of the extraction. In addition, the tubing must have a high degree of precision uniformity and tensile strength in order to withstand ground pressure, external and internal pressure and the pull force at the wellhead during the extraction process. The following diagram is an illustration of a typical oil well.



 

    

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We manufacture a broad range of seamless OCTG, which can be subdivided into API products and non-API products.

  API products. These are manufactured in accordance with a standard which is considered to be the basic or minimum standard that must be met for oilfield equipment. API is the primary trade association of the oil and natural gas industry in the United States and promotes the standardization of oilfield equipment by setting and maintaining more than 500 standards and recommended practices. The API standard is a benchmark standard, and API products are produced according to the API specifications.

  Non-API products. These are custom-made products. In addition to meeting API standards, non-API products are made with qualifications or specifications developed to meet customers’ special needs, such as higher strength, higher corrosion resistance or premium connectors. Non-API products are generally made to a higher standard than API products, and therefore more stringent technical standards and complex manufacturing techniques are required.

The table below sets forth our net revenues attributable to the two product categories for the periods indicated.

        For the year ended December 31,    
        2009
    2010
    2011
API net revenues (in thousands)
              $ 414,250          $ 277,290          $ 446,223   
Sales volume (tonnes)
                 369,266             271,986             391,088   
Average sales price
              $ 1,122          $ 1,020          $ 1,141   
Non-API net revenues (in thousands)
              $ 102,186          $ 70,143          $ 144,766   
Sales volume (tonnes)
                 52,877             37,543             72,358   
Average sales price
              $ 1,933          $ 1,868          $ 2,001   
 

We manufacture three major types of seamless OCTG, namely casing, tubing and drill pipes, all of which are used extensively in the oil and gas industries. The three major types of OCTG that we manufacture are described in detail below.

  Casing. Casing is a large-diameter pipe that lines the wellbore. Casing is used to prevent the wall of the wellbore from collapsing and allows drilling fluid to circulate and extraction to take place. The following diagram illustrates different types of casing used in the extraction process:



 
    

There are several layers of casing: surface casing, intermediate casing and production casing. Surface casing is used to protect the well from contamination in the shallow water and gas layers. It also supports the wellhead equipment and sustains the weight of the other layers of casing. Intermediate casing is used to isolate different layers of pressure to facilitate normal circulation of drilling fluid and also to protect the production casing. Intermediate casing also facilitates the installation of blow-out preventors, anti-leakage devices and tailpipes in the well. Production casing, also called the oil string, is the conduit through which oil and gas pass from the reservoir to the surface. Production casing also protects the well and separates fluids into various layers.

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  Tubing. Tubing is a pipe used for the transportation of crude oil and natural gas from the oil or gas layer to the surface after drilling has been completed. Tubing must be made to withstand the pressure generated from the extraction process. Tubing is manufactured in the same way as casing, except that an additional process known as “upsetting” is applied to thicken the pipes.

  Drill pipes. Drill pipes are steel tubes fitted with threaded ends and are used to connect the rig surface equipment with the bottomhole assembly. Drill pipes are also used to transport drilling fluid to the bit and to raise, lower and rotate the bottomhole assembly and the bit. Drill pipes must be manufactured to withstand severe external and internal pressure, distortion, bending and vibration.

In addition to the above types of seamless OCTG, we also produce line pipes, also known as liners, which are a special type of casing pillar that extends to the wellhead. Line pipes can be broadly divided into drilling liners and oil extraction liners. We classify our line pipe products as API products. We also produce green pipes, which are semi-finished pipes that we further process into our end-products. We sell green pipes to customers upon request. In 2009, 2010 and 2011, we sold steel billets and other unfinished products to meet our customers’ production requirements. We also sold iron ore pellets in 2009 and 2010.

Marketing and sales

Our marketing and sales approach varies according to the targeted market. China is currently our most important market. For sales in China, we mainly engage in direct sales. We have also established four representative offices in Daqing, Changqing, Xinjiang and Sichuan oilfields in China. Our representative offices, except the representative offices in Daqing and Houston, have field engineers who provide on-site technical support to our customers. Our engineers can also be sent to other oilfields when our customers request on-site technical support. We also encourage our on-site technicians to promote our products, especially our non-API products that compete with imported non-API products. Our customers typically conduct a quality review to ensure the integrity and stability of our operations before doing business with us.

In order to offset the significant decline in business from North America due to countervailing duties on seamless pipes made in China, we will continue to increase sales and marketing efforts in other international markets. Through our subsidiary, Houston OCTG, we have been actively pursuing customers in Central and South America. In February 2010, we also acquired WSP Pipe, a company incorporated in the Thai-Chinese Rayong Industrial Zone, Thailand, which is not subject to countervailing duties imposed by the U.S. government. We have been successful in our penetration efforts, tapping into new markets and securing new customers in Northern and Western Africa, particularly in Algeria and Nigeria. In 2010, we secured contract wins worth a total of approximately $91.8 million to sell our products to Venezuela, which represents further penetration into the South American market. We secured the contract wins through bidding for open tenders announced by the Venezuelan government. In 2011, our success in penetrating the South American market continued as we secured new contract wins for sales of our products to Ecuador. We are qualified to sell products to certain major oil companies in the Middle East and have begun providing casing and drill pipe to them. We currently have an extensive customer base covering more than 25 countries and regions.

For international sales, we currently rely mainly on distributors in major international markets that purchase products from us and then sell our products to operators of oil and gas fields. As part of our after-sales support function, we send our technicians overseas to our customers’ locations upon request. In 2009, 2010 and 2011, international sales accounted for approximately 38.4%, 37.3% and 46.8%, respectively, of our net revenues.

Customers

We have adopted a customer-oriented approach to sales and marketing and strive to provide high-quality customer support, including after-sales support. We believe our approach has enabled us to establish long-standing customer relationships with a broad customer base across major oilfields in China, including Daqing, Changqing, Xinjiang, Sichuan and Yanchang oilfields. The Daqing, Changqing, Xinjiang and part of Sichuan oilfields are operated by CNPC. We were one of the three largest OCTG suppliers to CNPC in 2011 and one of the two China-based non-API suppliers to Sinopec.

We typically extend our PRC customers credit with terms between 60 to 90 days. The credit terms are determined based on, among other things, prevailing market conditions, the size of the companies, their profitability, transaction volume, payment history, industry information on their credit worthiness and duration of their business relationship with us. We usually give credit to customers who have long-standing business relationships or large volume transactions with us.

Our overseas customer base covers a wide geographical area and our products are used in oilfields in North and South America, the Middle East, Asia, Africa and Russia. For overseas customers and distributors, payment is usually made through telegraphic transfer or a letter of credit that is issued prior to the shipment of products. We extend credit up to 90 days to certain large customers who have established long-standing business relationships with us.

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Sales of our products are typically conducted either through purchase orders or sales contracts with a term of less than six months. We typically offer a warranty on our products for up to one year. During the warranty period, we will repair or replace faulty products. In 2009, 2010 and 2011, we incurred warranty costs of $0.6 million, $45,000 and $2.5 million, respectively.

Our customers of other products are typically domestic manufacturers of steel products, and we only sell other products at our customers’ request. Sales of our other products are made via purchase orders placed by our customers. We sometimes enter into short-term sales contracts with terms of 60 to 90 days with our customers pursuant to which we sell our products at a fixed price during the term of each contract. We do not typically offer a warranty on our sale of other products.

In 2009, 2010 and 2011, sales to our five largest customers accounted for approximately 61.7%, 46.5% and 69.5%, respectively, of our net revenues. Sales to CNPC accounted for 35.4%, 20.2% and 34.2% of our net revenues for the years ended December 31, 2009, 2010 and 2011, respectively. Sales to PDVSA Services B.V. accounted for 11.1% and 22.3% of our net revenues for the years ended December 31, 2010 and 2011, respectively. Other than CNPC and PDVSA, no other customer accounted for over 10.0% of our net revenues in 2009, 2010 and 2011. The following table lists our five largest customers for the periods indicated.



Largest customers


  
Location
2009
                       
CNPC(1)
           
PRC
CAMEG SPA Filiale Sonelgaz
           
Algeria
Yanchang Oil Field Co., Ltd.
           
PRC
PTT Exploration and Production Public Co., Ltd.
           
Thailand
Sinopec
           
PRC
2010
                       
CNPC(1)
           
PRC
PDVSA Services B.V.
           
Venezuela
Yanchang Oil Field Co., Ltd.
           
PRC
Sinopec
           
PRC
Hongpeng Steel Co., Ltd.
           
PRC
2011
                       
CNPC(1)
           
PRC
PDVSA Services B.V.
           
Venezuela
Petroamazonas EP
           
Ecuador
Sinopec
           
PRC
Lukoil Uzbekistan Operating Company LLC
           
Uzbekistan(1)
 


(1)
  Contracts are typically entered into separately with the oilfields controlled by CNPC.

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Pricing policy

Our products are not currently subject to any price controls or regulations by PRC government authorities. The government does not participate in our pricing decisions. In determining product pricing, we primarily consider the following factors: estimated overall market price level, costs, brand name and customer recognition of competing products. We generally set our prices according to the market prices at the relevant markets. Prices for our API products in the PRC domestic market are generally set based on the prevailing market prices, which are usually the prices at which CNPC purchases from its major suppliers. Our export prices are typically higher than our domestic prices. Our export prices fluctuate depending on local market conditions, exchange rates and other factors. The prices of our OCTG are competitive compared to those charged by our international competitors. We generally set prices of our other products according to the market prices at the relevant markets. In determining product pricing, we primarily consider the following factors: estimated overall market price level, costs, brand name and customer recognition of competing products.

Logistics

We usually deliver our finished products to customers in China by train or by truck in circumstances requiring urgent delivery. Our deliveries overseas are primarily made by ship. We have engaged a number of overseas shipping agents to transport our finished products overseas. For short-distance delivery of our products, for example, from our site to train stations, we have entered into a transportation framework agreement with Wuxi Quanhua Material Co., Ltd., or Quanhua Material, a related party. Under this agreement, Quanhua Material agreed to provide transportation services to us for a fee that is negotiated based on the prevailing market price. This agreement initially expired on December 31, 2011. It was renewed for another year and is expiring on December 31, 2012.

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Wuxi has a well-developed transportation infrastructure and an easy access to port facilities and railroads. Wuxi is located on both the Shanghai-Nanjing expressway and the Shanghai-Nanjing rail line. The Hangzhou-Beijing Grand Canal also flows through Wuxi. We have a 20,000-square-meter logistics center in Wuxi. We procure our raw materials from Wuxi and other provinces in China. Raw materials from Wuxi are usually delivered to our facilities by truck or barge, while raw materials from other provinces are usually delivered to us by train or ship.

Manufacturing

The following diagram illustrates our manufacturing process.

OCTG Manufacturing Process

 

Hot-rolling production process. Our production process begins with the transportation of round steel billets from our suppliers to our production plants in Wuxi. Typically, these round steel billets have diameters of between 180 mm to 330 mm, weigh approximately 442 kg to 481 kg and have a length between 1.8 meters to 4.5 meters. After passing quality inspection, round steel billets are processed and manufactured into green pipes, which are semi-finished pipes. Green pipes are further processed into final products.

Round steel billets can be manufactured into green pipes through either the hot-rolling process or the cold-draw process. For the hot-rolling process, the round steel billets are first heated to the required temperature, then a hole is pierced length-wise through each individual round steel billet. The pierced round steel billet then undergoes an elongation process to round the pierced hole into the required circular shape. After that, it is reheated to standardize the durability of each pipe through a process called “stretch reducing.” For the cold-draw process, the round steel billets are similarly heated and a hole is pierced, but the resulting steel pipe is elongated and shaped through a cold-draw process that uses a mold. The pipes are then straightened and cut into standard lengths of 9.3 meters to 13 meters. Finally, the pipes are subject to various inspections, including size inspections, surface inspections, and nondestructive and hydrostatic tests, before being classified as green pipes or line pipes.

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Tubing and casing production process. For the manufacture of tubing, green pipes undergo an “upsetting” process to thicken the walls of the pipes. Apart from this step, the manufacture of tubing and casing is identical. First, green pipes are threaded on each end. The threading is then inspected and, if necessary, rethreaded to ensure that the thread accurately connects to the coupling. Next, the tubing and casing are strengthened by surface treatment and are subject to various inspections, including drifting and hydrostatic tests before they are coated and packaged into tubing and casing. Tubing and casing are manufactured in our threading lines.

Drill pipe production process. In order to produce drill pipes, green pipes are initially “upsetted” to thicken the walls. Next, the pipes are threaded and receive a strength-enhancing copper plating, after which a non-destructive test is conducted. The pipes are then welded to tool joints. The drill pipes then undergo weld heat treatment and a weld finishing process to remove welding stress. Various testing, including a hardness test, pressure test and non-destructive test is then carried out on the finished drill pipes before final coating and packaging. Drill pipes are manufactured in our drill pipe production line.

Production capacity

The following table sets out the annual production capacity for each of our OCTG and green pipe production facilities as of December 31, 2011 and the actual production output in 2009, 2010 and 2011.

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Production facilities
  
Product line
  
Location
  
Year of
commencement
  
Annual
production
capacity as of
December 31,
2011(1)
  
Actual
production
output in
2009(1)
  
Actual
production
output in
2010(1)
  
Actual
production
output in
2011(1)
                (in tonnes)     (in tonnes)     (in tonnes)     (in tonnes)
No. 1 threading line
   
Tubing, casing and premium connectors
   
Wuxi, Jiangsu Province, PRC
   
August 2001
         100,000             44,871             29,822             44,421   
No. 2 threading line
   
Tubing
   
Wuxi, Jiangsu Province, PRC
   
August 2001
         50,000             19,5 07             9,278             14,819   
No. 3 threading line
   
Casing and premium connectors
   
Wuxi, Jiangsu Province, PRC
   
August 2002
         70,000             36,766             34,031             48,462   
No. 4 threading line
   
Casing
   
Wuxi, Jiangsu Province, PRC
   
March 2005
         90,000             65,361             57,131             62,477   
No. 5 threading line
   
Tubing and casing
   
Wuxi, Jiangsu Province, PRC
   
April 2006
         90,000             51,668             30,894             60,935   
No. 6 threading line
   
Casing
   
Wuxi, Jiangsu Province, PRC
   
November 2008
         60,000             6,361             7,738             2,037   
No. 7 threading line
   
Casing and premium connectors
   
Wuxi, Jiangsu Province, PRC
   
May 2006
         40,000             36,581             29,138             35,287   
No. 8 threading line
   
Casing and premium connectors
   
Wuxi, Jiangsu Province, PRC
   
May 2007
         100,000             14,364             24,536             34,922   
No. 9 threading line
   
Tubing and premium connectors
   
Wuxi, Jiangsu Province, PRC
   
March 2007
         20,000             4,816             1,693             6,358   
No. 10 threading line
   
Tubing and casing
   
Wuxi, Jiangsu Province, PRC
   
June 2008
         100,000             60 ,534             20,514             51,674   
Drill pipe production line Drill pipes
   
   
   
Wuxi, Jiangsu Province, PRC
   
December 2006
         12,000             5,561             4,019             2,004   
Drill pipe production line Drill pipes
   
   
   
Wuxi, Jiangsu Province, PRC
   
November 2007
         12,000             1,341                             
Cold-draw pipe production line(2)
   
Green pipes
   
Xuyi, Jiangsu Province, PRC
   
January 2006
         100,000             44,421                             
Hot-rolling pipe production line
   
Green pipes
   
Wuxi, Jiangsu Province, PRC
   
January 2007
         450,000             248,120             240,716             293,932   
Hot-rolling pipe production line(2)
   
Green pipes
   
Xuyi, Jiangsu Province, PRC
   
July 2007
         100,000             16,342                             
Threading line
   
Tubing and casing
   
Songyuan, Jilin Province, PRC
   
February 2009
         60,000             10,794             9,966             13,018   
Threading line
   
Tubing and casing
   
Liaoyang, Liaoning Province, PRC
   
March 2009
         60,000             18,661             7,950             26,667   
Threading line
   
Tubing and casing
   
Liaoyang, Liaoning Province, PRC
   
July 2009
         60,000             2,207             4,131             20,862   
Threading line
   
Casing and premium connectors
   
Houston, USA
   
July 2010
         120,000                          8,502             17,773   
Threading line
   
Tubing and casing
   
Kuerle, Xinjiang Autonomous, PRC
   
October 2010
         100,000                                       1,068   
Threading line
   
Tubing and casing
   
Kuerle, Xinjiang Autonomous, PRC
   
October 2010
         100,000                                       373    
Threading line
   
Tubing and casing
   
Kuerle, Xinjiang Autonomous, PRC
   
November 2010
         100,000                                          
Threading line
   
Tubing and casing
   
Thai-Chinese Rayong Industrial Zone, Thailand
   
October 2011
         50,000                                       6,787   
Hot-rolling pipe production line
   
Green pipes
   
Liaoyang, Liaoning Province, PRC
   
May 2010
         300,000                          3,744             71,000   
Hot-rolling pipe production line
   
Green pipes
   
Kuerle, Xinjiang Autonomous, PRC
   
April 2011
         500,000                                          
Hot-rolling pipe production line
   
Green pipes
   
Thai-Chinese Rayong Industrial Zone, Thailand
   
May 2011
         60,000                                       12,286   
Hot-rolling pipe production line
   
Green pipes
   
Thai-Chinese Rayong Industrial Zone, Thailand
   
September 2011
         120,000                                       4,789   
 


(1)
  Comparison of actual output against annual production capacity is not meaningful as our annual production capacity is calculated using an estimated product mix for each production line, which may differ from the actual product mix manufactured from the production line.

(2)
  We operated these production lines at Jiangsu Fanli. Following the disposal of our equity interest in Jiangsu Fanli in 2010, we ceased the operation of these production lines.

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In 2010, we expanded our production capacity by introducing four new threading lines, which increased our aggregate annual production capacity by 420,000 tonnes to 1,344,000 tonnes. In 2010, Houston OTCG completed the construction of a pipe threading line with an annual capacity of 120,000 tonnes while Bazhou Seamless completed the construction of three pipe threading lines with an annual capacity of 100,000 tonnes each.

In May 2010, Liaoyang Seamless completed the construction of a hot-rolling OCTG pipe production line with an annual production capacity of 300,000 tonnes. In October 2011, Bazhou Seamless completed the construction of a pipe heat treatment production line with an annual production capacity of 200,000 tonnes.

In April 2011, Bazhou Seamless completed the construction of a hot-rolling OCTG pipe production line with an annual production capacity of 500,000 tonnes. In April 2011, Houston OCTG completed the construction of a pipe heat treatment production line with an annual production capacity of 100,000 tonnes.

In the second half of 2011, we completed construction of an OCTG pipe manufacturing and sales facility at WSP Pipe in the Thai-Chinese Rayong Industrial Zone in Thailand. The first of two hot-rolling production lines with a production capacity of 60,000 tonnes per year commenced trial production in May 2011, whereas the second hot-rolling production line with a production capacity of 120,000 tonnes per year was completed and commenced trial production in September 2011. We also completed the construction of a new threading line with an annual production capacity of 50,000 tonnes at WSP Pipe in October 2011.

Suppliers of raw materials

The major raw materials used in our products are round steel billets of various steel grades and green pipes, which are primarily sourced within China. To ensure a steady supply of round steel billets, we have entered into two long-term arrangements for the supply of round steel billets. In December 2006, we entered into a five-year cooperation agreement with Wuxi Xuefeng Steel Co. Ltd., or Wuxi Xuefeng, under which Wuxi Xuefeng was committed to supply us with 300,000 to 600,000 tonnes of round steel billets per year. The purchase price was subject to the parties’ periodic negotiations. This agreement expired in 2011 and going forward, we expect to fulfill our requirements for round steel billets through individual purchase orders from Wuxi Xuefeng on an as needed basis.

In July 2008, we acquired Mengfeng, a manufacturer of crude steel billets with a designed annual capacity of 600,000 tonnes to stabilize the supply, quality and cost of our raw materials. Additionally, in April 2009, we, together with two unrelated individuals, established Chaoyang Seamless in Chaoyang, Liaoning Province, China. We held a 51% equity interest in Chaoyang Seamless, through which we acquired tangible and intangible assets from a sponge iron and steel billet company in Liaoning province. The purpose of this investment was to further ensure a steady supply of raw materials for our growing OCTG manufacturing capacities in China, especially our OCTG production lines in northeastern China. In January 2012, we entered into an agreement to dispose of our interest in Chaoyang Seamless. We expect to purchase raw materials from Chaoyang Seamless in the future.

Historically, we relied on third-party green pipe suppliers and subcontractors to supply us with green pipes for our production needs, which was subject to fluctuations in market supply. Starting from 2006, we have significantly reduced our reliance on green pipe suppliers by expanding our in-house manufacturing capabilities of green pipes. In April 2006, we acquired a 70% equity interest in Jiangsu Fanli. In January 2007, we began production of green pipes at our new hot-rolling pipe line in Wuxi with an annual production capacity of 450,000 tonnes of green pipes. In July 2007, we commenced operation of our new hot-rolling pipe production line in Jiangsu Fanli, which has an annual production capacity of 100,000 tonnes of green pipes. After disposal of our equity interest in Jiangsu Fanli, our annual production capacity of green pipes as of December 31, 2010 decreased from 950,000 to 750,000 tonnes. As of December 31, 2011, we had five hot-rolling production lines capable of producing 1,450,000 tonnes of green pipes. Our green pipe production facilities are located in Wuxi, Jiangsu Province, Liaoyang, Liaoning Province, Kuerle, Xinjiang Autonomous Region and the Thai-Chinese Rayong Industrial Zone, Thailand. Our in-house production of green pipes allows us to monitor the quality of our green pipes without having to rely on the quality assurances of other manufacturers or suppliers. By producing green pipes ourselves, we have also streamlined our in-house production process and shortened the production cycle of our OCTG.

Expenditures on raw materials accounted for 74.4%, 73.4% and 78.3% of our cost of revenues in 2009, 2010 and 2011, respectively. In 2009, 2010 and 2011, purchases from our five largest suppliers accounted for approximately 58.4%, 29.9% and 29.0%, respectively, of our total raw material purchases.

Quality control and certifications

We have implemented a stringent quality control system at all stages of our production process. In order to ensure that our raw materials meet the required quality standards for production, we have implemented a set of procedures for the selection of our suppliers, following guidelines set forth in a quality control handbook issued by API. We have adopted a series of quality control tests to inspect all raw materials supplied to us and our projects in different stages of the production process, including the following:

  Size and surface inspection. Our quality assurance staff inspects the size and surface of the tubes to ensure that the tubes meet the required standard during the tube manufacturing process.

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  Non-destructive test. This test is conducted to ensure that no damage occurred to the tube during the upsetting, heat treatment and hot straightening treatments. For the blind areas at the end of the pipes, a magnetic power detectoscope is used to conduct the test. If we find damage within the pipe during the course of this test, our quality assurance staff will further investigate the area with a portable ultrasound detectoscope.

  Thread inspection. This test is conducted by our production staff by physically examining the thread after the threading stage of the production process to ensure that the thread accurately conforms to the required parameters.

  Hydrostatic test. In this test, the pipes are rolled onto a hydrostatic testing machine where water is pumped into the pipes to ensure that the pipes can withstand the requisite internal pressure and to confirm that there is no leakage.

  Drifting test. This test is conducted to inspect the straightness of the pipes and to determine if any protrusions exist along the inner walls.

  Physical and chemical analysis. This test analyzes the chemical composition, mechanical performance and metallographic structure of the pipe materials.

  Hardness and pressure test. The pipes are physically tested through a weld finishing test and hardness test to ensure that the pipes can withstand the requisite external pressure and exhibit the required hardness before final coating.

We also conduct quality control tests on our finished products. The pipes are subject to physical checks by our quality assurance staff to ensure that there are no visible defects and that all finished pipes accurately conform to the intended parameters and lengths.

We have a team of over 400 quality assurance staff equipped with advanced testing equipment. We also provide regular training to our production staff and have established a set of mandatory internal procedures and standards.

We have obtained certificates of registration from API certifying that our quality management system was in compliance with the ISO 9001 and API specification Q1 quality system standards in February 2002 and ISO/TS 29001 in December 2004. These certificates of registration are effective from the date of registration and have no expiration dates, provided that we continue passing the annual inspections by API. The scope of these registrations and the approved quality management systems apply to the manufacture of casing, tubing, line pipes and drill pipes, threading of tool joints and rotary-shouldered connections.

We further obtained certificates of authority to use the official API monogram on our manufactured products under the conditions of API Specification 5CT, API Specification 5D and API Specification 5L in February 2002 and API Specification 7 in February 2005. These certificates are subject to periodic inspection by API and must be renewed every three years. The expiration date of our current API certificates is May 2014.

In addition, we have obtained various industrial awards or certificates. In January 2008, WSP China was awarded “AAA” grade supplier certification by Daqing Oilfield Materials and Equipment Group, which procures production materials and equipment for Daqing Oilfield Company Limited, or Daqing Oilfield, a subsidiary of PetroChina Company Limited, the largest oil and natural gas producer in China. This certification means WSP China’s products and services meet the high standards set by Daqing Oilfield for suppliers.

Competition

We face competition in the domestic and international markets in which we operate. We believe we differentiate ourselves from our competitors and capture market share both in the domestic and international markets through our sales network, pricing strategies, quality and variety of our products, response time to customers’ specific demands and our ability to provide custom-made products. Furthermore, maintaining a balance of domestic sales and exports also provides us with the flexibility to reallocate sales to the markets with strong demand.

The PRC seamless OCTG market is dominated by a few major steel producers with a large number of small producers competing for the remaining small portion of the market. We face competition mainly from top producers who have succeeded in establishing a strong brand name with oil companies. Our major competitors in the PRC seamless OCTG market include Tianjin Pipe (Group) Corporation, Shanghai Baosteel Group Corporation and Pangang Group Chengdu Iron & Steel Co., Ltd. Among these major competitors, we are the only one specializing in seamless OCTG products, while the others also produce welded OCTG or non-OCTG products. Many of our competitors are state-owned enterprises which may have greater resources and better brand recognition than we do.

The competitors in our export markets include leading seamless pipe producers in the world, particularly those in Argentina, Japan, the United States, France and Russia. Our international competitors include JFE Steel Corporation in Japan, US Steel in the United States, Tenaris in Argentina, Vallourec & Mannesmann Tubes in France, TMK in Russia and Sumitomo in Japan.

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Intellectual property rights

We recognize the importance of protecting and enforcing our intellectual property rights by actively seeking legal protection for our products and proprietary information through patents, trademarks and technical know-how. See “Item 5. Operating and Financial Review and Prospects—C. Research and Development” for more information relating to our patents.

As of the date of this annual report, we had 88 patents and 57 pending patent applications in China, which include both utility model and invention patents. Most of our patents and patent applications relate to the manufacture of our non-API products. Specifically these patents deal with the production of specialized connectors, couplings and casings, and the production of our non-API products is substantially dependent on these patents. We own or have applied for patents to protect technologies that we believe are significant to our business. As with patent rights in most other jurisdictions, a patent holder in China has the right to exclude others from using and otherwise exploiting the patented technology within China without a license from the patent holder. Most of our patents cover utility models and have terms of ten years. Five of our patents cover inventions and have terms of 20 years. As we only hold PRC patents, if third parties manufacture and sell products using our technology outside China in competition against us, we may not have a legal cause of action against them.

In addition, we maintain trademarks for the name “WSP” in Saudi Arabia, Indonesia, Colombia, and Hong Kong. Our trademarks registration in Hong Kong covers our logos. We also have pending trademark applications in Malaysia, the United States, Canada and several other countries. As our brand name is becoming more recognized in the OCTG market, we are working to increase, maintain and enforce our rights in our trademark portfolio, the protection of which is important to our reputation and branding. We have one registered domain name. We have also entered into confidentiality agreements with our employees and business partners to protect our confidential information and know-how.

Environmental and safety matters

We believe we have been in substantial compliance with national and local environmental laws and regulations in China. We have installed waste treatment facilities and implemented waste treatment procedures to ensure that waste produced during our production processes is discharged in compliance with applicable laws and regulations. We have designated staff to handle solid waste and its disposal by selling re-usable steel scraps and defective pipes and disposing of other waste to waste collection companies. In addition, we have installed two sets of jet cloth filters to filter the oxidized dust generated from hot-rolling pipe production and pipe processing.

In order to handle the waste water generated from our production lines for hot-rolling pipe production and pipe processing, we have installed three waste water disposal systems. Processed waste water is recycled and is not discharged. Emulsified liquid waste generated in pipe processing is delivered to qualified companies for disposal.

We have installed improved ventilation systems for three of our threading lines by installing an axial-flow machine, increasing the number of air-vents and enlarging ventilation windows. These measures have contributed to an improvement in air quality and lower temperatures at our production facilities. In addition, in order to reduce the negative impact of our operations on the environment, we use natural gas in our hot-rolling pipe production lines for each stage of our hot-rolling production process. The burning of natural gas emits minimal pollutants when compared to oil and coal.

The local environmental regulatory authority of Wuxi, Jiangsu Province conducts regular inspections of our operations to ensure that we are in compliance with all applicable domestic environmental laws and regulations. We currently comply with the ISO 14001:2004 environmental standards. ISO 14001 specifies the requirements for an environmental management system, which helps to minimize operational impact on the environment.

Since pollution caused by our production activities is much less than those of larger-scale iron and steel operations, we currently do not perform any research and development on environmental matters.

We have not been subject to any fines or legal action involving non-compliance with any relevant environmental regulations, nor are we aware of any threatened or pending action by any environmental regulatory authority in any location where we operate our business.

Insurance

We maintain property insurance with respect to our operations that covers general property, plants and machinery, and shipping and transportation. In addition, we have limited product liability insurance that covers our sales in North America by Houston OCTG. A large number of our product liability insurance policies for products sold by Houston OCTG have reached their maximum payouts. We are currently in the process of negotiating this policy. However, we do not maintain product liability, business interruption or key-man insurance in China. We believe that our insurance coverage is customary for similar operations in our industry in China. However, we cannot assure you that our existing insurance policies are sufficient to protect us from all losses and liabilities that we may incur.

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Regulations

This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China or our shareholders’ right to receive dividends and other distributions from us.

Regulations on seamless OCTG manufacturing and sales businesses

The PRC government maintains a Catalogue for the Guidance of Foreign Investment Industries, or the Catalogue, which was issued jointly by the Natural Development and Reform Commission, or the NDRC, and the Ministry of Commerce, or MOFCOM. The Catalogue distinguishes between encouraged and discouraged industries, with discouraged industries being further classified into those where foreign investment is restricted and those where foreign investment is prohibited. OCTG manufacturing and sales is neither a discouraged nor an encouraged business.

Under the PRC law, operators of seamless OCTG manufacturing and sales businesses are not required to obtain any special licenses from government agencies, other than regular business licenses and other permits that must be held by every business entity located in China.

Regulations on environmental protection

The OCTG industry is not considered as a heavy pollution industry by the PRC State Environmental Protection Authority. However, we are still subject to a variety of governmental regulations related to environmental protection. The major environmental regulations applicable to us include the Environmental Protection Law of the People’s Republic of China, the Water Pollution Prevention Law of the People’s Republic of China, the Atmospheric Pollution Prevention Law of the People’s Republic of China, the Environmental Noise Pollution Prevention Regulations of the People’s Republic of China, the Environmental Impact Assessment Law of the People’s Republic of China and the Regulations Governing Environmental Protection in Construction Projects. Also, general environmental regulations relating to noise and the treatment of industrial waste are applicable to our operations.

All phases of our operations are subject to environmental regulations and discharge standards promulgated by government agencies in China. Before we may begin project development and production, we must comply with environmental regulations and standards. Environmental regulations set forth limits and prohibitions on spills, releases or emissions of various substances produced in association with certain processing and manufacturing operations. A breach of any regulations may result in imposition of fines and penalties and even curtailment or suspension of our operations. Furthermore, future changes in environmental laws and regulations could occur that result in stricter standards and enforcement, larger fines and liability, and increased capital expenditures and operating costs, which could have a material adverse effect on our financial condition or results of operations.

Regulation on PRC iron and steel industry

According to the Catalogue, steel production is neither a discouraged nor an encouraged business. In July 2005, the NDRC issued the Development Policy for the Iron and Steel Industry, or the Iron and Steel Policy, outlining the government’s comprehensive policy for the iron and steel industry. The Iron and Steel Policy sets forth the government’s guidance and regulations on all aspects of the iron and steel industry in China, including resource and equipment utilization, regional concentration of outputs, quality improvements, technological innovation, investment management and industry consolidation. The Iron and Steel Policy stipulates minimum plant size, capacity investment and technologies to be used in the industry. Pursuant to the Iron and Steel Policy, government approvals are required for the establishment of new steel plants and their upgrades, among other things. The Iron and Steel Policy also provides that as a matter of “general principle,” foreign investors may not own controlling stakes in PRC enterprises engaging in the iron and steel business. For violators of the policy, the Iron and Steel Policy provides various administrative punishments, including withholding manufacturing permits, environmental impact evaluation reports and waste discharge licenses.

In July 2008, WSP China acquired Mengfeng, a company located in Inner Mongolia, China. Mengfeng has been approved as a seamless steel pipe manufacturer by the Hohhot Municipal Commission of Development and Planning. However, Mengfeng has not built a seamless steel pipe production line yet and its current primary business is to provide raw materials for our subsidiaries in China. Because Mengfeng is part of our integrated OCTG manufacturing business and its steel billet outputs are primarily used for our production of OCTG rather than for sale to any third party, our management believes that WSP China’s ownership in Mengfeng is not in violation of the Iron and Steel Policy. However, there are substantial uncertainties regarding the interpretation and application of the Iron and Steel Policy. Accordingly, there can be no assurance that the PRC regulatory authorities, in particular the NDRC, will not in the future take a view that is contrary to the view of our management. If the PRC government determines that WSP China’s ownership in Mengfeng does not comply with the PRC government restrictions on foreign investment under the Iron and Steel Policy, we could be subject to severe penalties.

36



Regulations on negotiable instruments

Pursuant to the PRC Negotiable Instruments Law, adopted by the Standing Committee of the National People’s Congress on May 10, 1995 (as amended on August 28, 2004) and various PRC regulations, negotiable instruments including bank acceptance notes and commercial acceptance notes shall be issued in good faith and based on actual underlying transactions.

Under the PRC Negotiable Instruments Law and other relevant PRC regulations, administrative and criminal liabilities may apply to those who:

  counterfeit negotiable instruments;

  knowingly draft, sell or transfer counterfeit negotiable instruments;

  issue cheques that cannot be honored either due to insufficient funds or incorrect signature or seal;

  issue bills of exchange or promissory notes without reliable sources of funds for the purpose of obtaining money through fraud;

  make false entries on bills of exchange or promissory notes when issuing such instruments for the purpose of obtaining property or money through fraud;

  use negotiable instruments of others without authorization, or use overdue or invalid negotiable instruments for the purpose of obtaining property or money through fraud; or

  commit one of the abovementioned acts as the payer, in conspiracy with the drawer or holder of the negotiable instrument.

In addition, those who violate the PRC Negotiable Instruments Law and cause damages to others may be subject to civil liabilities.

In 2009, 2010, 2011 and the first quarter of 2012, we entered into certain bill financing arrangements which were not in compliance with the general principles under the PRC Negotiable Instruments Law. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources— Bill financing.”

Regulations on foreign currency exchange

Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 2008 and various regulations issued by SAFE, and other relevant PRC government authorities, Renminbi are freely convertible only to the extent of current account items, such as trade related receipts and payments, interest and dividends. Capital account items, such as direct equity investments, loans and repatriation of investment, require prior approval from SAFE or its local counterpart for conversion of Renminbi into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside of China.

Payments for transactions that take place within China must be made in Renminbi. Unless otherwise approved, PRC companies must repatriate foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks subject to a cap set by SAFE or its local counterpart. Unless otherwise approved, domestic enterprises must convert all of their foreign currency receipts into Renminbi.

Regulations on dividend distribution

The principal laws and regulations governing dividend distributions by wholly foreign-owned enterprises and Sino-foreign equity joint ventures include:

  Wholly Foreign-Owned Enterprise Law (1986), as amended in 2000;

  Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended in 2001;

  Sino-foreign Equity Joint Venture Enterprise Law (1979), as amended in 2001; and

  Sino-foreign Equity Joint Venture Enterprise Law Implementing Rules (1983), as amended in 2001.

Under these laws and regulations, wholly foreign-owned enterprises and Sino-foreign equity joint ventures in China may pay dividends only out of their accumulated profits, if any, as determined in accordance with the PRC accounting standards and regulations. Additionally, these foreign-invested enterprises are required to set aside 10% of their after-tax profits based on the PRC accounting standards each year, if any, to fund their general reserve fund, until the accumulative amount of such reserves reaches 50% of their registered capital. These reserves are not distributable as cash dividends. Wholly foreign-owned enterprises are also required to allocate a portion of their after-tax profits, as determined by the board of directors, to its staff welfare and bonus funds, which may not be distributed to equity owners.

In addition, dividends we pay to our non-PRC shareholders may be subject to a 10% withholding tax. After FSHL was qualified as a tax resident company in the Hong Kong Special Administrative Region in 2009, a withholding tax at 5% is applicable on dividends paid to FSHL. See “Item 10 Additional Information— E. Taxation—People’s Republic of China taxation.”

37



C.    Organizational Structure

We hold our interest in the operating subsidiaries indirectly through our wholly-owned intermediate holding company, FSHL, a company incorporated in the British Virgin Islands.

Substantially all of our business is conducted through our wholly-owned operating subsidiary established in China, WSP China.

The following table provides a list of our significant subsidiaries as of the date of this annual report:





  

Name


Place of incorporation
  
Ownership Interest
FSHL
       
British Virgin Islands
         100 %  
WSP China
       
PRC
         100 %  
Liaoyang Seamless
       
PRC
         70 %  
Songyuan Seamless
       
PRC
         100 %  
Houston OCTG
       
United States
         100 %  
Mengfeng
       
PRC
         100 %(1)  
Bazhou Seamless
       
PRC
         100 %  
WSP Pipe
       
Thailand
         100 %  
 


(1)  
  In July 2008, WSP China entered into an agreement with Hebei Bishi to acquire 100% equity ownership of Mengfeng for a total consideration of approximately $40.5 million. As of the date of this annual report, WSP China has paid a total of approximately $38.2 million to Hebei Bishi.

D.    Property, Plant and Equipment

We are headquartered in Wuxi, China, where we own multiple buildings with an aggregate of approximately 199,130 square meters of office and manufacturing space. In addition, we have manufacturing facilities, either completed or under construction, and/or offices in Liaoyang, Songyuan, Kuerle, Tuoketuo County, Daqing, Changqing, and Dazhou, China and internationally in Houston, Texas and Thailand. Among these facilities and offices, we own approximately 382,819 square meters of space and lease the remaining approximately 21,204 square meters. In 2009, 2010 and 2011, we paid approximately $1.0 million, $1.2 million and $1.0 million, respectively, in rental expenses under these leases. We have land use rights to approximately of 1,882,054 square meters of land on which our plants or offices are situated, and such land use rights are usually valid for a period of fifty years starting from the date of grant.

We are currently in the process of completing the construction of a pipe heat treatment production line with an annual processing capacity of 20,000 tonnes in Liaoyang through WSP Pipe. The following table sets forth the major items of our planned expansion. For existing production, facilities, see “—B. Business Overview—Production capacity.”


  

  

  

  

Production facilities
  
Product line
  
Location
  
Expected time
of completion
  
Expected annual
production capacity
(in tonnes)
Liaoyang pipe heat treatment production line
   
Heat treatment
   
Thai-Chinese Rayong Industrial Zone, Thailand
   
First half of 2012
         100,000   
Thailand pipe heat treatment production line
   
Heat treatment
   
Thai-Chinese Rayong Industrial Zone, Thailand
   
First half of 2012
         20,000   
 

We purchase equipment from both international and domestic suppliers. Our major equipment suppliers include Taiyuan Tongze Equipment Co., Ltd., Jiangsu Shengfeng Construction Co., Ltd. and Nantong Wujian Construction Co., Ltd.

For capital expenditures we expect to incur for the expansion of our production facilities in 2012, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital expenditures.” For environmental issues that may affect the utilization of our assets, see “—Environmental and safety matters.”

Item 4A.    UNRESOLVED STAFF COMMENTS

Not applicable.

Item 5.    OPERATING AND FINANCIAL REVIEW AND PROSPECTS

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 their related notes included in this annual report. This report contains forward-looking statements. See “Item 5. Operating and Financial Review and Prospects—G. Safe Harbor.” In evaluating our business, you should carefully consider the information provided under the caption “Item 3. Key Information—D. Risk Factors” in this annual report. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.

38



A.    Operating Results

Overview

We are a leading Chinese manufacturer of seamless OCTG, including casing, tubing and drill pipes used for oil and natural gas exploration, drilling and extraction. We sell our products in both domestic and international markets. We offer a comprehensive range of seamless OCTG products to our customers. Our product portfolio can generally be divided into API products and non-API products.

In China, we target sales of our products primarily at leading Chinese oil companies. For instance, in 2011, we were one of the three largest OCTG suppliers to CNPC, and one of the two China-based non-API suppliers to Sinopec. In the international markets, we have established an extensive overseas customer base, covering oilfields in North and South America, the Middle East, Asia, Africa and Russia.

We have grown significantly since our inception until 2009. However, our business was adversely affected in 2009 and 2010 due to decreased demand for our products resulted from the worldwide economic slump, anti-dumping and countervailing duties imposed on Chinese OCTG products by the United States government as well as oversupply condition in domestic market. Our business prospectus and financial results improved in 2011, primarily due to increases in both the sales of non-API and API products. As of December 31, 2009, 2010 and 2011, our annual production capacities of seamless OCTG were 924,000 tonnes, 1,344,000 tonnes and 1,394,000 tonnes, respectively. In 2009, 2010 and 2011, our net revenues were $577.0 million, $470.5 million and $686.1 million, respectively. We had net income of $1.6 million in 2009, net loss of $132.8 million in 2010 and net loss of $76.8 million in 2011.

Factors affecting our results of operations

Demand for seamless OCTG in the domestic and international markets

Demand for our OCTG products depends significantly on the number of domestic and worldwide oil and gas wells drilled, completed and reworked, as well as the depth and drilling conditions of these wells. The level of such drilling activities in turn depends on the level of capital spending by major oil and gas companies. Capital spending on OCTG used for oil and natural gas exploration, drilling and production activities is driven in part by the prevailing prices of oil and natural gas and the perceived stability and sustainability of those prices. Domestic demand for our products is largely driven by the growth of the oil and gas industry in China. China’s strong demand for oil and gas in recent years has resulted in significant increases in drilling activities in China, leading to a greater demand for seamless OCTG.

Our revenues and net income decreased from 2009 to 2010 due in part to decreases in oil and natural gas prices resulted from lower demand for our OCTG products. Our revenues and net income increased from 2010 to 2011 due in part to increases in both the sales of non-API and API products. Revenues and volume of products sold decreased by 18.5% and 2.3%, respectively, from 2009 to 2010. In 2011, revenues increased by 45.8%, while volume of products sold decreased by 4.0%, compared to 2010. In 2009, 2010 and 2011, approximately 38.4%, 37.3% and 46.8%, respectively, of our net revenues were derived from export sales.

Since 2005, China has been a net exporter of API OCTG and a net importer of non-API OCTG. North America, Russia and the Middle East are other important seamless OCTG markets. With the existing and conventional reservoirs gradually being depleted, major oil and gas exploration and production companies have significantly shifted their exploration and development focuses to non-conventional deep-water oil sources and non-conventional gas sources in recent years. The shift to more challenging operating conditions have increased demand for high quality seamless OCTG.

However, worldwide developed economies suffered a sharp downturn in late 2008 as looming housing-related asset write-downs at major financial institutions paralyzed credit markets and sparked a serious global banking crisis. The global credit and economic crisis reduced worldwide demand for energy. As a result, after rising steadily for six years to peak at around $147 per barrel in July 2008, oil prices collapsed to the $35 to $50 per barrel range towards the end of 2008. In 2009, oil prices fluctuated between $34 and $80 per barrel. The significant fluctuation in oil and gas prices in 2009 that resulted in lower activity, higher inventories, and the belief that demand will not increase significantly in 2010 as a result of the economic slowdown, has led to rapid and substantial reductions in exploration and production expenditures. In the midst of a weak global economic environment and anti-dumping and countervailing duties imposed by the U.S. government, sales of both our API and non-API products have been adversely affected in 2009. Our marketing and sales strategy at the beginning of 2008 emphasized international sales of OCTG products because of strong overseas demand for high-end, non-API products and higher export prices for API products compared to Chinese domestic market prices for API products. In response to weakening international demand for OCTG products from the fourth quarter of 2008, we adjusted our strategy by concentrating on sales of OCTG products to domestic customers. As a result, 61.6% of our net revenues in 2009 were attributable to the domestic market as compared to 34.7% in 2008.

Changes in our sales mix to the Chinese domestic market also helped offset some of our sales decreases in international markets. Domestic average selling prices for our products, especially for API products, remained at low levels despite increasing raw materials costs. Domestic prices for our non-API products remained comparatively higher because our sophisticated proprietary technologies make our products attractive to customers.

39



In 2010, global demand for our OCTG products remained weak with oil prices recovering slowly amid worries of Europe’s financial crisis and growing oil stockpiles. Sales of both our API and non-API products in 2010 have continued to be adversely affected by the weak global economic environment and anti-dumping and countervailing duties imposed by the U.S. government. As a result of our continued focus on sales of OCTG products to domestic customers due to weakening international demand for OCTG products, 62.7% of our net revenues in 2010 were attributed to the domestic market as compared to 61.6% in 2009.

Towards the end of 2010, U.S. crude oil prices have risen to above $87 a barrel on expectations of higher energy demand and lower U.S. interest rates with the US Federal Reserve taking measures to boost the economy. In the beginning of 2011, U.S. crude oil prices hovered above $100 a barrel amid global economic uncertainty due to concerns that the political upheaval in North Africa and the Middle East may disrupt oil output in the OPEC nations. Towards the second quarter of 2011, oil prices traded slightly below $100 a barrel within a narrow range amid signs of slowing global economic growth and growing concerns of European debt crisis. In August 2011, oil prices fell below $80 a barrel amid worries of a bout-dip recession following the downgrade of the U.S. credit rating by the Standard & Poor’s. However, the worsening debt crisis in Europe and the United States as intensified by the escalating unrest in the Middle East caused oil prices to continue trending upward toward the end of 2011 and in the first quarter of 2012. In 2012, we expect sales prices in China for our non-API products to remain at current levels for the near term because our products are capable of being used in extreme oil and gas exploration environments. Our customers also recognize the technological advantages of our products, such as our T-series premium connection and anti-corrosion pipes which use our proprietary technologies. Our non-API products have price advantages compared to those products produced by our international competitors because of our lower costs of production, and we provide faster delivery to our international customers than most of our international competitors. The trend of recovery in shipments continued through 2011. See “Item 3. Key Information—D. Risk Factors— Declines in domestic and international oil and natural gas prices, or domestic and international exploration, drilling and production activities, would adversely affect our profitability.”

Supply of raw materials

Our primary raw materials consist primarily of round steel billets and green pipes. The prices of round steel billets and green pipes fluctuate in response to global and domestic demand and supply, which have resulted in significant price volatility in recent years. Due to increasing market demand, we experienced a substantial increase in steel prices, especially in 2007 and the first two quarters of 2008. The price of steel declined towards the end of the third quarter of 2008 and the decline continued in the fourth quarter of 2008. The price of steel was volatile in the first quarter of 2009 and has been on an upwards trend since the second quarter of 2009. The volatility and upward trend of steel price has continued through 2010 and 2011.

Historically, we purchased round steel billets directly from suppliers. In order to secure a steady supply of round steel billets, in December 2006, we entered into a five-year cooperation agreement with Wuxi Xuefeng, under which Wuxi Xuefeng is committed to supply us with 300,000 to 600,000 tonnes of round steel billets per year. The purchase price was subject to the parties’ periodic negotiations. This agreement expired in 2011 and going forward, we expect to fulfill our requirements for round steel billets through individual purchase orders from Wuxi Xuefeng on an as needed basis.

In July 2008, we acquired Mengfeng, a manufacturer of crude steel billets with a designed annual capacity of 600,000 tonnes to stabilize the supply, quality and cost of our raw materials. However, Mengfeng has currently stopped production activities due to continued operating losses and is rescheduling its production planning. Additionally, in April 2009, we, together with two unrelated individuals, established Chaoyang Seamless in Chaoyang, Liaoning Province, China. We held a 51% equity interest in Chaoyang Seamless, through which we acquired tangible and intangible assets from a sponge iron and steel billet company in Liaoning province. The purpose of this investment was to further ensure a steady supply of raw materials for our growing OCTG manufacturing capacities in China, especially our OCTG production lines in northeastern China. In January 2012, we entered into an agreement to dispose of our interest in Chaoyang Seamless. However, we expect to purchase raw materials from Chaoyang Seamless in the future.

Historically, we purchased green pipes primarily from other manufacturers. In January 2007, we began production of green pipes at our new hot-rolling pipe plant in Wuxi with an annual production capacity of 450,000 tonnes of green pipes. We completed the construction of a hot-rolling pipe production line with an annual production capacity of 300,000 tonnes in Liaoyang in 2010 and a hot-rolling pipe production line with an annual production capacity of 500,000 tonnes in Kuerle in April 2011. In the second half of 2011, we completed the construction of an OCTG pipe manufacturing and sales facility at WSP Pipe in the Thai-Chinese Rayong Industrial Zone in Thailand. The first of two hot-rolling production lines with a production capacity of 60,000 tonnes per year commenced trial production in May 2011, whereas the second hot-rolling production line with a production capacity of 120,000 tonnes per year was completed and commenced trial production in September 2011.

Our production of green pipes allows us to monitor the quality of our green pipes without having to rely on the quality assurances of other manufacturers or suppliers. By producing green pipes in-house, we have streamlined our in-house production process and shortened the production cycle of our OCTG.

40



Production capacity

We have expanded our production capacity significantly in the past few years. As of December 31, 2009, 2010 and 2011, our production capacities of seamless OCTG were 924,000, 1,344,000 and 1,394,000 tonnes, respectively. Our annual production capacity is the maximum production capacity that can be achieved at the optimal level of operations of our production lines, calculated using an estimated product mix for each production line. As of December 31, 2011, our key operating assets included eighteen threading lines and two drill pipe production lines. See “Item 4. Information on the Company—B. Business Overview—Manufacturing.” Our overall capacity utilization rate is not comparable year to year due to the fact that our actual output from each production line reflects the actual product mix produced from a particular line, which differs from estimated product mix because the types of products we actually produce are based on customer specifications. We may increase our production capacity in the future depending on the circumstances.

Pricing

In determining product pricing, we primarily consider factors including projected overall market price levels, costs and customer recognition of competing products. The domestic prices of our API products are generally set based on the prevailing domestic market prices, which are usually the prices at which CNPC, the largest owner of oilfields in China, purchases from its major suppliers. Our export prices are usually set based on the prevailing international market prices, which are typically higher than our domestic prices. The prices of our OCTG are competitive with those charged by our international competitors.

Average sales price for our non-API products decreased from 2009 to 2010 primarily due to increased sales of lower priced non-API products. Average sales price for our non-API products increased from 2010 to 2011 primarily due to increased sales of higher priced non-API products in the international markets.

In 2009, average export prices increased from 2008, primarily due to sales of higher priced API and non-API products despite an overall decline in the international market demand for seamless OCTG as global drilling and exploration activities decreased as a result of worldwide economic turmoil. In 2010, average export prices decreased from 2009, primarily due to sales of lower priced API and non-API products as a result of weakening international market demand. In 2011, average export prices increased from 2010 primarily due to sales of higher priced API and non-API products.

Other products constituted 10.5%, 26.2% and 13.9% of our net revenues in 2009, 2010 and 2011. The main reason for the increase in net revenues of other products from 2009 to 2010 was due to increased demand from our customers for other products to meet their production requirements coupled with the comparative decrease in demand for our API products and non-API products. Sales of other products allow us to reduce the stock of our inventory of raw materials or unfinished products in different stages of our manufacturing process. We generally set prices of other products according to the market prices at the relevant markets. In determining product pricing, we primarily consider the following factors: estimated overall market price level, costs, brand name and customer recognition of competing products.

Product mix and geographical distribution

Our gross margin and operating margin are substantially affected by our product mix, particularly with respect to API and non-API OCTG products. Our non-API products are generally non-standard products with customized specifications that are developed to meet special needs, such as improved strength, higher corrosion resistance, improved sealing and premium connectors, among others. Because non-API products typically command a price premium compared with API products, our gross margin and operating margin will increase if a higher percentage of our net revenues are derived from sales of non-API products. Sales of our non-API products as a percentage of net revenues decreased from to 17.7% in 2009 to 14.9% in 2010, and increased to 21.1% in 2011. Our API products accounted for 71.8%, 58.9% and 65.0%, respectively, of our net revenues during the same periods. The decrease in sales of our API products in 2010 compared to 2009 was primarily due to lower domestic API sales resulted from the stiff domestic market environment. The following table sets forth sales volume and average sales prices of our API and non-API products for the periods indicated.




  

  

  




  
For the year ended December 31,
  



  
2009
  
2010
  
2011
API
                                                    
Sales volume (tonnes)
                 369,266             271,986             391,088   
Average sales price
              $ 1,122          $ 1,020          $ 1,141   
                                                           
Non-API
                                                    
Sales volume (tonnes)
                 52,877             37,543             72,358   
Average sales price
              $ 1,933          $ 1,868          $ 2,001   
 

41



We generate revenues from both domestic and export sales. Domestically, we are a major player in the seamless OCTG market. In recent years, we have also devoted efforts to expand our export sales and our international presence because export prices are generally higher than domestic prices for the same products and exports provide us with revenue diversification and allow us to build global brand recognition. Our domestic sales increased as measured by the percentage of total sales in 2010 as compared to 2009 due to an increase in the amount of our products allocated for domestic sales. Net revenues from export sales accounted for 38.4%, 37.3% and 46.8% of our net revenues in 2009, 2010 and 2011, respectively. The decrease in export sales from 2009 to 2010 was due primarily to lower international market demand for our products and that in 2009, we shifted our focus to domestic markets due to weakening international demand for OCTG products starting in the fourth quarter of 2008. See “—Demand for seamless OCTG in the domestic and international markets” for detailed discussion. The increase in export sales from 2010 to 2011 was due primarily to increased sales of both API and non-API products. We rely mainly on distributors and agents to sell our products to oil and gas fields overseas. In 2011, we increased our sales in overseas market as the overseas markets recover and continued to develop our ability to conduct direct sales overseas. The following table sets forth the sales volume and average sales prices of our domestic and export sales for the periods indicated. Our domestic and export sales below also include our sales of non-OCTG products.




  

  

  




  
For the year ended December 31,
  



  
2009
  
2010
  
2011
Sales volume (tonnes)
                 648,055             633,272             607,897   
Domestic
                 520,880             510,994             411,525   
Export
                 127,175             122,278             196,372   
Average sales price
              $ 890           $ 743           $ 1,129   
Domestic
              $ 682           $ 577           $ 887    
Export
              $ 1,743          $ 1,435          $ 1,636   
 

Overview of financial results

Net revenues

Our net revenues primarily consist of sales of OCTG products. Our OCTG products fall into two categories, API products and non-API products. Our primary OCTG products consist of tubing, casing and drill pipes. See“—Factors affecting our results of operations—Product mix and geographical distribution” for details on our product mix. We also generate, to a lesser extent, revenues from other non-OCTG pipe products, such as green pipes, which are semi-finished pipes that can be further processed into end-products, as well as iron ore pellets, iron ore billets and other unfinished products. The following table sets forth the net revenues of our API, non-API and other products for the periods indicated. Net revenues are net of business taxes.




  

  

  




  
For the year ended December 31,
  
Net revenues (in thousands)


  
2009
  
2010
  
2011
API
              $ 414,250          $ 277,290          $ 446,223   
Non-API
                 102,186             70,143             144,766   
Iron ore
                 19,968             31,918                
Others
                 40,625             91,114             95,136   
Total
              $ 577,029          $ 470,465          $ 686,125   
 

We have built an extensive customer base, covering customers located in China, as well as in North and South America, the Middle East, Asia, Africa and Russia. Sales of our OCTG products to the South American market, especially Venezuela, increased as a result of our successful penetration into this market and accounted for 47.8% of our export sales in 2011. We determine the geographical market of our net revenues based on the location of the initial purchasers of our products. The following table sets forth the breakdown of our net revenues by geographic market for the periods indicated. See“—Factors affecting our results of operations—Product mix and geographical distribution” for a discussion of our domestic and export sales trends.

42






  

  

  




  
For the year ended December 31,
  
Net revenues (in thousands)


  
2009
  
2010
  
2011
Domestic
                                                       
PRC
              $ 355,402          $ 294,946          $ 364,940   
Export
                                                       
Malaysia
                 12,875             5,087             4,974   
Singapore
                 5,236             3,542             3,528   
Hong Kong
                 10,500             8,499             3,484   
United Arab Emirates
                 17,889             691              3,272   
Rest of Asia
                 53,074             21,016             35,658   
Total Asia
                 99,574             38,835             50,916   
United States
                 51,904             45,414             43,334   
Canada
                 936              7,318             914    
Total North America
                 52,840             52,732             44,248   
Venezuela
                              62,295             153,506   
Others
                 69,213             21,657             72,515   
Total export
              $ 221,627          $ 175,519          $ 321,185   
 

Cost of revenues

Our cost of revenues consists primarily of our manufacturing costs adjusted for changes in inventory. Our manufacturing costs primarily include the costs of raw materials used to manufacture our products, most significantly, green pipes and round steel billets. Green pipes have accounted for a significant portion of our raw materials costs in the past. Since we began using green pipes produced by our former subsidiary Jiangsu Fanli and our hot-rolling pipe plant in 2007, the costs of round steel billets have become the primary component of our costs of raw materials. The remaining components of our manufacturing costs include shipping and handling costs, labor, utility, depreciation and miscellaneous expenses such as overhead costs, maintenance costs and sundry costs. Labor costs consist of wages, salaries and other statutory employee benefits for our production workers. Depreciation includes charges on our machinery and equipment for the production of our goods. We include in our cost of revenues write-down for value of potentially obsolete or slow-moving inventories, based on specific analysis of our sales forecasts and inventory conditions.

We incur significant shipping and handling costs in connection with the shipping of our products to our customers located in other parts of China and overseas. We usually deliver our finished products to customers in China by train or by truck in circumstances requiring urgent delivery. Our overseas deliveries are primarily made by ship. Our export contracts are usually entered into on a Free On Board (FOB) basis, which means that we pay for shipping of the goods to the port of shipment, plus loading costs. Our customers pay freight, insurance, unloading costs and shipping from the port of destination to the factory. We engage a number of overseas shipping agents to transport our finished products overseas. The shipping and handling costs were $26.0 million, $33.8 million and $41.0 million in 2009, 2010 and 2011, respectively.

VAT in China is charged on sales at a general rate of 17% based on the sales price of our products to customers. We are deemed to have paid a 4% VAT based on the general rate minus a 13% VAT refund on export sales, which we are entitled to receive immediately upon filing the VAT returns. The 4% VAT is recorded as a cost of revenues on export sales.

Operating expenses

Our operating expenses include selling and marketing expenses, impairment on long-lived assets and general and administrative expenses.

Selling and marketing expenses

Selling and marketing expenses primarily include salary and benefits, samples, promotion and marketing expenses, and commissions or service fees to sales agents.

We generally sell our products directly to oilfields in China through our four sales offices located in the Daqing, Changqing, Xinjiang and Sichuan oilfields, which cover all major oilfields in China. Internationally, we sell our products primarily through distributors and sales agents. We sell directly to our distributors, who interact independently with the end-customers. With respect to sales agents, we typically pay them a commission or a service fee.

43



Our selling and marketing expenses also include costs of product warranties. In connection with the warranties relating to our products, we provide a warranty to customers that our products will meet the stated functionality as agreed to in each sales contract. We provide for the estimated warranty costs under these guarantees based upon historical experience and management’s estimate of the level of future claims. Our provisions for estimated warranty costs were $0.1 million, $0.5 million and $4.0 million in 2009, 2010 and 2011, respectively. Increase in provisions for estimated warranty costs from 2010 to 2011 was primarily due to a provision made for a legal settlement in the United States. We have defective product issues occasionally and such defects typically become evident within the first few months of sales.

General and administrative expenses

General and administrative expenses comprise primarily of salaries and benefits, share-based compensation expenses, professional fees, guarantee fees, and business travel expenses.

We incurred general and administrative expenses of approximately $44.8 million, $67.0 million and $61.8 million in 2009, 2010 and 2011, respectively. Our general and administrative expenses increased from 2009 to both 2010 and 2011 primarily due to increases in allowance for doubtful accounts and legal fees, expansion of overall operations, acquisition of new facilities, as well as higher salary expenses incurred for recruiting additional employees.

Impairment on long-lived assets

We measure impairment by comparing the carrying value of the long-lived assets to future undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we would recognize an impairment loss based on the fair value of the assets.

We recorded an impairment charge of $17.1 million for Chaoyang Seamless in 2010 and nil in 2011 based on the results of our impairment test.

Research and development expenses

Our research and development expenses are not disclosed as a separate item in the income statement but allocated to cost of revenues and other operating expenses, depending on whether the costs are related to the design, production, testing or enhancement of our products and manufacturing process and the personnel who participate in the research and development projects. The OCTG industry in which we operate is characterized by rapid development and increasing demand for non-API products. In 2006, we did not have a separate department for research and development, even though many employees have devoted part of their time in research and development activities. We established our research and development department in July 2007. We incurred research and development expenses of approximately $0.7 million, $1.7 million and $1.5 million in 2009, 2010 and 2011, respectively. We expect to incur more research and development expenses in the future as we devote greater resources to improving our technical know-how in OCTG production, in particular relating to the production of non-API products.

Other operating income (expense)

Other operating income (expense) primarily includes income or expense from sales of auxiliary materials and gains or losses from disposal of fixed assets. We do not expect that other operating income (expense) will be material in our business.

Taxation

WSP Holdings is a tax-exempted company incorporated in the Cayman Islands. FSHL is a tax-exempted company incorporated in the British Virgin Islands.

FSHL’s subsidiaries registered in China are subject to the New EIT Law on the taxable income in accordance with the relevant PRC income tax laws.

In September 2008, WSP China was officially granted the “high and new technology enterprise” status for a period of three years with retrospective effect from January 1, 2008. Therefore, WSP China is entitled to a preferential income tax rate of 15% in 2008, 2009 and 2010 as long as it maintains its qualification as a “high and new technology enterprise” under the New EIT Law. WSP China has used the 15% preferential tax rate in the calculation of current and deferred tax balances, which was consistent with the preferential tax rate applicable to WSP China prior to January 1, 2008. In September 2011, we obtained an approval from the PRC authorities for a renewal of the “high and new technology” enterprise status, effective retrospectively from January 1, 2011. We expect that WSP China will maintain its qualification as a “high and new technology enterprise” in the foreseeable future as it has successfully fulfilled the required conditions in the past. See “—C. Research and Development” for more information relating to our research and development results and efforts. If WSP China fails to maintain the “high and new technology enterprise” status, the calculation of deferred tax balances will be based on the uniform tax rate of 25%.

44



As of December 31, 2009, 2010 and 2011, the measurement of our deferred tax assets has been reduced by a valuation allowance in the amount of $6.9 million, $33.1 million and $47.3 million, respectively as based on the available evidence it is more likely than not that some portion of our deferred tax assets are not expected to be realized. The recognition of valuation allowance has partly contributed to the increase in our effective income tax rate in 2009 and decrease in our effective income tax rate in both 2010 and 2011.

Our other entities registered in China are subject to the 25% and 33% EIT rates since and before January 1, 2008, respectively.

Houston OCTG is subject to United States federal corporate income tax rate of 34% and Texas state margin tax.

The subsidiaries of FSHL that are tax residents in China will be subject to the Chinese dividend withholding tax at 10% when these Chinese subsidiaries distribute dividends paid out of profits that arise on or after January 1, 2008. In 2009, following FSHL’s qualification as a tax resident company in the Hong Kong Special Administrative Region, a withholding tax at 5% will be applicable on China dividends paid to FSHL. The qualification for tax residency in the Hong Kong Special Administrative Region is subject to an annual application and renewal process. FSHL made no renewal in 2011 due to the continued operating losses of its PRC subsidiaries. A provision for PRC dividend withholding tax of $0.8 million has been made based on the 40% of the 2009 undistributed earnings of our PRC subsidiaries as of December 31, 2009, which are expected to be distributed. The remaining undistributed earnings of our PRC subsidiaries of approximately $90.8 million at December 31, 2009 are considered to be reinvested, and no deferred tax liability has been made for the PRC dividend withholding taxes that would be payable upon the distribution of those amounts to FSHL as of December 31, 2009. In 2009, we distributed dividends out of the annual profits of WSP China for the year ended December 31, 2007. No withholding tax is necessary on any dividend amount paid out of retained earnings of WSP China before January 1, 2008. A reversal of provision for PRC dividend withholding tax of $0.4 million was made based on 40% of the 2010 undistributed earnings of the Company’s PRC subsidiaries due to operating losses. As of December 31, 2011, no provision for PRC dividend withholding tax was required to be made for our PRC subsidiaries due to continued operating losses.

The calculation of income taxes reflects the status of WSP Holdings and FSHL as non-China tax resident companies. The tax residency of a company is normally a question of fact. For a company, such as WSP Holdings and FSHL, which has been established outside China, tax residency will only be in China if the location of effective management of the company is in China.

Because the concept of tax residency is new in China, it is possible that the tax authorities may in the future assert that WSP Holdings and/or one or more of its non-Chinese subsidiaries are tax residents in China. In the event that this occurs, WSP Holdings or FSHL will become subject to the New EIT Law on its worldwide income. This would cause any income earned by WSP Holdings and FSHL to be subject to China’s 25% EIT. As there is an exemption for any dividends received by a China tax resident company from another tax resident company, such taxable income would not include any dividends from the Chinese subsidiaries.

We have made an assessment of the level of tax authority based on the technical merits for each tax position, including the potential application of interest and penalties, and have measured the unrecognized tax benefits associated with the tax positions. As of December 31, 2009, 2010 and 2011, the Company had additional unrecognized tax benefits of $3,178, $3,698 and nil, respectively, that related to net operating loss carryforwards. The aforementioned liability is recorded as non-current liabilities because the related payment is not anticipated within one year of the balance sheet date. In 2010, the Company had recorded an additional liability for an uncertain tax position related to the government grant received by one of its subsidiaries. We classify interest and/or penalties related to income tax matters in income tax expense. We had additional accrued interest and penalties as of December 31, 2009, 2010 and 2011 of approximately $365,000, $2,558,000 and $944,000, respectively, arising from the unrecognized tax benefit balances for 2007.

For a discussion on VAT, see “Item 5—Overview of financial results—Cost of revenues.”

Critical accounting policies

We prepare our financial statements in conformity with U.S. GAAP, which require us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this annual report.

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Revenue recognition

We recognize revenue when persuasive evidence of an arrangement with the customer exists, the product has been shipped and title has passed, provided that we do not have significant future performance obligations, the amount due from the customer is fixed or determinable, and collectability is reasonably assured. There is no significant customer acceptance process. We assess whether the amount due from the customer is fixed or determinable based on the payment terms of the agreement. We assess collection based on a number of factors, including past transaction history with the customer and creditworthiness of the customer.

We present revenue net of value added tax, sales returns and applicable local government levies.

Iron ore sales

Sales of iron ore is recognized on the same criteria above except that revenue is recognized when the iron ore is collected by the customer at the destination port. We record the sales of iron ore on a gross basis, as we act as principal in the transaction taking the risks and rewards of ownership and take the title of the products.

In November 2009, we entered into a five-year commitment to purchase a minimum of 300,000 tonnes of iron ore pellets to be delivered by separate shipments on a yearly basis from 2010 through 2014. The commitment for purchase of iron ore pellets is not determinable as the contract does not include a stated purchase price.

In November 2010, we entered into another commitment to purchase approximately 600,000 tonnes of iron ore fines for a total amount of $75 million. The commitment for purchase of iron ore fines is to be completed within a period of one year through one or two shipments per month. However, this commitment expired in 2011 through lapse of time, as no shipments were made over the one-year period.

Warranty

We sell the majority of our products to customers along with unconditional repair or replacement warranties for a 12-month period from the date of purchase. We determine the estimated liability for warranty claims based on our historical experience and management’s estimate of the level of future claims. Our provision for warranty claims is derived based on the average percentage of actual warranty claims over our revenues in the past five years. Our estimate of the accrued product warranty claims may change in the near term depending on the significance of our sales to the United States and any unsettled warranty claims. We foresee fewer warranty claims in the future due to the significant decline in our sales to the United States. Estimated costs for product warranties are recognized at the time when revenue is recognized.

Impairment of long-lived assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When these events occur, we measure impairment by comparing the carrying amount of the asset to future undiscounted net cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the asset, we will recognize an impairment loss based on the fair value of the asset. In 2011, we continued to experience a decline in sales to the United States due to the anti-dumping and countervailing duty imposed on our products, which resulted in a low capacity utilization of our production facilities. In view of these changes in our operating circumstances and the operating losses incurred by certain asset groups, we performed an impairment test for these asset groups namely, WSP China, Liaoyang Seamless, Songyuan Seamless and Mengfeng on December 31, 2011. The future undiscounted net cash flows of the asset groups exceed their carrying amounts and therefore we recognized no impairment loss. We also performed an analysis on potential impairment indicators for three other asset groups, namely, Bazhou Seamless, Houston OCTG and WSP Pipe, and concluded that test of recoverability was not required due to the absence of events or changes indicating that the carrying amounts of these asset groups may not be recoverable.

The impairment test that we performed for certain asset groups on December 31, 2011 was assisted by an independent third party valuation firm. The valuation analysis, which is based on our financial projections, utilizes generally accepted valuation methodologies such as the future undiscounted net cash flows as stipulated under the step one of the two-step process of the relevant authoritative accounting pronouncement. The valuation analysis considers certain principal factors such as the nature, financial and operating results of our business, the global economic outlook in general and the specific economic and competitive elements affecting our business, industry and market, the market-derived investment returns of entities engaged in a similar line of business and returns from other similar types of projects, the stage of development, contemporaneous business plans and relevant financial risks of our business. The valuation analysis also incorporates certain major assumptions concerning the political, legal, fiscal and economic conditions, future movement of exchange rates and interest rates, the availability of financial resources, management competency and availability of key personnel, industry trends and market conditions. Based on the result of the impairment test, the aggregate future undiscounted net cash flows from the reporting units is greater than the sum of carrying value of the relevant reporting units by $662.4 million.

46



The projected undiscounted cash flow estimate included, among other things, an analysis of projected revenue growth, gross margins, effective tax rates, capital expenditures and working capital requirements. These assumptions are inherently uncertain and subjective. The key assumptions of our cash flow forecasts were consistent with the assumptions that we used in developing our business plan, which included:

  Net revenues will grow at a CAGR of 0.3% to 7.4% for 2012 through 2019 resulting in sales volume of 410,000 tonnes to 460,000 tonnes of finished products while sales price of finished products per tonne is expected to increase by 0% to 5.0% per annum.

  Cost of revenues is projected to decrease by 1.4% to 4.1% for all asset groups from 2012 through 2019, except for Songyuan Seamless where cost of revenues is projected to increase by 0.4%, and the cost of revenues represents around 81.4% to 92.7% of sales.

  Operating expenses as a percentage of net revenues are expected to remain at 2.0% to 10.0% for all asset groups during the projection period.

  The availability of finance will not be a constraint on the forecasted growth of all asset groups’ related business.

  There will be no material changes in the existing political, legal, fiscal and economic conditions in China;

  There will be no material deviation in industry trends and market conditions from economic forecasts.

Goodwill

The excess of the purchase price over the fair value of net assets acquired is recorded on the consolidated balance sheet as goodwill. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. We perform an annual goodwill impairment test on December 31 of each fiscal year for all reporting units. Goodwill is tested following a two-step process. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. We performed an impairment test for goodwill on December 31, 2010 and based on the results that the fair value of goodwill exceeds its carrying amount, we recognized no impairment loss.

The impairment test that we performed for goodwill on December 31, 2010 was assisted by an independent third party valuation firm.

The valuation analysis utilizes and considers generally accepted valuation methodologies such as the income, market and cost approaches. The valuation analysis basically depends upon the income and market approaches to derive a business enterprise value. Under the income approach, a discounted cash flow method is used to arrive at a value based on our financial projections while under the market approach, financial ratios of comparable companies in the same or similar line of business are analyzed to determine a value. In applying the market approach, different value measures or market multiples of comparable companies are analyzed to induce a series of multiples that are considered representative of the industry average, which will then be adjusted by a growth and risk adjustment factor to reflect the expected growth rate and risk level of the reporting unit. The valuation analysis considers certain principal factors such as the nature, stage of development of operation and relevant business risks of the reporting unit, the global economic outlook and specific economic and competitive elements affecting the reporting unit’s business, its industry and market as well as the nature and prospects of the industry. The valuation analysis also incorporates certain major assumptions concerning the political, legal, fiscal and economic conditions, tax legislation, future movement of exchange rates and interest rates, the availability of financial resources, management competency and availability of key personnel, industry trends and market conditions.

The only reporting unit with goodwill was Chaoyang Seamless. After we performed impairment test of long-lived assets and recognized impairment loss for the asset group of Chaoyang Seamless, the fair value of the reporting unit exceeds its carrying amount, including goodwill. Thus there was no goodwill impairment for Chaoyang Seamless as it passed step one of goodwill impairment test.

Pursuant to WSP China’s board of directors’ approval on November 21, 2011, WSP China entered into an agreement with a PRC individual to dispose of its entire 51% equity interest in Chaoyang Seamless on January 17, 2012. Accordingly, the assets and liabilities of Chaoyang Seamless are separately reported as “assets and liabilities held for sale” as of December 31, 2011 at the lower of their carrying value or fair value less cost to sell. There have been no impairments related to Chaoyang Seamless and no impairment loss is identified on goodwill for the year ended December 31, 2011.

47



Accounts receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows.

The allowance for doubtful accounts is our estimate of the amount of probable credit losses in our existing accounts receivable. We consider factors such as customer credit-worthiness, past transaction history with the customer and current economic industry trends when we determine the collectability of specific customer accounts. Allowance for doubtful accounts for accounts receivable was $9.8 million, $20.1 million and $22.6 million as of December 31, 2009, 2010 and 2011, respectively. The increase in allowance for doubtful accounts for accounts receivable in 2010 was primarily due to the provision for one customer who failed to meet the repayment schedule. The slight increase in allowance for doubtful accounts for accounts receivable in 2011 was primarily due to an increase in provisions for long overdue debts.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined by the weighted average method. Cost comprises direct materials and where applicable, direct labor costs, toll manufacturing costs and overhead that has been incurred in bringing the inventories to their present location and condition. Write-downs of potentially obsolete or slow-moving inventories are recorded based on the management’s specific analysis of future sales forecasts and economic conditions.

Income taxes

Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws and regulations applicable to us as enacted by the relevant tax authorities.

Management must exercise significant judgment to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We base the valuation allowance on our estimates of taxable income in each jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. If actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance, which could materially impact our financial position and results of operations.

U.S. GAAP requires that an entity recognize the impact of an uncertain income tax position on the income tax return at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority.

Contingencies

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to us which will only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

Share-based compensation expenses

On August 24, 2007, our board of directors adopted the 2007 Share Incentive Plan and awarded options to our directors, officers, employees and consultants to purchase an aggregate of 5,206,000 ordinary shares, at an exercise price of $4.00 per share. We have determined, with the assistance from an independent third party valuation firm, that the fair value of the options as of the date of grant at August 24, 2007 was $0.83 per option. We calculated the fair value of our ordinary shares to be $3.81 per share.

We use the Black-Scholes option pricing model to determine the fair value of our options. The significant assumptions used in the Black-Scholes model included: expected life of 3 years; risk-free interest rate of 4.31%; dividend yield of 4.38%; and volatility of 39.4%. The determination of the fair value of share-based compensation awards on the date of grant using an option-pricing model is affected by our share price as well as assumptions regarding a number of complex and subjective variables, including our expected share price volatility over the term of the awards, actual and projected employee share option exercise behavior, risk-free interest rates and expected dividends.

As we have historically been a private company, the sources utilized to determine the fair value of the underlying shares at the date of measurement are subjective in nature.

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For our August 2007 option grants, the estimated fair value of our ordinary shares was based on (i) financial condition as of the date of the grant and (ii) operating history. This valuation was based on a combination of the market approach and the income approach.

The market approach focuses on comparing our company to comparable publicly traded companies. In applying this method, valuation multiples are: (i) derived from historical operating data of comparable companies; (ii) evaluated and adjusted, if necessary, based on the strengths and weaknesses of our company relative to the selected guideline companies; and (iii) applied to the appropriate operating and future projected financial data of our company to arrive at an indication of fair market value for our company’s equity.

In the income approach, equity value is dependent on the present value of future economic benefits such as cost savings, periodic income, or revenues. Indications of equity value are developed by discounting future net cash flows to their present value at a discount rate that reflects both the current return requirements of the market and the risks inherent in the specific investment. In most circumstances, the discount rate is the weighted average cost of capital, which takes into account the cost of equity and the cost of debt. For this method, we used a discount rate of 16%. Our cost of equity was derived using the Capital Asset Pricing Model, which takes into account the risk-free interest rate and a required risk premium. Our required risk premium takes into account the equity risk premium, a small stock premium and a country risk premium for China.

Based on the above methods, we determined an equity value of our company using a weighted average and taking into account a lack of marketability discount of approximately 7.76% due to our status as a private company. Our share-based compensation expense was $809,000 for 2009 and nil for both 2010 and 2011.

Internal control over distribution of our products

In the years ended December 31, 2009, 2010 and 2011, we did not have any direct sales to Sanctions Targets.

We sell our products in international markets primarily through independent, non-U.S. distributors who are responsible for interacting with the end customers of our products. We have limited control over the parties to whom these independent distributors resell our products, and certain independent distributors may have sold an insignificant amount of our products to Sanctions Targets. We are aware of an insignificant amount of resales of our products by two non-U.S. and non-affiliated distributor customers to Sudan, a Sanctions Target, during the three years ended December 31, 2011. To the best of our knowledge, in 2009, 2010 and 2011, our indirect sales to Sanctions Targets accounted for approximately 2.3%, 1.1% and 0.6%, respectively, of our net revenues.

We have adopted a written policy to prevent direct or indirect sales to Sanctions Targets and have begun to implement internal control mechanisms to enforce such policy, which include contractually requiring all of our distributors to covenant with us that they will not resell any of our products to any Sanctions Targets. However, we cannot guarantee that our measures will be able to prevent future sales or resales of our products to Sanctions Targets. See “Item 3. Key Information—D. Risk factors—We may be unable to prevent possible resales or transfers of our products to countries, governments, entities, or persons targeted by United States economic sanctions, especially when we sell our products to distributors over which we have limited control.”

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Results of operations

The following table summarizes the results of our operations for the periods indicated:



  

  

  

  




  

For the year ended December 31,
  
(in thousands, except percentages)
2009
  
2010
  
2011
  
Net revenues
  $ 577,029             100 %         $ 470,465             100 %            686,125          
100
%  
Cost of revenues
     (496,656 )            (86.1 )            (467,400 )            (99.3 )            (637,615 )      
(92.9
)  
Gross profit
     80,373             13.9             3,065             0.7             48,510       
7.1
   
Selling and marketing expenses
     (18,244 )            (3.2 )            (20,841 )            (4.4 )            (34,486 )      
(5.0
)  
General and administrative expenses
     (44,798 )            (7.8 )            (67,008 )            (14.2 )            (61,774 )      
(9.0
)  
Impairment on long-lived assets
                               (17,055 )            (3.6 )                   
   
Gain on disposal of subsidiary
                                                         3,268       
0.5
   
Other operating (expenses) income, net
     2,559             0.4             5,446             1.2             2,777       
0.4
   
(Loss) income from operations
     19,890             3.4             (96,393 )            (20.5 )            (41,705 )      
(6.1
)  
Interest income (expense), net
     (17,026 )            (3.0 )            (26,043 )            (5.5 )            (30,609 )      
(4.5
)  
Other income
     767              0.1             767              0.2             767        
0.1
   
Exchange differences
     218              0              (1,484 )            (0.3 )            (5,144 )      
(0.8
)  
(Loss) income before provision for income taxes
     3,849             0.7             (123,153 )            (26.2 )            (76,691 )      
(11.2
)  
Provision for income taxes
     (2,137 )            (0.4 )            (9,388 )            (2.0 )            (99 )      
0
   
Net (loss) income before earnings in equity investments
     1,712             0.3             (132,541 )            (28.2 )            (76,790 )      
(11.2
)  
Earnings in equity investments
     (105 )            0              (211 )            0              (10 )      
0
   
Net (loss) income
     1,607             0.3             (132,752 )            (28.2 )            (76,800 )      
(11.2
)  
Less: Net income (loss) attributable to the non-controlling interests
     2,568             0.4             13,989             3.0             8,320       
1.2
   
Net (loss) income attributable to WSP Holdings Limited
  $ 4,175             0.7 %         $ (118,763 )            (25.2 )%            (68,480 )      
(10.0
)  
 

Year ended December 31, 2011 compared to year ended December 31, 2010

Net revenues

Our net revenues increased by 45.8% from $470.5 million in 2010 to $686.1 million in 2011.

  API products. Sales of our API products increased by 60.9% from $277.3 million in 2010 to $446.2 million in 2011 primarily due to increases in sales volume and average sales price. Sales volume of our API products increased by 43.8% from 271,986 tonnes in 2010 to 391,088 tonnes in 2011, primarily due to increased demand for our products in both the domestic and international markets as a result of contract wins in South America and increased orders from our primary PRC customers under improved market conditions. The average sales price of our API products increased from $1,020 per tonne in 2010 to $1,141 per tonne in 2011, primarily due to sales of higher-priced API products in both the domestic and international markets.

  Non-API products. Sales of our non-API products increased by 106.4% from $70.1 million in 2010 to $144.8 million in 2011 primarily due to increases in sales volume and average sales price. Sales volume of our non-API products increased by 92.7% from 37,543 tonnes in 2010 to 72,358 tonnes in 2011, primarily due to increased demand for our products in both the domestic and international markets as a result of increased orders from our primary PRC customers under improved market conditions. The average sales price of our non-API products increased from $1,868 per tonne in 2010 to $2,001 per tonne in 2011 primarily, due to sales of higher-priced non-API products in the international markets.

  Iron ore. Sales of iron ore was nil in 2011 compared to $31.9 million in 2010 due to our internal lack of iron ore pellet requirements and low market demand for sales of iron ore pellets.

  Other products. Sales of other products increased by 4.4% from $91.1 million in 2010 to $95.1 million in 2011 due to an increase in sales of unfinished products to meet our customers’ production requirements.

Net revenues from domestic sales increased by 23.7% from $294.9 million in 2010 to $364.9 million in 2011 primarily due to increases in average sales price and total sales volume of our products as a result of increased orders from our primary PRC customers under improved market conditions.

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Net revenues from export sales increased by 83.0% from $175.5 million in 2010 to $321.2 million in 2011 primarily due to higher sales volume as a result of improving demand for our products in the international markets, including contract wins in South America, and an increase in the average sales price. Our products in the international market command a price premium and our export prices are usually set based on the prevailing market prices, which are generally higher than the domestic prices.

Cost of revenues

Our cost of revenues increased by 36.4% from $467.4 million in 2010 to $637.6 million in 2011 primarily due to increases in raw materials purchases, utility costs and employee costs as a result of higher production activities and scale of operations. Shipping and handling costs increased by 21.2% from $33.8 million in 2010 to $41.0 million for 2011. Our cost of revenues as a percentage of net revenues decreased from 99.3% in 2010 to 92.9% in 2011. The decrease was primarily attributable to an increase in our average sales prices of our API and non-API products.

Gross profit and gross margin

As a result of the foregoing, our gross profit increased by 1,482.7% from $3.1 million in 2010 to $48.5 million in 2011.

Our gross margin increased from 0.7% in 2010 to 7.1% in 2011, primarily due to higher sales prices of our API and non-API products.

Selling and marketing expenses

Our selling and marketing expenses increased by 65.5% from $20.8 million in 2010 to $34.5 million in 2011, primarily due to increases in sales commissions attributable to higher export sales and provisions for product warranty claims. As a result, our selling and marketing expenses as a percentage of net revenues increased from 4.4% in 2010 to 5.0% in 2011.

General and administrative expenses

Our general and administrative expenses decreased by 7.8% from $67.0 million in 2010 to $61.8 million in 2011, primarily due to decreased legal settlement charges from 2010 to 2011 relating to a legal settlement charge of approximately $7.8 million with a customer in 2010. Our general and administrative expenses as a percentage of net revenues decreased from 14.2% in 2010 to 9.0% in 2011.

Interest expenses, net

Our net interest expense increased by 17.5% from $26.0 million in 2010 to $30.6 million in 2011, primarily due to an increase in borrowings resulted from increased working capital requirements.

Income tax expenses

Our income tax expenses decreased from $9.4 million in 2010 to $0.1 million in 2011, primarily due to a lower tax expense and an increase in deferred tax credits attributable to losses from operations. Our effective tax rate was 0% in 2011, compared to negative 8.0% in 2010, primarily due to decreases in provision of valuation allowance on deferred income tax assets, expenses eligible for tax deductions and unrecognized tax benefits.

Net (loss) income

As a result of the foregoing, we had net loss of $76.8 million in 2011, compared to our net loss of $132.8 million in 2010. Our net margin was negative 11.2% in 2011, compared to negative 28.2% in 2010.

Net (loss) income attributable to WSP Holdings Limited

As a result of the foregoing, net loss attributable to us was $68.5 million for the year ended December 31, 2011, compared to net loss attributable to us of $118.8 million for the year ended December 31, 2010. Net margin attributable to us was negative 10.0% in 2011, compared to negative 25.2% in 2010.

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Year ended December 31, 2010 compared to year ended December 31, 2009

Net revenues

Our net revenues decreased by 18.5% from $577.0 million in 2009 to $470.5 million in 2010.

  API products. Sales of our API products decreased by 33.1% from $414.3 million in 2009 to $277.3 million in 2010 due to decreases in sales volume and average sales price. Sales volume of our API products decreased by 26.3% from 369,266 tonnes in 2009 to 271,986 tonnes in 2010 due to decreased demand for our products particularly in the domestic market. The average sales price of our API products decreased from $1,122 per tonne in 2009 to $1,020 per tonne in 2010, primarily due to the stiff price competition as a result of the oversupply of OCTG products in the domestic market.

  Non-API products. Sales of our non-API products decreased by 31.4% from $102.2 million in 2009 to $70.1 million in 2010 due to decreases in sales volume and average sales price. Sales volume of our non-API products decreased by 29.0% from 52,877 tonnes in 2009 to 37,543 tonnes in 2010 mainly due to decreased demand for our products in the international markets. The average sales price of our non-API products decreased from $1,933 per tonne in 2009 to $1,868 per tonne in 2010 due to sales of lower priced non-API products in the international markets.

  Iron ore. Sales of iron ore increased by 59.8% from $20.0 million in 2009 to $31.9 million in 2010.

  Other products. Sales of other products increased by 124.3% from $40.6 million in 2009 to $91.1 million in 2010 due to an increase in sales of steel billets and unfinished products to meet our customers’ production requirements.

Net revenues from domestic sales decreased by 17.0% from $355.4 million in 2009 to $294.9 million in 2010. These decreases were primarily attributable to lower sales volume as a result of decreased demand for our products, and a decrease in the average sales price due to the oversupply of OCTG products in the domestic market.

Net revenues from export sales decreased by 20.8% from $221.6 million in 2009 to $175.5 million in 2010. These decreases were primarily due to lower sales volume as a result of the weakening demand for our products in the international market, and a decrease in the average sales price. Our products in the international market command a price premium and our export prices are usually set based on the prevailing market prices, which are generally higher than the domestic prices.

Cost of revenues

Our cost of revenues decreased by 5.9% from $496.7 million in 2009 to $467.4 million in 2010. The primary factors driving the decrease in our cost of revenues were the decreases in raw materials purchases, utility costs and labor due to lower production activities and scale of operations. Shipping and handling costs increased by 29.9% from $26.0 million for 2009 to $33.8 million for 2010. Our cost of revenues as a percentage of net revenues increased from 86.1% in 2009 to 99.3% in 2010. The increase was primarily attributable to a decrease in our average sales prices resulted from a lower percentage of net revenues derived from our non-API products in the international markets.

Gross profit and gross margin

As a result of the foregoing, our gross profit decreased by 96.2% from $80.4 million in 2009 to $3.1 million in 2010.

Our gross margin decreased from 13.9% in 2009 to 0.7% in 2010, primarily due to lower gross margin of our API products resulted from lower sales prices.

Selling and marketing expenses

Our selling and marketing expenses increased by 14.2% from $18.2 million in 2009 to $20.8 million in 2010. The increase was primarily due to an increase in product warranty claims made by customers. As a result, our selling and marketing expenses as a percentage of net revenues increased slightly from 3.2% in 2009 to 4.4% in 2010.

General and administrative expenses

Our general and administrative expenses increased by 49.6% from $44.8 million in 2009 to $67.0 million in 2010, primarily due to increases in allowance for doubtful accounts and legal fees incurred, as well as an increase in staff costs, including increased average salaries and benefits. Our general and administrative expenses as a percentage of net revenues increased from 7.8% in 2009 to 14.2% in 2010.

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Impairment on long-lived assets

In 2010, we experienced a significant decline in sales to the United States due to the anti-dumping and countervailing duties imposed on our products, which resulted in a low capacity utilization of our production facilities. In view of these changes in our operating circumstances and the operating losses incurred by certain asset groups, we performed an impairment test for these asset groups namely, WSP China, Liaoyang Seamless, Songyuan Seamless, Mengfeng and Chaoyang Seamless on December 31, 2010. We recorded an impairment charge of $17.1 million for Chaoyang Seamless in 2010 based on the results of our impairment test. In 2008 and 2009, no impairment charges were recorded as the sum of the expected undiscounted cash flows exceed the carrying amounts of the assets.

Interest expenses, net

Our net interest expense increased by 53.0% from $17.0 million in 2009 to $26.0 million in 2010, primarily due to lower interest income resulted from lower cash balances and an increase in borrowings resulted from increased working capital requirements, and partially due to a reduction in the capitalization of interest expense following the completion of certain construction projects.

Income tax expenses

Our income tax expenses increased from $2.1 million in 2009 to $9.4 million in 2010, primarily due to the provision of valuation allowance on deferred income tax assets and an additional liability for uncertain tax positions. Our effective tax rate was negative 8.0% in 2010 compared with 55.5% in 2009, primarily due to loss from operations, provision of valuation allowance on deferred income tax assets and income tax exemptions and reliefs granted to us. Income taxes receivable as of December 31, 2010 decreased by 85.3% compared to 2009 due to the income taxes refund received from local tax bureau.

Net (loss) income

As a result of the foregoing, our net loss was $132.8 million in 2010, compared with net income of $1.6 million in 2009. Our net margin was negative 28.2% in 2010 compared with 0.3% in 2009.

Net (loss) income attributable to WSP Holdings Limited

As a result of the foregoing, net loss attributable to us was $118.8 million for the year ended December 31, 2010, compared with net income attributable to us of $4.2 million for the year ended December 31, 2009. Net margin attributable to us was negative 25.2% compared with 0.7% during the same period.

B.    Liquidity and Capital Resources

Cash flows and working capital

Since 2009, we have experienced a significant decline in sales to the United States due to anti-dumping and countervailing duties on seamless pipes made in China imposed by the United States government. See “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—Legal proceedings.” Products sold to the United States accounted for 9.0%, 9.7% and 6.3% of our net revenues in 2009, 2010 and 2011, respectively, compared to 34.3% of our net revenues in 2008. As a result, our business operations were adversely affected and we suffered significant operating losses and had working capital deficiencies and negative operating cash flow for the year ended December 31, 2010. In 2011, our business operations continued to be adversely affected by the duties and we suffered significant operating losses and working capital deficiencies. In addition, we had a significant amount of short term borrowings totaling $733.5 million. As of December 31, 2011, we had cash and cash equivalents balance of $27.7 million, restricted cash of $249.8 million, term deposits of $0.3 million and unused bank credit facilities of $54.4 million, which are subject to renewal within the next twelve months.

Future uses of cash will include, among other possible demands:

  Continuing capital expenditures;

  Repayment of bank borrowings; and

  Continuing use of cash in operations

We have taken various actions to conserve cash, procure additional financing and improve the liquidity. Such actions include reducing working capital requirements in operations through reduction of accounts receivables, inventories and other measures and reducing capital spending through delaying or scaling down certain projects. Our ability in meeting future cash flow requirements is dependent on many events outside of our direct control, including, among other things, successful renewal of bank borrowings, additional financing from the banks and capital market, and recovery of demand and selling prices for OCTG products.

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In August 2011, one of our subsidiaries entered into a syndicated bank credit facility agreement with two major lead commercial banks and six other participating commercial banks, which provide us with a syndicated bank credit facility of up to RMB3.5 billion ($556.1 million) (with an initial commitment of RMB2.86 billion ($453.9 million)) for a term up to three years from the first drawdown date. The interest will accrue on a daily basis at a rate equal to five percent plus the prevailing interest rate published by the People’s Bank of China on the unpaid principal balance then outstanding.

During the first quarter of 2012, $167.6 million out of $773.5 million bank borrowings outstanding as of December 31, 2011 became due for repayment. We were able to renew $15.0 million and repay $152.6 million out of these borrowings while having obtained new bank borrowings of $129.9 million. While we are required to repay approximately $750.8 million bank borrowings in the remainder of 2012, we believe we will be able to renew a substantial portion of our bank borrowings and bank credit facilities as they fall due. For details on our borrowings, please see “—Borrowings.”

In order to counteract the adverse impact of anti-dumping and countervailing duties imposed by the United States, we have actively pursued new opportunities in other international markets. Since the end of 2010, we secured several new order wins in the international markets such as Venezuela and Ecuador.

In the past, we had significant working capital commitments for purchases of raw materials, which included commitments for purchases of iron ore pellets from an iron ore supplier. However, we foresee no significant or immediate working capital commitments for purchases of iron ore pellets due to the fact that the contractual terms have not been strictly performed by the supplier and us in practice and that certain contractual terms are still subject to further negotiations between we and the supplier. Additionally, we made no purchases from this supplier in 2011 due to our internal lack of iron ore pellet requirements and low market demand for sales of iron ore pellets. Therefore, we expect to maintain a similar level of working capital requirements in 2012 as 2011. We expect that we will be able to meet our working capital requirements in 2012 with cash flows generated from our operations and our credit facilities. For details on our borrowings, please see “—Borrowings.”

The following table sets forth a summary of our cash flows for the periods indicated.

        For the year ended December 31,
   
(in thousands)


  
2009
  
2010
  
2011
Net cash flows from operating activities
              $ (116,456 )         $ (5,142 )         $ 60,791   
Net cash flows from investing activities
                 (120,141 )            (71,404 )            (187,567 )  
Net cash flows from financing activities
                 280,697             (9,776 )            97,578   
Effect of foreign exchange rate changes on cash and cash equivalents
                 53              1,760             8,270   
Net increase/decrease in cash and bank balances
                 44,153             (84,562 )            (20,928 )  
Cash and cash equivalents at beginning of the period
                 89,097             133,250             48,688   
Cash and cash equivalents at end of the period included in assets held for sale
                                           (18 )  
Cash and cash equivalents at end of the period
              $ 133,250          $ 48,688          $ 27,742   
 

Net cash generated from operating activities was $60.8 million in 2011, compared to net cash used in operating activities of $5.1 million in 2010. Net cash generated in 2011 was primarily attributable to net loss of $76.8 million adjusted by depreciation of property, plant and equipment of $38.9 million, an increase in accounts payable in the amount of $139.6 million resulting from our increased purchase of raw materials and increased use of bills payable, a decrease in other payables and accrued expenses in the amount of $5.1 million due to slower operating activities, and an increase in advances from customers in the amount of $1.2 million, partially offset by an increase in accounts receivable in the amount of $49.8 million resulting from increased product sales and an increase in inventories of $7.4 million.

Net cash used in operating activities was $5.1 million in 2010, compared to net cash used in operating activities of $116.5 million in 2009. Net cash used in 2010 was primarily attributable to net loss of $132.8 million adjusted by depreciation of property, plant and equipment of $34.1 million, an increase in accounts payable in the amount of $9.0 million resulting from our increased purchase of raw materials and increased use of bills payable, an increase in other payables and accrued expenses in the amount of $26.2 million due to slower operational activities, and a decrease in advances from customers in the amount of $7.4 million, partially offset by a decrease in accounts receivable in the amount of $0.8 million resulting from decreased product sales and intensified collection activities and a decrease in inventories of $32.5 million resulting from decreased production volume.

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Net cash used in operating activities was $116.5 million in 2009. Net cash used in 2009 was primarily attributable to net income of $1.6 million adjusted by depreciation of property, plant and equipment of $29.5 million, a decrease in accounts payable in the amount of $182.6 million resulting from our decreased purchase of raw materials and decreased use of bills payable due to decreased sales volume, a decrease in other payables and accrued expenses in the amount of $9.0 million due to slower operational activities, a decrease in income taxes payable in the amount of $9.8 million due to lower net income and an increase in advances to suppliers in the amount of $8.5 million, partially offset by a decrease in accounts receivable in the amount of $42.0 million resulting from decreased product sales and intensified collection activities and a decrease in inventories of $45.5 million resulting from decreased production volume.

Investing activities

Net cash used in investing activities was $187.6 million in 2011, compared to net cash used in investing activities of $71.4 million in 2010. Net cash used in investing activities in 2011 was primarily attributable to an increase in restricted cash of $104.0 million due to an increase in our use of bank acceptance bills which required cash deposits as security, and an increase in cash used to purchase property, plants and equipment in the amount of $93.4 million related to major capital expenditure projects commenced in prior years.

Net cash used in investing activities was $71.4 million in 2010, compared to $120.1 million in 2009. Net cash used in investing activities in 2010 was primarily attributable to a decrease in restricted cash of $68.2 million due to a decrease in our use of bank acceptance bills which required cash deposits as security, offset by an increase in cash used to purchase property, plants and equipment in the amount of $139.3 million due to our increased operational scale and production activities.

Net cash used in investing activities was $120.1 million in 2009. Net used in investing activities in 2009 was primarily attributable to a decrease in restricted cash of $26.6 million due to a decrease in our use of bank acceptance bills which required cash deposits as security, offset by an increase in cash used to purchase property, plants and equipment in the amount of $132.8 million due to our increased operational scale and production activities.

Financing activities

Net cash generated from financing activities was $97.6 million in 2011, compared to net cash used in financing activities of $9.8 million in 2010. Net cash generated from financing activities in 2011 was primarily attributable to a net increase in long-term bank borrowings in the amount of $105.8 million, offset by a net decrease in short-term bank borrowings in the amount of $8.3 million.

Net cash used in financing activities was $9.8 million in 2010, compared to net cash generated from financing activities of $280.7 million in 2009. Net cash used in financing activities in 2010 was primarily attributable to a net decrease in short-term bank borrowings in the amount of $23.0 million offset by a net increase in long-term bank borrowings in the amount of $38.0 million, and a deferred partial payment for the acquisition of a subsidiary of $17.7 million.

Our net cash generated from financing activities was $280.7 million in 2009. Our net cash generated from financing activities in 2009 was primarily attributable to a net increase in short term borrowing in the amount of $212.5 million for working capital and capital expenditure purpose and the proceeds from long term bank borrowing in the amount of $196.4 million, partially offset by our payment of dividend in the amount of $77.6 million.

Borrowings

We had the following outstanding borrowings as of the dates indicated.

        As of December 31,
   
(in thousands)


  
2009
  
2010
  
2011
Short-term bank loans
              $ 432,490          $ 508,355          $ 714,310   
Credit from bills receivable discounted with recourse
                 66,636             88,191             38,916   
Long-term bank loans due for settlement over one year
                 189,069             135,896             79,354   
Long-term bank loan due for settlement within one year
                 7,322             0              20,315   
Total
              $ 695,517          $ 732,442          $ 852,895   
 

Our bank and other borrowings increased during the past three years mainly due to the expansion of our production capacity and our working capital requirements.

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Our short-term borrowings are used primarily for working capital and capital expenditures purposes. Our outstanding short-term bank borrowings were $714.3 million as of December 31, 2011 as compared to $508.4 million as of December 31, 2010 and $432.5 million as of December 31, 2009. As of December 31, 2009, 2010 and 2011, the average interest rate of our short-term bank loans was 5.2%, 6.0% and 6.2%, respectively. Our short-term bank loans have floating interest rates tied to the benchmark interest rate for loans of similar maturity announced by the People’s Bank of China, or PBOC. As of December 31, 2011, we had outstanding secured loans with an aggregate amount of $781.4 million, which were secured by certain land use rights, buildings, machines and equipment and letters of credit issued by other banks. Our short-term borrowings also include loans not due within one year that were reclassified as short-term borrowings due to technical breaches of these loans.

In August 2011, we entered into a syndicated bank credit facility agreement with two major lead commercial banks and six other participating commercial banks, which provide us with a syndicated bank credit facility of up to RMB3.5 billion ($556.1 million) (with an initial commitment of RMB2.86 billion ($453.9 million) for a term up to three years from the first drawdown date. The interest will accrue on a daily basis at a rate equal to five percent plus the prevailing interest rate published by the People’s Bank of China on the unpaid principal balance then outstanding. This agreement contains financial covenants, which are applicable to one of our major operating subsidiaries, including maintenance of levels of debt to assets ratio not exceeding 72% in 2011, 71% in 2012 and 67% in 2013, minimum sales of RMB4 billion in 2011, RMB4.5 billion in 2012 and RMB5.5 billion in 2013, minimum net profit of RMB80 million in 2011, RMB150 million in 2012 and RMB350 million in 2013, minimum current ratio of 170% in 2011, 180% in 2012 and 180% in 2013, and minimum quick ratio of 120% in 2011, 130% in 2012 and 130% in 2013. As of December 31, 2011, we have drawn down approximately RMB2.63 billion ($417.9 million) out of the total approved loan facility of RMB2.86 billion ($454.4 million). Additionally, under these covenants, we must also meet certain ratios and thresholds at the end of a one-year special observation period from July 1, 2011 to June 30, 2012. These ratios and thresholds include maximum debt to asset ratio of 70%, minimum sales of RMB4.2 billion, minimum net income of RMB100 million, minimum current ratio of 170% and minimum quick ratio of 120%. As of December 31, 2011, our unutilized credit facilities amounted to $54.4 million. During the first quarter of 2012, we have renewed $15.0 million and repaid $152.6 million out of $773.5 million in bank borrowings outstanding as of December 31, 2011. We are required to repay approximately $750.8 million in bank borrowings for the remaining three quarters.

As of December 31, 2011, we had outstanding balance of long-term loans from two local banks of $99.7 million. These loans were obtained pursuant to various loan agreements that we entered into with the two local banks in 2009, 2010 and 2011. The loan agreements have terms ranging from one to six years. We used the loans primarily for project financing purposes. The interest rate will be adjusted periodically in accordance with the benchmark interest rate announced by the PBOC. In 2011, the average interest rate of our long-term loans was 6.0% and all long-term loans were secured loans.

Our facility agreements with certain commercial banks contain various covenants and conditions that limit our ability to conduct our business and restrict us from engaging in certain business activities. Some of these facility agreements include financial covenants, such as debt to assets ratio. Failure to maintain any of the financial covenants or a breach of any other restrictive covenants would result in a default under the relevant facility agreements and entitle the lenders to declare all borrowings outstanding, together with accrued and unpaid interests and fees, to be due and payable. In addition, our failure to comply with the financial or other covenants under the facility agreements could lead us to seek a waiver or an amendment of the covenants contained in the facility agreements, or alternative financing. Any waiver of the covenants in or amendment of the terms of our facility agreements may involve upfront fees, higher annual interest costs and other terms less favorable to us than those currently offered by the existing facilities. Additionally, we may not be able to obtain alternative financing on commercially reasonable terms or terms accepted to us, if at all.

We did not meet certain ratios and thresholds for the year ended December 31, 2011 set forth in the financial covenants in our syndicated bank credit facility agreement. Additionally, we do not expect to meet certain ratio and thresholds for the special observation period set forth in the financial covenants in this facility agreement. We have informed our lenders about our non-compliance with the 2011 financial covenants and our expected non-compliance with the special observation period covenants. We are currently in discussion with these lenders regarding our non-compliance and finding an adequate resolution. Accordingly, we reclassified our long-term loans of $127.9 million from such bank into short-term loans due within one year.

Furthermore, based on the financial position and results of operations of one of our subsidiaries as of and for the year ended December 2009, such subsidiary failed to meet the financial covenant related to maximum debt to asset ratio under facility agreements with two banks. We agreed to implement measures to address these breaches and obtained waivers for these breaches from the two banks. Nonetheless, there was a delay in implementing certain remedial measures required by one bank and we remained non-compliant with relevant financial covenant in 2010, which gave the bank the right to accelerate repayment of the outstanding amount under the relevant facility agreement. The breach of covenant was rectified in April 2011. Notwithstanding the waiver, it was uncertain whether we would be able to meet the covenants in the future, and consequently the corresponding loans were reclassified as current liability. Accordingly, we reclassified our long-term loans of $100.8 million from such bank into short-term loans due within one year. Additionally, another of our subsidiaries, which commenced commercial production in the second half of 2011, is also in breach of its financial covenants under a project loan. Accordingly, we reclassified our long-term loans of $33.0 million from such bank into short-term loans due within one year.

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See “Item 3. Key Information—D. Risk Factors—Restrictive covenants under our facility agreements and any future indebtedness may limit the manner in which we operate and an event of default under any of our facility agreements and any future indebtedness may adversely affect our operations; and our financial leverage may hinder our ability to expand and materially affect our results of operations.”

We complied with the financial covenants under our other facility agreements as of December 31, 2011.

Bill financing

In the years ended December 31, 2009, 2010 and 2011 and to date in 2012, we have used a portion of our credit facilities from certain banks as bill financing to fund a portion of our working capital requirements and business operational needs. In addition to serving as a source of capital for our business, bill financing allows us to pass on certain financing costs to our suppliers..

Under their terms, the bill financing facilities should be used to finance trade purchases. However, we entered into certain bill financing arrangements where the amounts of bank and commercial acceptance notes drawn down on the banks under the facilities were greater than our real expectation of purchasing needs from suppliers, which included both our subsidiaries and third parties. Moreover, on some occasions, the same purchase contracts (required for the issuance of bank acceptance notes under the bill financing facilities) were presented to two or more different banks to obtain financing. A portion of the notes we issued to our subsidiaries and third-party suppliers were then presented by the relevant suppliers to the banks for collection of an amount equal to the face value of the notes after deducting interest. Cash received from the notes presented in excess of the actual amount of purchases was then provided to us and utilized for operational purposes.

These bill financing arrangements were not in compliance with the general principles under the PRC Negotiable Instruments Law. However, we continued to enter into other such arrangements in 2011 and in 2012. The cash thereby obtained was then refunded by the suppliers to us. The total amount of the bill financing, being the difference between the aggregate amount of such bank and commercial acceptance notes issued and the aggregate amount of related actual purchases, was approximately RMB1.684 billion ($246.6 million), RMB323.6 million ($48.9 million) and RMB1.419 billion ($225.2 million) in 2009, 2010 and 2011, respectively. Excluding the cash deposits that we paid upfront to the endorsing banks pursuant to the arrangements, the funding we obtained from the banks through this kind of bill financing in 2009, 2010 and 2011 was estimated to be approximately RMB438.2 million ($66.2 million), RMB354.8 million ($54.8 million) and RMB323.6 million ($51.4 million), respectively.

Our management has conducted an assessment, including testing of the design and the effectiveness of our internal control over financial reporting as of December 31, 2011 and identified a material weakness that the control procedures designed to ensure bill financing transactions are in compliance with relevant PRC laws and regulations have not been operating effectively. See “Item 15. Controls and Procedures—Management’s Annual Report on Internal Control over Financial Reporting”

In light of the current financial environment and our capital needs, we may continue to rely on such bill financing arrangements as a source of capital for the remainder of 2012. We have sought legal advice from our PRC legal advisor. Considering the relevant factors including, in particular, that we have settled these notes in the past when they were due, and under the assumption that we are able to settle the outstanding notes when they become due, our PRC legal advisor subsequently issued a legal opinion stating that such bill financing arrangements would not result in any criminal or administrative liabilities on us or our senior management or directors, and there would not be any civil liabilities. We have also obtained written confirmations from all endorsing banks that they will not take any legal action against us in connection with the bank and commercial acceptance notes that have been duly settled.

As of the date of this annual report, we have settled all of the bank and commercial acceptance notes involved in bill financing in 2009, 2010 and 2011 that have become due. We expect to settle the notes from bill financing transactions that are outstanding on the date of this annual report when they become due.

Capital expenditures

Our capital expenditures are generally used to purchase buildings, plants and machinery. In 2009, 2010 and 2011, our capital expenditures amounted to $147.6 million, $161.0 million and $93.4 million, respectively.

Our major capital expenditure projects are almost completed and we have taken steps to slow down and eliminate certain expansion plans in view of our current capital conditions. We are in the process of completing the construction of a pipe heat treatment line with an annual processing capacity of 20,000 tonnes in Thailand through our subsidiary, WSP Pipe Ltd. The construction of our pipe heat treatment line with an annual processing capacity of 100,000 tonnes in Liaoyang through our subsidiary, Liaoyang Seamless, is also nearing completion. We estimate that our capital expenditures in 2012 will be approximately $40.0 million mainly attributable to balance of payments due to major capital expenditure projects which commenced in prior years. We have constantly been reevaluating and revising our capital expenditure plan based on the prevailing economic conditions and future expectations, as well as the availability of funding. We will monitor our expansion plans carefully to meet anticipated demand while taking appropriate cost cutting measures to ensure our financial stability.

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We will continue to make capital expenditures from time to time to meet the expected growth of our operations. We expect that we will be able to meet our capital expenditures requirements in 2012 with cash flows generated from our operations and a similar level of bank borrowings as in 2011. As of December 31, 2011, our existing bank borrowings and unutilized credit facilities amounted to $852.9 million and $54.4 million respectively. We are monitoring the funding requirement for our capital expenditures and will make necessary adjustments to the capital investments related to our existing projects.

C.    Research and Development

We believe our strong commitment to research and development has been one of the key factors in our success. The OCTG industry in which we operate is characterized by rapid development and increasing demand for high quality products. We have focused our research and development efforts on the following major areas:

  development and application of new materials;

  design of premium connectors;

  improvement of production techniques (including improved corrosion-resistance and upsetting); and

  development of quality control systems.

Our senior management team leads our research and development efforts and sets strategic directions for the advancement of our products and manufacturing processes. We have a technical team to design and engineer our proprietary products and processes, many of whom have years of experience in the OCTG and steel industry. In addition, engineers from different departments also assist with our research and technology development activities on a project by project basis. The in-depth knowledge and expertise in the OCTG industry of our researchers and engineers enable us to conduct research and development of our products efficiently.

In 2006 we entered into a technological cooperation arrangement with Southwest Petroleum University in China to conduct collaborative research on drilling pipes. We have established a postdoctoral research program at our company, which is devoted to research in OCTG areas such as the development of oil well pipes and casing. We have also used our research capabilities to attract new recruits.

We plan to continue to invest in research and development in order to broaden our product offerings, especially with respect to our non-API products. Since 2006, our research and development team has focused on the development of new materials such as 13Cr, 9Cr, super high-intensity tubing and casing as well as hot-rolling processes. As of the date of this annual report, we had 88 patents and 57 pending patent applications in China and had developed several other proprietary processes and technologies as a result of our research and development activities, many of which we have applied in our manufacturing processes and our products. See “Item 4. Information on the Company—B. Business Overview—Intellectual property rights” for more information relating to our patents and patent applications.

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D.
  Trend Information

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2011 to December 31, 2011 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

E.
  Off-Balance Sheet Commitments and Arrangements

As of December 31, 2011, we did not provide any guarantees to banks in respect of banking facilities utilized by third parties. Previously, we provided guarantees to banks in respect of banking facilities utilized by third parties. We recognize the liability for the guarantees at their fair value on the date of entering into the guarantee. These third parties also provided guarantees to us for some of our bank borrowings. Guaranteed parties included our related parties, vendors, processors and other unrelated parties, who had no trading relationship with us. There were no guaranteed balances of outstanding debt arrangements from third parties as of December 31, 2009, 2010 and 2011.

We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

F.
  Contractual Obligations and Commercial Commitments

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2011.




  

  

  

  

  

            Payment due by period(1)(2)
   
As of December 31, 2011
(in thousands) (1) (2)


  
Total
  
Less than
1 year
  
1-3 years
  
3-5 years
  
More than
5 years
Long term debt obligations(3)
              $ 99,669             20,315          $ 79,354                             
Capital lease obligations
                                                                        
Operating lease obligations
              $ 1,940          $ 1,097          $ 837           $ 6                 
Purchase obligations(4)
              $ 17,915          $ 17,915                                          
 

(1)
  The above table does not include the unrecognized tax benefits amounting to $12.8 million as the timing of such obligation is not determinable.

(2)
  The above table does not include a commitment to purchase a minimum amount of 0.3 million tonnes of iron ore pellets on a yearly basis from 2010 through 2014 as the purchase price of the iron ore pellets under such commitment is not determinable.

(3)
  The figures are principal only and do not include interest.

(4)
  Represents obligations relating to the production facilities in Wuxi, Liaoyang, Songyuan, Kuerle, Tuoketuo, Houston OCTG and Chaoyang.

G.
  Safe Harbor

This annual report on Form 20-F contains forward-looking statements that relate to future events, including our future operating results and conditions, our prospects and our future financial performance and condition, all of which are largely based on our current expectations and projections. The forward-looking statements are contained principally in the sections entitled “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as “believe,” “expect,” “anticipate,” “project,” “predict,” “forecast,” or other and similar expressions. Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement, including but not limited to the following:

  expectations regarding the worldwide demand for seamless OCTG products;

  the company’s beliefs regarding the effects of environmental regulation, the lack of infrastructure reliability and long-term access to raw material supplies;

  the importance of environmentally friendly seamless OCTG production;

  expectations regarding governmental support for the deployment of OCTG industry;

  expectations regarding the scaling of the company’s manufacturing capacity;

  expectations with respect to the company’s ability to secure raw materials in the future;

  future business development, results of operations and financial condition; and

  competition from other manufacturers of OCTG products and conventional OCTG suppliers.

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The forward-looking statements made in this annual report on Form 20-F relate only to events or information as of the date on which the statements are made in this annual report on Form 20-F. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report on Form 20-F completely and with the understanding that our actual future results may be materially different from what we expect.

Item 6.
  Directors, Senior Management and Employees

A.
  Directors and Senior Management

The following table sets forth information regarding our directors and executive officers as of the date of this annual report.




  

  

Directors and executive officers


  
Age
  
Position
Longhua Piao
           
49
   
Chairman and Chief Executive Officer
Syed Hisham bin Syed Wazir
           
57
   
Vice Chairman
Xizhong Xu
           
43
   
Director and Assistant General Manager
Weidong Wang
           
45
   
Independent Director
Jing Lu
           
71
   
Independent Director
Dennis D. Zhu
           
48
   
Independent Director
Michael Muhan Liu
           
49
   
Independent Director
Baiqin Yu
           
66
   
Vice General Manager of Production
Yi Zhang
           
56
   
Vice General Manager of Technology
Zongdi Ye
           
60
   
Vice General Manager of Machinery
Choon-Hoi Then
           
55
   
Chief Financial Officer
Rixin Luo
           
49
   
Assistant General Manager of Sales and Marketing
Yanping Dong
           
49
   
Assistant General Manager of Administration
Jiaxing Liu
           
65
   
Vice General Manager of Human Resources
 

The address of our directors and executive officers is WSP Holdings Limited, No. 38 Zhujiang Road, Xinqu, Wuxi, Jiangsu Province, People’s Republic of China.

Directors

Longhua Piao has been our director and chief executive officer since our inception and became our chairman in August 2007. Mr. Piao serves as the chief executive officer of WSP China since he founded WSP China in November 1999. Mr. Piao is principally responsible for formulating our strategic development objectives, supervising the implementation of our business plans and policies, and our overall organizational management. Prior to founding WSP China, Mr. Piao served as the general manager of Daqing City Zhong Bang Jing Mao Company Limited during the period between 1996 and 1999. Outside of our group, Mr. Piao is a director and the controlling shareholder of Expert Master Holdings Limited, an investment company, Eastar Industries Inc., a steel manufacturing and trading company, Lianyungang Eastar Photonics Technologies Co., Ltd., an LED manufacturing company, Regalia Investments Holdings Ltd., an investment company, WSP Canada Ltd., an oil pipe trading company, Wuxi Huayi Investment Company Limited, an investment and trading company, Wuxi Longhua Steel Pipes Company Limited, WSP Pipe LLC, an investment company and Cambodian WS Mining Industry Holding Ltd., both of which are iron ore mining companies. Mr. Piao completed the in-service accounting program (postgraduate level) at the Shanghai University of Finance and Economics School of Accounting in October 2006. Mr. Piao has received a number of awards. In January 2006, the Wuxi Municipal People’s Government honored Mr. Piao for his contributions towards the development of Wuxi’s non-state-owned economy by naming him as one of the top 10 private entrepreneurs for 2005.

Syed Hisham bin Syed Wazir has been our director and vice chairman since November 18, 2010. Datuk Syed Hisham bin Syed Wazir is currently the president and group chief executive officer and director of UMW Holdings Berhad, a public company in Malaysia engaged in auto manufacturing, industrial equipment and oil and gas services. From 2009 to December 2010, Datuk Syed Hisham bin Syed Wazir served as the chief operating officer of Naza Kia Sdn Bhd and Naza Kia Services Sdn Bhd, Malaysian companies responsible for the sales, marketing, distribution and after sales service of Kia automobiles in Malaysia. From 2005 to 2009, Datuk Syed Hisham bin Syed Wazir served as the managing director of Edaran Otomobil Nasional Berhad, one of the largest conglomerates and distributor of domestically manufactured cars in Malaysia. Prior to that, Datuk Syed Hisham bin Syed Wazir served as the president and chief operating officer at Honda Malaysia Sdn Bhd. Datuk Syed Hisham bin Syed Wazir holds a Master of Business Administration from Ohio State University and a Bachelor of Science in Mechanical Engineering from the University of Plymouth in the United Kingdom.

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Xizhong Xu serves as our director and assistant general manager and has joined the board of directors of WSP Holdings since November 2006. Mr. Xu joined our company in December 2000 and is responsible for our strategic investment planning and management. Prior to joining us, Mr. Xu served as a credit officer at the Bank of Communications, Wuxi Branch, from December 1992 to October 2000. Mr. Xu is also a director of Lianyungang Eastar Photonics Technologies Co., Ltd., a LED manufacturing company. Mr. Xu received his bachelor’s degree in economics from the Jiangsu Institute of Technology in July 1990, and was awarded an accounting professional certificate from the Ministry of Finance People’s Republic of China in June 1998.

Weidong Wang is a partner at DeHeng Law, one of the largest law firms in China, where he practices in the areas of mergers and acquisitions, private equity, corporate finance and corporate governance. He has represented clients in a variety of public and private offerings of equity and debt securities. He has advised clients in a variety of industries, including energy, oil field services, manufacturing and finance. Prior to DeHeng Law, Mr. Wang worked in the corporate and securities group of Sidley Austin in Chicago from 1998 to 2002. Mr. Wang received his Master of Law and Doctor of Jurisprudence from the University of Chicago Law School. He also received a Master of Comparative Law from Brigham Young University Law School. He has been an adjunct professor at the International MBA program of Peking University since 2002 and served as a visiting scholar at Peking University Law School. He published a number of articles in the areas of corporate and securities laws in journals and newspapers.

Jing Lu has been our independent director since November 13, 2007. From December 1997 to December 2000, Mr. Lu served as the standing vice president of Daqing Petroleum Administration Bureau and vice chairman of the board of directors and standing vice general manager of Daqing Oilfield Company Limited. Mr. Lu served as a representative of the 8th National People’s Congress between 1990 and 1997. He was an adjunct professor of the China University of Petroleum from December 2000 to December 2005 and adjunct professor at Beijing Petroleum Managers Training Institute from February 1996 to February 1998. He was also an adjunct professor of economic management of Heilongjiang University from October 1989 to October 1990, and adjunct professor at Daqing Petroleum Institute from October 1989 to October 1992. Mr. Lu was awarded with a special allowance and certificate by the PRC State Council for his outstanding contribution in engineering in June 2000. Mr. Lu was a consultant to Daqing Oil Field Co., Ltd. from January 2001 to December 2002 and a consultant to Daqing Hanwei Changyuan Glass Steel Tube Company from January 2004 to December 2007. He has been a consultant to Daqing Oilfield Jingtai Engineering Company since July 2006. Mr. Lu graduated from the Department of Oilfield Exploration of the Beijing Institute of Petroleum in August 1964.

Dennis D. Zhu has been our independent director since November 13, 2007. Since December 2005, Mr. Zhu has been a managing director of Oaktree Capital (Hong Kong) Limited where his major responsibilities include developing and cementing investment opportunities and relationships in Greater China. Mr. Zhu was the chairman of Greater China Operating Committee at JPMorgan Chase from March 2003 to June 2005, and also served with J.P. Morgan Securities (Asia Pacific) Ltd., Beijing representative office from May 2001 to November 2005 as a managing director and from May 1999 to April 2001 as the chief representative. Between 1994 and 1999, Mr. Zhu worked at Credit Suisse First Boston in the Equity Capital Markets and Investment Banking departments as Head of China Businesses. From 1992 to 1994, Mr. Zhu worked at FMC Corporation’s Investment Analysis Department in Chicago. Between 1982 and 1990 Mr. Zhu worked at the PRC Ministry of Finance in Beijing. Mr. Zhu is the independent director and a member of the audit committee of Aluminum Corporation of China Limited, a joint stock limited company based in China principally engaged in mining and production of aluminum and with its shares listed on NYSE (ACH), the Hong Kong Stock Exchange and the Shanghai Stock Exchange. Mr. Zhu is also the independent director of China Forestry Holdings Co., Ltd., a company based in China principally engaged in the management of forests and sales of timber logs with its shares listed on the Hong Kong Stock Exchange. Mr. Zhu obtained an MBA. from the University of Chicago Graduate School of Business in 1993, a master of science degree in economics from the PRC Ministry of Finance Research Institute in Beijing in 1985, and a bachelor degree in economics from the Hebei Institute of Geology in 1982.

Michael Muhan Liu has been our independent director since June 1, 2011. Mr. Liu has been a managing director of East China Capital Investments Ltd., a company mainly involved in investment and financing of mineral resources projects. Since 2009, he has served as a director of China Growth Minerals Ltd., a Hong Kong company mainly involved in the investment in uranium. From 2004 to 2009, he served as a director of International Barytax Resources Ltd., a Toronto listed company involved in the investment of copper exploration projects in Africa. From 2005 to 2008, he served as a director of Pacific Imperial Mines Ltd., a Toronto listed company involved in gold exploration projects in China, and was the Executive Vice President and Chief Financial Officer of this company for two years during such period. From 2001 to 2003, Mr. Liu served as the president of Asia Pacific operations for CNT Corporation, an agriculture company. Mr. Liu received his Master of Arts in Economics from University of New Brunswick, Canada and his Master of Business Administration from University of British Columbia, Canada.

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Executive officers

Baiqin Yu serves as our vice general manager of production. Mr. Yu is responsible for production, logistics and environmental and safety management. Prior to joining us in September 2006, Mr. Yu served as the vice general manager of the tubular product division of Baosteel Tube Co. from January 2001 to October 2003 and served as the chief manager for the Electric Resistance Welded project and UOE Pipe project of Baosteel Tube Co. from October 2003 to June 2006. Mr. Yu was awarded with the Excellent New Products of Shanghai Certificate from the Economic Commission of Shanghai in June 2001, and the Shanghai Development Contributor Honor Award from the Shanghai Major Projects Competition Committee in January 2006. Mr. Yu also received the Shanghai Excellent Quality Management Certificate by the Quality Work-task Committee of the Shanghai Municipal People’s Government in September 1999, and the Science and Technology Progress Certificate by the Ministry of Metallurgy in December 1999. Mr. Yu graduated from the Central South Mineral and Metallurgy College in August 1970.

Yi Zhang serves as our vice general manager of technology. He is responsible for technology development and quality control. Mr. Zhang also served as a director until June 30, 2007 and is currently a director of WSP China. Prior to joining us in January 2004, Mr. Zhang served as the chief engineer of Baosteel Tube Co. from July 1998 to December 2003 and as the deputy chief engineer of the Xi’an Tubular Goods Research Center from May 1982 to June 1998. Mr. Zhang was an instructor to post-graduate students in material science at the Graduate School of Northeast University from July 2002 to July 2007. Mr. Zhang was awarded Certificates of Technological Innovation from the Shanxi People’s Government, the State Science and Technology Commission and the Ministry of Science and Technology in January 1997, December 1997 and December 1998, respectively. He also received the Tianjin Science and Technological Innovation Certificate from the Tianjin People’s Government in September 1999, as well as a Certificate of Product Expertise from Baosteel Group in October 2000, and received a Senior Engineer’s Certificate from CNPC in 1993. Mr. Zhang received a master’s degree in metallurgy from the Xi’an Jiaotong University in 1999.

Zongdi Ye serves as our vice general manager of machinery. Mr. Ye is currently a director of WSP China. Mr. Ye is principally responsible for sourcing of production equipment, quality testing and coordinating the logistics for transportation of this equipment. Prior to joining us in March 2001, Mr. Ye served as a manager and an executive director of Daye 170 Seamless Steel Tube Co., Ltd. from May 1998 to October 2000. From January 1980 to April 1998, Mr. Ye served in various capacities for the Daye Steel Group Corporation, including technician and engineer of its steel rolling mill, deputy factory manager of its smelting mill, assistant general manager and senior engineer. Mr. Ye graduated from the Wuhan Steel Institute with a degree in metallurgical engineering in 1980, and was qualified as a senior engineer by the Assessment Committee for Senior Posts in Metallurgical Technology of the Hubei Province in December 1999.

Choon-Hoi Then serves as our chief financial officer. Prior to joining us in March 2011, Mr. Then served as the vice president of finance, Asia at Rich Corporation from 2008 to 2010 where he was responsible for corporate finance in Asia and provided regional operational support. From 1999 to 2008, he held various positions at several Asia-based subsidiaries of Fedders Corporation, most recently as Asia Pacific controller where he was responsible for treasury matters and accounting functions of all of the company’s Asia Pacific entities. Prior to that, he held various accounting positions at several companies in New Zealand, Singapore and Malaysia. Mr. Choon-Hoi Then studied for his professional accountancy qualification at Tengku Abdul Rahman College. He is a professionally qualified member of the Association of Certified Accountants (ACCA-UK) and a fellow of FCCA. He also holds a Postgraduate Diploma in computing science from Glasgow University in the United Kingdom.

Rixin Luo serves as our assistant general manager of sales and marketing. Mr. Luo is responsible for managing sales, customer-relations and marketing. Prior to joining us in March 2002, Mr. Luo was a manager of Daye Sales Company from January 1999 to November 2001. Mr. Luo was the head of the market research department of Daye Steel Group Corporation from May 1996 to December 1998. He served as an assistant general manager of Daye 170 Seamless Steel Tube Co. from March 1995 to April 1996. He also served as a technician, engineer and department head of the smelting mill of Daye Steel Group from 1984 to 1995. Mr. Luo graduated from the Wuhan Institute of Technology in 1984. He was qualified as an engineer authorized by the Assessment Committee for Intermediate Posts in Metallurgical and Steel Engineering Technology in August 1992.

Yanping Dong serves as our assistant general manager of administration. Ms. Dong is responsible for general administration and policy planning. Prior to joining us in January 2000, Ms. Dong served as a financial manager at Daqing City Zhong Bang Jing Mao Company Limited from January 1996 to January 2000. Ms. Dong completed a training course in accounting at the Wuxi Municipal Institute of Technology in December 2003 and the in-service accounting program (post-graduate level) at Shanghai University of Finance and Economics School of Accounting in October 2006. She received the Certificate of Accounting Professional by the Wuxi Municipal Finance Bureau in November 2002. Ms. Dong is Mr. Piao’s spouse.

Jiaxing Liu serves as our vice general manager of human resources. Mr. Liu is responsible for human resources management and policy planning and serves as our compliance officer. Prior to joining us in May 2007, Mr. Liu served as chairman on the boards of directors of Bao Ri Co. Ltd. and Nanjing Rolling Steel Factory of the Bao Steel Group Corporation from February 2003 to May 2007. From 1990 to 2003, he held senior positions, including as chief human resources manager, senior economist and engineer, at Bao Steel Group Corporation. Mr. Liu graduated from Shanghai Institute of Technology.

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B.
  Compensation of Directors and Executive Officers

Compensation of directors and executive officers

For the year ended December 31, 2011, the aggregate cash compensation that we paid to our executive officers and directors was approximately $2.3 million. No executive officer is entitled to any severance benefits upon termination of his or her employment with our company.

Share incentive plan

Our board of directors has adopted a 2007 Share Incentive Plan, which is intended to attract and retain the best available personnel for positions of substantial responsibility, provide additional incentive to employees, directors and consultants and promote the success of our business. We have reserved 10,000,000 shares for issuance under our 2007 Share Incentive Plan. The following paragraphs describe the principal terms of our 2007 Share Incentive Plan.

Administration. Our 2007 Share Incentive Plan is administered by our board of directors or, after our board of directors makes the designation, by our compensation committee. In each case, our board of directors or our compensation committee will determine the provisions, terms and conditions of each option grant, including, but not limited to, the option vesting schedule, repurchase provisions, forfeiture provisions, form of payment upon settlement of the award, payment contingencies and satisfaction of any performance criteria.

Awards. The following paragraphs briefly describe the principal features of the various awards that may be granted under our 2007 Share Incentive Plan.

 

Options. Options provide for the right to purchase a specified number of our ordinary shares at a specified price and period determined by our compensation committee in one or more installments after the grant date.


 

Restricted Shares. A restricted share award is the grant of a specified number of our ordinary shares determined by our compensation committee. A restricted share is subject to restrictions on transferability and other restrictions as our compensation committee may impose. A restricted share may be repurchased by us upon termination of employment or service during a restricted period. Our compensation committee shall also determine in the award agreement whether the participant will be entitled to vote the restricted shares or receive dividends on such shares.


 

Restricted Share Units. Restricted share units represent the right to receive a specified number of our ordinary shares at a specified date in the future. On the date specified in the award agreement, we shall deliver to the holder unrestricted ordinary shares which will be freely transferable.


Change of control. If change of control occurs due to third-party acquisition, all outstanding options or share purchase rights may, at the discretion of our compensation committee, be assumed, or equivalent options or rights will be substituted by the successor corporation or parent or subsidiary of successor corporation. In the event that the successor corporation refuses to assume or substitute for the options or share purchase rights, all options or share purchase rights will become fully vested and exercisable and all forfeiture restrictions shall lapse.

Amendment, modification and termination. Unless terminated earlier, our 2007 Share Incentive Plan will expire in 2017. Our board of directors has the authority to amend or terminate our 2007 Share Incentive Plan subject to shareholders’ approval to the extent necessary to comply with applicable laws and regulations. However, no such action may materially adversely affect any awards previously granted pursuant to our 2007 Share Incentive Plan without the prior written consent of the plan participants.

Share options

As of the date of this annual report, our board of directors has granted certain of our officers, employees and consultants options for 5,206,000 ordinary shares in our company. The following paragraphs describe the principal terms of our restricted shares.

Option agreement. Options granted under our 2007 Share Incentive Plan are evidenced by an option agreement that contains, among other things, provisions concerning exercisability and forfeiture upon termination of employment or consulting arrangement, as determined by our board.

Vesting schedule. Options granted under our 2007 Share Incentive Plan vest over a two-year period following a specified vesting commencement date. 50% of the options granted vest at the first anniversary of the grant date and the remaining 50% shall vest at the secondary anniversary of the grant date, subject to the optionee continuing to be an employee or a service provider on each vesting date.

Option exercise. The term of options granted under our 2007 Share Incentive Plan may not exceed three years from the date of vesting.

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Termination of options. Where the option agreement permits the exercise of the options that were vested before the recipient’s termination of service with us, or the recipient’s disability or death, the options will terminate to the extent not exercised or purchased on the last day of a specified period or the last day of the original term of the options, whichever occurs first.

The following table summarizes, as of the date of this annual report, the outstanding options that we granted to our directors and executive officers and to other individuals as a group under our 2007 Share Incentive Plan.




  

  

  

  

Name


  
Ordinary Shares
Underlying
Outstanding Options
  
Exercise Price
(per Share)
  
Grant Date
  
Expiration Date
Longhua Piao
                 230,000          $ 4.0       
August 24, 2007
   
August 24, 2012
Syed Hisham bin Syed Wazir
                 100,000          $ 4.0       
August 24, 2007
   
August 24, 2012
Xizhong Xu
                 *           $ 4.0       
August 24, 2007
   
August 24, 2012
Baiqin Yu
                 *           $ 4.0       
August 24, 2007
   
August 24, 2012
Yi Zhang
                 *           $ 4.0       
August 24, 2007
   
August 24, 2012
Zongdi Ye
                 *           $ 4.0       
August 24, 2007
   
August 24, 2012
Rixin Luo
                 *           $ 4.0       
August 24, 2007
   
August 24, 2012
Yanping Dong(1)
                 *           $ 4.0       
August 24, 2007
   
August 24, 2012
Directors and executive officers as a group
                 1,580,000          $ 4.0       
August 24, 2007
   
August 24, 2012
Other individuals as a group
                 1,023,000          $ 4.0       
August 24, 2007
   
August 24, 2012
 

*
  Upon exercise of all options exercisable within 60 days of the date of this annual report, would beneficially own 1% or less of our ordinary shares.

(1)
  Ms. Yanping Dong is Mr. Piao’s wife.

C.
  Board Practices

Board of directors

Our board of directors consists of seven members. Except for Ms. Yanping Dong, who is Mr. Piao’s wife, there are no family relationships between any of our directors and executive officers. A director is not required to hold any shares in the company by way of qualification. Our board may exercise all the powers of the company to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for any obligation of the company or of any third party. There are no severance benefits payable to our directors upon termination of their directorships.

Committees of the board of directors

We have established three committees under the board of directors: the audit committee, the compensation committee and the corporate governance and nominating committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below.

Audit committee

Our audit committee consists of Messrs. Weidong Wang, Dennis D. Zhu and Michael Muhan Liu. Messrs. Weidong Wang, Dennis D. Zhu and Michael Muhan Liu satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange and Rule 10A-3 under the Securities Exchange Act of 1934, as amended. The audit committee oversees our accounting and financial reporting processes and audits of the financial statements of our company. The audit committee is responsible for, among other things:

  selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;

  reviewing with the independent auditors any audit problems or difficulties and management’s response;

  reviewing and approving all related party transactions;

  discussing the annual audited financial statements with management and the independent auditors;

  reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies; and

  meeting separately and periodically with management and the independent auditors.

In 2011, our audit committee held meeting or passed resolutions by unanimous written consent four times.

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Compensation committee

Our compensation committee consists of Messrs. Weidong Wang, Jing Lu and Dennis D. Zhu. Messrs. Weidong Wang, Jing Lu and Dennis D. Zhu satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things:

  reviewing the compensation philosophy of the company;

  evaluating the performance of our chief executive officer and determining and approving the compensation of our chief executive officer as well as other executive officers and directors; and

  reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.

In 2011, our compensation committee held meeting or passed resolutions by unanimous written consent once.

Corporate governance and nominating committee

Our corporate governance and nominating committee consists of Messrs. Jing Lu, Dennis D. Zhu and Michael Muhan Liu. Messrs. Jing Lu, Dennis D. Zhu and Michael Muhan Liu satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. The corporate governance and nominating committee assists the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The corporate governance and nominating committee is responsible for, among other things:

  identifying and recommending qualified candidates to the board for selection of nominees as directors, or for appointment to fill any vacancy;

  reviewing annually with the board of directors the current composition of the board of directors with regards to characteristics such as independence, experience and availability of service to us;

  advising the board of directors periodically with regard to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board of directors on all matters of corporate governance and on any remedial actions to be taken; and

  monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.

In 2011, our corporate governance and nominating committee held meeting or passed resolutions by unanimous written consent once.

Special committee

In December 2011, our board of directors formed a special committee of independent directors consisting of Messrs. Dennis D. Zhu, Weidong Wang and Michael Muhan Liu in response to a non-binding proposal letter from HDS, notifying the board of its interest in acquiring all of our shares in a possible going private transaction. See “Item 4. Information on the Company—History and Development of the Company.”

Code of business conduct and ethics

Our code of business conduct and ethics provides that our directors and officers are expected to avoid any action, position or interest that conflicts with the interests of our company or gives the appearance of a conflict. Directors and officers have an obligation under our code of business conduct and ethics to advance our company’s interests when the opportunity to do so arises.

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Duties of directors

Under Cayman Islands law, our directors have a duty of loyalty to act honestly and in good faith, with a view to our best interests. Our directors also have a duty to exercise the skill they possess with such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care, our directors must ensure compliance with our memorandum and articles of association. We have the right to seek damages if a duty owed by our directors is breached. If a director has a personal interest in a matter before the board of directors of our company, the director will disclose such interest to the board of directors, excuse himself or herself from the discussion of the matter and will not take part in the vote on the matter.

Terms of directors and officers

In accordance with our articles of association, all directors are eligible for re-election once every three years. At each annual general meeting, one-third of our directors (or, if their number is not a multiple of three, the number nearest to but not less than one-third) will retire from office by rotation. A retiring director shall be eligible for re-election and shall continue to act as a director at the meeting during which he has proposed his retirement. The directors to retire by rotation shall include any director who wishes to retire and not to offer himself for re-election. Any other directors subject to retirement shall be those who have been longest in office since their last re-election or appointment. In addition, a director must vacate his directorship if he resigns, becomes mentally unsound or dies, is absent from board meetings for six consecutive months without special leave from our board, becomes bankrupt or ceases to be a director under the law or is removed by our shareholders. A director may be removed by an ordinary resolution of our shareholders. Officers are selected by and serve at the discretion of the board of directors. The compensation of our directors is determined by the board of directors. There is no mandatory retirement age for directors.

Employment agreements

We have entered into employment agreements with each of our executive officers. Under some of these agreements there is a specified period of employment, while under others there is not. We may terminate the employment for cause, at any time, without notice or remuneration, for certain acts of the executive officer, including but not limited to a conviction of a criminal offense involving integrity or honesty, being guilty of fraud, gross misconduct, or gross incompetence or unsatisfactory or poor performance after receiving a written warning. An executive officer may terminate his employment at any time by giving the company a specified period of written notice or payment in lieu of notice, and under most agreements neither party may terminate for 36 months absent good reason. These agreements do not provide for any special termination benefits, nor do we have other arrangements with these executive officers for special termination benefits.

Each executive officer has agreed to hold, both during and after the employment agreement expires or is terminated, in strict confidence and not to use, except as required in the performance of his duties in connection with the employment with our company, any confidential information, technical data, trade secrets and know-how of our company or the confidential information of any third party, including our subsidiaries, received by us. The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice and that they shall be our absolute property. In addition, each executive officer has agreed to be bound by the non-competition restrictions set forth in his or her employment agreement. Specifically, each executive officer has agreed, while being employed by us and for a period of one year after termination of his or her employment, not to:

  solicit business from or perform services for any person who was a client, customer, supplier or prospective client of ours or of our subsidiaries during the executive officers’ employment;

  solicit or induce any person to terminate his or her employment or consulting relationship with us or our subsidiaries; or

  engage, invest or assist in any business that competes with our existing or future business or our subsidiaries.

Each of the executive officer’s employment may be terminated for cause if the employee is convicted or pleads guilty to a crime which the board reasonably believes has had or will have a detrimental effect on us, the employee has been negligent or acted dishonestly to our detriment, the employee continues to engage in misconduct or fails to perform his/her required duties despite opportunity for cure, the employee has died or has a disability for more than 180 days in any 12-month period. In addition, we may terminate the employment without cause, at any time, upon one month written notice.

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Communications with our independent directors

Our board of directors has adopted procedures for all interested parties to directly communicate their concerns or inquiries to our independent directors. All interested parties may make their concerns known to the presiding director Mr. Weidong Wang via paulwang.wsp@gmail.com.

D.
  Employees

As of December 31, 2009, 2010 and 2011, we employed 4,758, 4,744 and 4,799 full-time employees, respectively. The following table sets forth the number of our full-time employees by area as of December 31, 2011.

 
                      
As of December 31, 2011
                      
Production
                 3,147   
Technical services
                 416    
Quality assurance
                 501    
Logistics
                 312    
General administration
                 345    
Marketing and sales
                 78    
Total
                 4,799   
 

To enhance our employees’ performance, we have designed and implemented in-house training programs that are tailored to each employee’s job scope and responsibilities. Specific training is provided to new employees at orientation to familiarize them with our working environment and safety requirements. In addition, we provide our professional staff and technicians with training courses that focus on their technical skills and qualifications to ensure that they are familiar with the technology in the industry. We also sponsor our employees’ attendance at external training programs related to their area of expertise. We believe the recruitment, training and retention of skilled and experienced personnel with relevant industry experience will continue to be essential to our ability to deliver quality OCTG to our customers and to implement our business strategy.

The compensation package that we provide to our employees includes salary and bonus. In order to reward our staff and attract outstanding candidates, we have adopted the 2007 Share Incentive Plan whereby certain employees may be granted options to subscribe for our shares at the discretion of the board of directors or of a committee designated by the board. As stipulated by PRC regulations, our PRC subsidiaries contribute to social insurance for their staff every month, including pension, medical insurance, unemployment insurance, occupational injuries insurance, childbirth insurance and the housing providence fund, except that Jiangsu Fanli has not provided its employees with such social insurance and housing fund for the period from April 2004 to February 2007, for which we have made a provision covering such period.

We have a workers’ union that protects employees’ rights and welfare benefits, and assists in mediating any disputes that may arise between us and our employees. We have not had any strikes or other labor disturbances that have interfered with our operations, and we believe that we have maintained a good working relationship with our employees.

E.
  Share Ownership

The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of the date of this annual report:

(1)
  each of our directors and executive officers; and

(2)
  each person known to us to own beneficially more than 5.0% of our ordinary shares.

Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of ordinary shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant or right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person.

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        Shares beneficially owned
   



  
Number
  
%
Directors and executive officers:
                                       
Longhua Piao(1)(6)
                 104,330,000             51.0   
Syed Hisham bin Syed Wazir(2)(7)
                 46,000,000             22.5   
Xizhong Xu
                 *              *    
Weidong Wang
                 -              -    
Jing Lu
                 -              -    
Dennis D. Zhu
                 -              -    
Michael Muhan Liu
                 -              -    
Baiqin Yu
                 *              *    
Yi Zhang
                 *              *    
Zongdi Ye
                 *              *    
Choon-Hoi Then
                 *              *    
Rixin Luo
                 *              *    
Yanping Dong(3)
                 *              *    
Jiaxing Liu
                 *              *    
All directors and executive officers as a group(4)
                 164,748,000             80.4   
 
Principal shareholders:
                                     
Expert Master Holdings Limited(5)
                 104,100,000             50.9   
UMW China Ventures (L) Ltd.(6)
                 45,900,000             22.5   
OCM Asia Principal Opportunities Fund, L.P.(7)
                 14,088,000             6.9   
 

*
  Upon exercise of all options exercisable within 60 days of the date of this annual report, would beneficially own 1% or less of our ordinary shares.

(1)
  Includes (i) 104,100,000 ordinary shares owned by EMH, which is wholly-owned by Mr. Piao; and (ii) 230,000 ordinary shares issuable upon exercise of options held by Mr. Piao. The business address of Mr. Piao is No. 38 Zhujiang Road, Xinqu, Wuxi, Jiangsu Province, People’s Republic of China.

(2)
  Includes (i) 45,900,000 ordinary shares owned by UMW China Ventures (L) Ltd.; and (ii) 100,000 ordinary shares issuable upon exercise of options held by Datuk Syed Hisham bin Syed Wazir, who is UMW Holdings Berhad’s group managing director and chief executive officer. UMW Holdings Berhad is the ultimate owner of UMW China Ventures (L) Ltd. Datuk Syed Hisham bin Syed Wazir disclaims beneficial ownership of all of the shares owned by UMW China Ventures (L) Ltd. The business address of Syed Hisham bin Syed Wazir is UMW Holdings Bhd, Jalan Utas 15/7, 40915 Shah Alam, Selangor, Malaysia.

(3)
  Ms. Dong is Mr. Piao’s spouse.

(4)
  Includes ordinary shares issuable upon exercise of options held by all of our directors and executive officers as a group.

(5)
  EMH is wholly-owned by Mr. Piao. The address of Expert Master Holdings Limited is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.

(6)
  UMW China Ventures (L) Ltd., a corporation incorporated in Labuan, Malaysia, with the address at Brumby House, Jalan Bahasa, P.O. Box 80148, 87011 Labuan F.T. Malaysia, is wholly-owned by UMW Petropipe (L) Ltd., a corporation incorporated in Labuan, Malaysia, with the address at Brumby House, Jafan Bahasa, P.O. Box 80148, 87011 Labuan F.T. Malaysia, which is in turn a wholly-owned subsidiary of UMW Holdings Berhad, a company incorporated in Malaysia and whose shares are listed on the Malaysian Stock Exchange. The address of UMW Holdings Berhad is: 3rd Floor, The Corporate, No.10 Jalan Utas (15/7), Batu Tiga Industrial Estate, 40200 Shah Alam, Selangor Darul Ehsan, Malaysia.

(7)
  OCM Asia Principal Opportunities Fund, L.P. is a Cayman Islands exempted limited partnership. The principal business address of OCM Asia Principal Opportunities Fund, L.P. is c/o Oaktree Capital Group Holdings GP, LLC, 333 South Grand Avenue, 28th Floor, Los Angeles, California 90071.

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As of the date of this annual report, 204,375,226 of our ordinary shares were issued and outstanding. To the best of our knowledge, approximately 26.6% of the issued and outstanding shares are held by the depositary, a U.S. record holder. None of our principal shareholders have different voting rights as holders of our ordinary shares.

Item 7.
  Major Shareholders and Related Party Transactions

A.
  Major Shareholders

Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”

B.
  Related Party Transaction

Other transactions among certain shareholders, their predecessors or subsidiaries

Transactions with Mr. Piao and his affiliates

Based on a building lease agreement dated June 19, 2006 and subsequently amended, WSP China has rented from Wuxi Longhua a piece of land and certain buildings located in Wuxi, China for production and storing purposes, for which we paid $798,000, $805,000 and $844,000 in 2009, 2010 and 2011, respectively. The lease initially expired on August 31, 2009. It was renewed for one year terms and is expiring on August 31, 2012.

In 2009 and 2011, for financing purposes, we utilized our credit facilities by issuing certain bank and commercial acceptance notes to Wuxi Longhua for its presentation to certain PRC banks for discounting and payment before the notes’ maturity dates, and the excess amount obtained through these notes were refunded by Wuxi Longhua to us. In view of the purpose and nature of the transactions, we accounted for them as financing transactions with the banks in our financial statements. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources— Bill financing.”

Wuxi Quanhua Material Co., Ltd., or Quanhua Material, a company controlled by Mr. Quanhua Piao, Mr. Piao’s brother, has been providing logistics services to us on an arm’s length basis during the years ended December 31, 2009, 2010 and 2011, for which we paid the fees of approximately $3.4 million, $1.1 million and $1.7 million, respectively. On January 5, 2007, we entered into a Logistics Framework Agreement with Quanhua Material for the supply of logistics services at fees to be negotiated by the parties on an arm’s length basis. This agreement initially expired on December 31, 2009. It was renewed for one year terms and will expire on December 31, 2012.

Xuyi Aihua Oil Pipe Anticorrosive Product Co., Ltd., or Xuyi Aihua, a company controlled by Mr. Quanhua Piao, has been providing chemical products, such as paint, to us since January 2007. In 2009, 2010 and 2011, we paid approximately $3.4 million, $2.1 million and $3.1 million, respectively, in fees based on prices negotiated on an arm’s length basis. We expect to continue to purchase products from Xuyi Aihua in the future.

Wuxi Eastar Co., Ltd., or Wuxi Eastar, is a limited liability company incorporated in China and controlled by Miss Yanping Dong, Mr. Piao’s spouse. In 2009 and 2011, we sold OCTG products and materials to Wuxi Eastar on arm’s length basis in the amount of approximately $4.6 million and $12,000, respectively. We also purchased equipment from Wuxi Eastar in the amount of approximately $1.1 million, $20.5 million and $6.3 million for the years ended December 31, 2009, 2010 and 2011 on an arm’s length basis.

Wuxi Bright Wanbang Oil & Gas Anticorrosion Co., Ltd., or Wuxi Wanbang, an investee company in which we hold a 29% equity interest, provided certain anticorrosion services to us on an arm’s length basis, which amounted to $4.0 million, $3.3 million and $6.4 million in fees for the years ended December 31, 2009, 2010 and 2011. In addition, Wuxi Wanbang purchased raw materials from us on an arm’s length basis, which amounted to approximately $1.4 million, $2.3 million and $3.4 million for the years ended December 31, 2009, 2010 and 2011, respectively.

In 2009, we provided a prepayment in the amount of $3.0 million to WSP Pipe, a company controlled by Mr. Piao and incorporated in the Thai-Chinese Rayong Industrial Zone, Thailand for purchase of raw materials. In February 2010, we, through FSHL, acquired WSP Pipe from Mr. Piao with a nominal considerations and the prepaid amount of $3.0 million was treated as the consideration for the transfer of the equity interest in WSP Pipe.

On January 26, 2011, Mr. Piao, along with another subsidiary of our company, entered into guarantees in favor of Bangkok Bank Public Company Limited, or Bangkok Bank, in consideration of Bangkok Bank’s granting of credit and other banking facilities to WSP Pipe in an aggregate principal sum of Baht 705,000,000 and $63,000,000 (the “Bangkok Loan”). Pursuant to this guarantee, Mr. Piao has guaranteed the payment obligations of WSP Pipe for the indebtedness of WSP Pipe when due under the Bangkok Loan together with the interest accrued thereon and related fees and charges.

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Other related party transactions

Liaoning Daxing Steel Pipes Co., Ltd and related companies, or Liaoning Daxing Group, is a group of companies which holds a 30% equity interest in Liaoyang Seamless. In 2009, 2010 and 2011, Liaoning Daxing Group provided transportation services to us on an arm’s length basis for approximately $187,000, $176,000 and $528,000, respectively. We purchased electricity power supply from Liaoning Daxing Group on an arm’s length basis for approximately $104,000 and $127,000 in 2009 and 2010, respectively. We also rented vehicles from Liaoning Daxing Group on an arm’s length basis for approximately $33,000, $23,000 and $41,000 for the years ended December 31, 2009, 2010 and 2011, respectively. In 2010, we purchased plant premises from Liaoning Daxing Group on an arm’s length basis for approximately $4.2 million. In 2011, we purchased a motor vehicle from and sold a motor vehicle to Liaoning Daxing Group on arm’s length basis for approximately $16,000 and $30,000, respectively.

In 2010, for financing purposes, we utilized a portion of our credit facilities as bill financing by issuing certain bank and commercial acceptance notes to Liaoning Daxing Group. Taking into consideration their purpose and nature, we accounted for these transactions as financing transactions with the banks in our financial statements. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources— Bill financing.”

In 2011, we sold $19,000 in waste materials to Liaoning Daxing Group.

C.
  Interests of Experts and Counsel

Not applicable.

Item 8.
  Financial Information

A.
  Consolidated Statements and Other Financial Information

We have appended consolidated financial statements filed as part of this annual report.

Legal proceedings

In April 2009, seven U.S. companies and the United Steelworkers Union filed a petition with the International Trade Commission and the Department of Commerce, alleging that China based OCTG manufacturers unfairly dumped OCTG products in the U.S. market and that Chinese producers were benefitting from massive government subsidies. We were named as one of the major exporters of OCTG products from China and included as one of the mandatory respondent companies to the United States government’s countervailing duty investigation. On September 8, 2009, a preliminary determination was issued with a countervailing duty rate of 24.92% assigned to us. On December 7, 2009, the DOC published its final determination in the countervailing duties investigation with a rate of 14.61% assigned to WSP China. The rate was subsequently changed to 14.95% in January 2010 due to certain ministerial errors made by the DOC.

WSP China was not classified as a mandatory respondent to the anti-dumping investigation and participated in this case as a separate rate respondent. In November 2009, we received a preliminary anti-dumping rate of 36.53% which was based on the average dumping rates of other OCTG producers that were selected as mandatory respondents. In December 2009, this rate was amended to 96.51%, due to certain ministerial errors made by the DOC. On April 9, 2010, the DOC announced its final determination in the anti-dumping investigation with a rate of 29.94% assigned to WSP China. In May 2010, the ITC made a final ruling which requires all Chinese exports of OCTG products to the United States, including WSP China’s products, be charged up to about 32.07% anti-dumping duties and 14.95% countervailing duties.

The anti-dumping and countervailing duties are applied to all Chinese exports of OCTG products to the United States starting from the date of the DOC’s preliminary determinations. WSP China did not export OCTG products to the United States in 2009 and 2010 after the date of the DOC’s preliminary determinations. The anti-dumping and countervailing duties will apply to us if WSP China exports OCTG products to the United States in the future and we are not subject to any other penalties or fines.

In December 2008, SB International, Inc., a Texas corporation, brought a case against us, Houston OCTG, WSP China, Mr. Longhua Piao and certain other individuals in the District Court of Dallas County, Texas, alleging that the defendants interfered with the plaintiff’s contracts and business relations with its customers. The petition also contained claims for theft of information, conversion, breach of fiduciary duty, misappropriation of confidential information, fraud and conspiracy. There is no specific amount of damages claimed in the petition. We filed a counterclaim against SB International, Inc. and certain other plaintiffs, requesting for declaratory judgment and claims for breach of fiduciary duty, negligence, constructive fraud, request for accounting and breach of contract. In February 2011, this case was settled for $7.8 million.

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In May 2007, Frank H. Migl and several other plaintiffs brought a lawsuit against Watson Pipe, Inc., Atlas Tubular, L.P., Halliburton Energy Services, Inc. and Xxtreme Inspection in the District Court of Lavaca County, Texas. The plaintiffs alleged that a casing pipe ruptured in one of plaintiffs’ oil and gas wells, which caused over $7.0 million in damages. In 2008, the plaintiffs amended the petition to add WSP China as a defendant, and one of the defendants filed a petition against WSP China as third-party defendant, alleging that WSP China supplied the defective products for the operation. We have denied the claims and intend to vigorously defend ourselves against the claims. In January 2011, this case was settled for $0.8 million.

In December 2009, Dewbre Petroleum Corporation, as the plaintiff, brought a lawsuit against SB International, Inc., Tubular Synergy Group, LP, Padre Tubular Resources, Inc. and Xxtreme Pipe Storage, LLC in the District Court of Nueces County, Texas. The plaintiff alleged that a defective pipe caused damage to its well. In January 2010, the plaintiffs amended the petition to add WSP China as a defendant, alleging that WSP China supplied the defective pipe. The plaintiff claimed total damages in the amount of approximately $20.8 million. In May 2011, this case was settled for $4.3 million.

In August 2009, Western Oil and Gas Development Corp., as the plaintiff, brought a lawsuit against WSP China, J&B Pipe Supply, Inc., SB International, Inc. and certain other party in the District Court of Canadian County, Oklahoma. The plaintiff alleged that a casing pipe provided by WSP China caused damage to its well. The plaintiff claimed total damages in the amount of approximately $9.5 million. J&B Pipe Supply, Inc. and SB International, Inc. have filed cross claims against WSP China for indemnification and breach of warranty. We have denied the claims and intend to vigorously defend ourselves against the claims. In June 2011, this case was settled for $4.5 million.

In April 2010, Penn Virginia Oil & Gas, L.P., as the plaintiff, brought a lawsuit against WSP China and certain other parties in the District Court of Panola County, Texas, alleging that WSP China supplied a defective casing pipe, which caused a failed operation in an oil and gas well. The plaintiff claimed total damages in the amount of approximately $4.8 million. In January 2011, this case was settled for $2.3 million.

In May 2010, Chesapeake Energy Corporation and certain other parties, as the plaintiffs, brought a lawsuit against WSP China and certain other parties in the District Court of Desoto Parish, Louisiana, alleging that WSP China supplied a defective casing pipe, which caused a failed operation in an oil and gas well. We intend to vigorously defend ourselves against the claims. We anticipate that this case will go to trial in the first quarter of 2013. In connection with this case, certain landowners who were affected by the failed oil and gas well operation mentioned above filed a lawsuit against Chesapeake Energy Corporation in the District Court of Desoto Parish, Louisiana in November 2009. Such landowners claimed damages up to $50,000 for each of them and their minor children in a group of 36 individuals. In May 2010, the landowners amended the petition to name WSP China as a co-defendant in the lawsuit. The trial date for this case is expected to be in the second quarter of 2013.

In connection with a lawsuit brought by Mewbourne Oil Company against Trident Steel Corporation for selling defective casing pipes, in August 2010, Trident Steel Corporation filed a third-party petition against Minmetals, Inc. and WSP China in the District Court of Lipscomb County, Texas, stating that it fulfilled the Mewbourne Oil Company’s purchase order using the casing pipes manufactured by Minmetals, Inc. and WSP China and seeking indemnification from Minmetals, Inc. and WSP China for breach of warranty. The total amount of indemnification is unclear now. We have denied the claims and intend to vigorously defend ourselves against the claims. The trial date for this case is expected to be in November 2012.

In March 2011, Cimarex Energy Co. filed a lawsuit against us, WSP China, Houston OCTG and other defendants in Nueces County, Texas, seeking total damages in the amount of $11.0 million resulting from defects in casing pipes provided by us. We have denied the claims and intend to vigorously defend ourselves against the claims. In March 2012, this case was settled for $5.0 million.

Except as disclosed above, we are not currently a party to any other material legal or administrative proceedings. However, we are, from time to time, a party to various legal or administrative proceedings arising in the ordinary course of our business.

Dividend policy

From time to time, we have paid dividends to shareholders. We declared a dividend of $15.0 million in January 2005, which was in turn contributed by our shareholders to increase the registered capital of WSP China. We declared dividends in aggregate of $28.8 million in June 2006 and August 2006 and $32.5 million in October 2007. In March 2009, we declared a cash dividend in the amount of $0.15 per ordinary share, or $1.50 per ADS, and a one-time special cash dividend in the amount of $0.225 per ordinary share, or $2.25 per ADS, out of our annual profits for the years ended December 31, 2007 and 2008.

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In March 2009, our board also approved our dividend policy to declare annual dividend in the range of 30% to 50% of our annual profit going forward. 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 our board of directors may deem relevant. The timing and amount of dividend payments are subject to the discretion of our board of directors and is dependent upon various factors, including our cash flow and working capital requirements, as well as the withholding tax obligations under the New EIT Law. Depending on future events and other changes in the regulatory environment or the business climates, our board of directors may determine at a later time to change our dividend policy.

Cash dividends on our ADSs, if any, will be paid in U.S. dollars.

B.
  Significant Changes

We have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

Item 9.
  The Offer and Listing

A.
  Offering and Listing Details.

Our ADSs are listed on the New York Stock Exchange under the symbol “WH”. From December 6, 2007 to February 14, 2012, each ADS represented two ordinary shares. Effective on February 15, 2012, each ADS represented ten ordinary shares. All ADS trading prices on the New York Stock Exchange set forth in this annual report, including historical trading and closing prices, have been adjusted to reflect the new ADS to ordinary shares ratio of ten ordinary shares to one ADS.

The following table sets forth the high and low trading prices of our ADSs for the period indicated:




  

  

        Trading Price
   



  
High
  
Low
Annual High and Low
                                     
2007 (from December 6)
                 47.50             40.80   
2008
                 46.20             18.25   
2009
                 37.50             11.15   
2010
                 17.40             5.00   
2011
                 8.35             1.05   
Quarterly High and Low
                                      
First Quarter 2010
                 17.40             12.75   
Second Quarter 2010
                 14.95             7.75   
Third Quarter 2010
                 10.95             5.25   
Fourth Quarter 2010
                 8.45             5.00   
First Quarter 2011
                 7.30             5.80   
Second Quarter 2011
                 8.35             3.70   
Third Quarter 2011
                 4.55             1.62   
Fourth Quarter 2011
                 3.00             1.05   
First Quarter 2012
                 2.47             1.80   
Monthly High and Low
                                     
October 2011
                 3.00             1.05   
November 2011
                 2.35             1.75   
December 2011
                 2.60             1.75   
January 2012
                 2.37             2.10   
February 2012
                 2.47             1.80   
March 2012
                 2.06             1.91   
April (through April 27), 2012
                 1.98             1.06   
 

72



B.
  Plan of Distribution

Not applicable.

C.
  Markets

Our ADSs, each representing ten ordinary shares, have been listed on the New York Stock Exchange since December 6, 2007 under the symbol “WH.”

D.
  Selling Shareholders

Not applicable.

E.
  Dilution

Not applicable.

F.
  Expenses of the Issue

Not applicable.

Item 10.
  Additional Information

A.
  Share Capital

Not applicable.

B.
  Memorandum and Articles of Association

The following are summaries of the material provisions of our amended and restated memorandum and articles of association, as well as the Companies Law (2011 Revision) of the Cayman Islands, which is referred to as the Companies Law below, in so far as they relate to the material terms of our shares. This summary is not complete, and you should read our amended and restated memorandum and articles of association.

Registered Office

Our registered office is located at the offices of Codan Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands.

Objects

Our amended and restated memorandum of association states that the objects for which the Company is established are unrestricted, and that the Company shall have and be capable of exercising all the functions of a natural person of full capacity irrespective of any question of corporate benefit, as provided in section 27(2) of the Companies Law and in view of the fact that the Company is an exempted company that the Company will not trade in the Cayman Islands with any person, firm or corporation except in furtherance of the business of the Company carried on outside the Cayman Islands.

Board of Directors

See “Item 6.C. Board Practices—Board of Directors.”

Meetings

Subject to the company’s regulatory requirements, an annual general meeting and any extraordinary general meeting shall be called by not less than ten clear days’ notice in writing. Notice of every general meeting will be given to all of our shareholders other than those that, under the provisions of our amended and restated articles of association or the terms of issue of the ordinary shares they hold, are not entitled to receive such notices from us, and also to our principal external auditors. Extraordinary general meetings may be called only by the chairman of our board of directors or a majority of our board of directors, and may not be called by any other person.

Notwithstanding that a meeting is called by a shorter notice than that mentioned above, but, subject to applicable regulatory requirements, it will be deemed to have been duly called, if it is so agreed (1) in the case of a meeting called as an annual general meeting by all of our shareholders entitled to attend and vote at the meeting; (2) in the case of any other meeting, by a majority in number of our shareholders having a right to attend and vote at the meeting, being a majority together holding not less than 95% in nominal value of the ordinary shares giving that right.

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Two shareholders present in person or by proxy (in the case of a shareholder being a corporation, by its duly authorized representative) that represent not less than one-third in nominal value of our total issued and outstanding voting shares will constitute a quorum. No business other than the appointment of a chairman may be transacted at any general meeting unless a quorum is present at the commencement of business. If present, the chairman of our board of directors shall be the chairman presiding at any shareholders meetings.

A corporation being a shareholder shall be deemed for the purpose of our amended and restated articles of association to be present in person if represented by its duly authorized representative being the person appointed by resolution of the directors or other governing body of such corporation to act as its representative at the relevant general meeting or at any relevant general meeting of any class of our shareholders. Such duly authorized representative shall be entitled to exercise the same powers on behalf of the corporation that he represents as that corporation could exercise if it were our individual shareholder.

The quorum for a separate general meeting of the holders of a separate class of shares is described in “—Modification of Rights” below.

Voting rights attaching to the shares

Subject to any special rights or restrictions as to voting for the time being attached to any shares, at any general meeting on a show of hands every shareholder who is present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly authorized representative) shall have one vote, and on a poll every shareholder present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly appointed representative) shall have one vote for each fully paid share of which such shareholder is the holder.

No shareholder shall be entitled to vote or be reckoned in a quorum, in respect of any share, unless such shareholder is registered as our shareholder at the applicable record date for that meeting and all calls or installments due by such shareholder to us have been paid.

If a recognized clearing house or depositary (or its nominee(s)) is our shareholder, it may authorize such person or persons as it thinks fit to act as its representative(s) at any meeting or at any meeting of any class of shareholders provided that, if more than one person is so authorized, the authorization shall specify the number and class of shares in respect of which each such person is so authorized. A person authorized pursuant to this provision is entitled to exercise the same powers on behalf of the recognized clearing house or depositary (or its nominee(s)) as if such person was the registered holder of our shares held by that clearing house or depositary (or its nominee(s)) including the right to vote individually on a show of hands.

Protection of minority shareholders

The Grand Court of the Cayman Islands may, on the application of shareholders holding not less than one fifth of our shares in issue, appoint an inspector to examine our affairs and to report thereon in a manner as the Grand Court shall direct.

Any shareholder may petition the Grand Court of the Cayman Islands that may make a winding up order, if the court is of the opinion that it is just and equitable that we should be wound up, or, as an alternative to a winding up order, (a) an order regulating the conduct of our affairs in the future, (b) an order requiring us to refrain from doing or continuing an act complained of by the shareholder petitioner or to do an act which the shareholder petitioner has complained it has omitted to do, (c) an order authorising civil proceedings to be brought in our name and on our behalf by the shareholder petitioner on such terms as the Court may direct, or (d) an order providing for the purchase of the shares of any of our shareholders by other shareholders or us and, in the case of a purchase by us, a reduction of our capital accordingly.

Claims against us by our shareholders must, as a general rule, be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by our amended and restated memorandum and articles of association.

The Cayman Islands courts ordinarily would be expected to follow English case law precedents which permit a minority shareholder to commence a representative action against, or derivative actions in our name to challenge (1) an act which is ultra vires or illegal, (2) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of us, and (3) an irregularity in the passing of a resolution which requires a qualified (or special) majority.

Pre-emption rights

There are no pre-emption rights applicable to the issue of new shares under either Cayman Islands law or our amended and restated memorandum and articles of association.

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Liquidation rights

Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any class or classes of shares (1) if we are wound up and the assets available for distribution among our shareholders are more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed pari passu among those shareholders in proportion to the amount paid up at the commencement of the winding up on the shares held by them, respectively and (2) if we are wound up and the assets available for distribution among the shareholders as such are insufficient to repay the whole of the paid-up capital, those assets shall be distributed so that, as nearly as may be, the losses shall be borne by the shareholders in proportion to the capital paid up at the commencement of the winding up on the shares held by them, respectively.

If we are wound up, the liquidator may with the sanction of our special resolution and any other sanction required by the Companies Law, divide among our shareholders in specie or kind the whole or any part of our assets (whether they shall consist of property of the same kind or not) and may, for such purpose, set such value as the liquidator deems fair upon any property to be divided and may determine how such division shall be carried out as between the shareholders or different classes of shareholders. The liquidator may also vest the whole or any part of these assets in trustees upon such trusts for the benefit of the shareholders as the liquidator shall think fit, but so that no shareholder will be compelled to accept any assets, shares or other securities upon which there is a liability.

Modification of rights

Except with respect to share capital (as described below) and the location of the registered office, alterations to our amended and restated memorandum and articles of association may only be made by special resolution, meaning a majority of not less than two-thirds of votes cast at a shareholders meeting.

Subject to the Companies Law, all or any of the special rights attached to shares of any class (unless otherwise provided for by the terms of issue of the shares of that class) may be varied, modified or abrogated with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. The provisions of our amended and restated articles of association relating to general meetings shall apply similarly to every such separate general meeting, but so that the quorum for the purposes of any such separate general meeting or at its adjourned meeting shall be a person or persons together holding (or represented by proxy) on the date of the relevant meeting not less than one-third in nominal value of the issued shares of that class, every holder of shares of the class shall be entitled on a poll to one vote for every such share held by such holder and that any holder of shares of that class present in person or by proxy may demand a poll.

The special rights conferred upon the holders of any class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of such shares, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.

Alteration of capital

We may from time to time by ordinary resolution:

  increase our capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe;

  consolidate and divide all or any of our share capital into shares of larger amount than our existing shares;

  cancel any shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled subject to the provisions of the Companies Law;

  sub-divide our shares or any of them into shares of smaller amount than is fixed by our amended and restated memorandum of association, subject nevertheless to the Companies Law, and so that the resolution whereby any share is sub-divided may determine that, as between the holders of the shares resulting from such subdivision, one or more of the shares may have any such preferred or other special rights, over, or may have such deferred rights or be subject to any such restrictions as compared with the others as we have power to attach to unissued or new shares; and

  divide shares into several classes and without prejudice to any special rights previously conferred on the holders of existing shares, attach to the shares respectively any preferential, deferred, qualified or special rights, privileges, conditions or such restrictions that in the absence of any such determination in general meeting may be determined by our directors.

We may, by special resolution, subject to any confirmation or consent required by the Companies Law, reduce our share capital or any capital redemption reserve in any manner authorized by law.

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Transfer of shares

Subject to any applicable restrictions set forth in our amended and restated articles of association, any of our shareholders may transfer all or any of his or her shares by an instrument of transfer in the usual or common form or in a form prescribed by the NYSE or in any other form that our directors may approve.

Our directors may decline to register any transfer of any share which is not paid up or on which we have a lien. Our directors may also decline to register any transfer of any share unless:

  the instrument of transfer is lodged with us accompanied by the certificate for the shares to which it relates and such other evidence as our directors may reasonably require to show the right of the transferor to make the transfer;

  the instrument of transfer is in respect of only one class of share;

  the instrument of transfer is properly stamped (in circumstances where stamping is required); and

  a fee of such maximum sum as the New York Stock Exchange may determine to be payable or such lesser sum as our directors may from time to time require is paid to us in respect thereof.

If our directors refuse to register a transfer they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.

The registration of transfers may, on notice being given by advertisement in such one or more newspapers or by any other means in accordance with the requirements of the New York Stock Exchange, be suspended and the register closed at such times and for such periods as our directors may from time to time determine; provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year as our directors may determine.

Share repurchase

We are empowered by the Companies Law and our amended and restated articles of association to purchase our own shares, subject to certain restrictions. Our directors may only exercise this power on our behalf, subject to the Companies Law, our amended and restated memorandum and articles of association and to any applicable requirements imposed from time to time by the New York Stock Exchange, the SEC, or by any other recognized stock exchange on which our securities are listed.

Dividends

Subject to the Companies Law, we may in a general meeting declare dividends in any currency to be paid to our shareholders. Dividends may be declared and paid out of our profits, realized or unrealized, or from any reserve set aside from profits which our directors determine is no longer needed. Our board of directors may also declare and pay dividends out of the share premium account or any other fund or account that can be authorized for this purpose in accordance with the Companies Law.

Except in so far as the rights attaching to, or the terms of issue of, any share otherwise provides (1) all dividends shall be declared and paid according to the amounts paid up on the shares in respect of which the dividend is paid, but no amount paid up on a share in advance of calls shall be treated for this purpose as paid up on that share and (2) all dividends shall be apportioned and paid pro rata according to the amounts paid upon the shares during any portion or portions of the period in respect of which the dividend is paid.

Our directors may also pay any dividend that is payable on any shares semi-annually or on any other dates, whenever our financial position, in the opinion of our directors, justifies such payment.

Our directors may deduct from any dividend or bonus payable to any shareholder all sums of money (if any) presently payable by such shareholder to us on account of calls, installments or otherwise.

No dividend or other money payable by us on or in respect of any share shall bear interest against us.

In respect of any dividend proposed to be paid or declared on our share capital, our directors may resolve and direct that (1) such dividend be satisfied wholly or in part in the form of an allotment of shares credited as fully paid up, provided that our members entitled thereto will be entitled to elect to receive such dividend (or part thereof if our shareholders so determine) in cash in lieu of such allotment or (2) the shareholders entitled to such dividend will be entitled to elect to receive an allotment of shares credited as fully paid up in lieu of the whole or such part of the dividend as our directors may think fit. We may also, on the recommendation of our directors, resolve in respect of any particular dividend that, notwithstanding the foregoing, it may be satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right of shareholders to elect to receive such dividend in cash in lieu of such allotment.

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Any dividend interest or other sum payable in cash to the holder of shares may be paid by check or warrant sent by mail addressed to the holder at his registered address, or addressed to such person and at such addresses as the holder may direct. Every check or warrant shall, unless the holder or joint holders otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on the register in respect of such shares, and shall be sent at his or their risk and payment of the check or warrant by the bank on which it is drawn shall constitute a good discharge to us.

All dividends unclaimed for one year after having been declared may be invested or otherwise made use of by our board of directors for the benefit of our company until claimed. Any dividend unclaimed after a period of six years from the date of declaration of such dividend may be forfeited by our board of directors and, if so forfeited, shall revert to us.

Whenever our directors or our shareholders in a general meeting have resolved that a dividend be paid or declared, our directors may further resolve that such dividend be satisfied wholly or in part by the distribution of specific assets of any kind, and in particular, of paid up shares, debentures or warrants to subscribe for our securities or securities of any other company. Where any difficulty arises with regard to such distribution, our directors may settle it as they think expedient. In particular, our directors may issue fractional certificates, ignore fractions altogether or round the same up or down, fix the value for distribution purposes of any such specific assets, determine that cash payments shall be made to any of our shareholders upon the footing of the value so fixed in order to adjust the rights of the parties, vest any such specific assets in trustees as may seem expedient to our directors, and appoint any person to sign any requisite instruments of transfer and other documents on behalf of a person entitled to the dividend, which appointment shall be effective and binding on our shareholders.

Untraceable shareholders

We are entitled to sell any shares of a shareholder who is untraceable, provided that:

  all checks or warrants in respect of dividends of such shares, not being less than three in number, for any sums payable in cash to the holder of such shares have remained un-cashed for a period of 12 years prior to the publication of the advertisement and during the three months referred to in third bullet point below;

  we have not during that time received any indication of the whereabouts or existence of the shareholder or person entitled to such shares by death, bankruptcy or operation of law; and

  we have caused an advertisement to be published in newspapers in the manner stipulated by our amended and restated articles of association, giving notice of our intention to sell these shares, and a period of three months has elapsed since such advertisement and the New York Stock Exchange has been notified of such intention.

The net proceeds of any such sale shall belong to us, and when we receive these net proceeds we shall become indebted to the former shareholder for an amount equal to such net proceeds.

C.
  Material Contracts

We have not entered into any material contracts other than in the ordinary co