F-1 1 df1.htm FORM F-1 Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on September 7, 2010

Registration No. 333-            

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

China Ming Yang Wind Power Group Limited

(Exact name of Registrant as Specified in Its Charter)

Not Applicable

(Translation of Registrant’s Name into English)

 

Cayman Islands   3510   Not Applicable
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

 

Jianye Road, Mingyang Industry Park

National Hi-Tech Industrial Development Zone

Zhongshan, Guangdong 528437

People’s Republic of China

(86) 760-28138666

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Law Debenture Corporate Services Inc.

400 Madison Avenue, 4th Floor

New York, New York 10017

(212) 750-6474

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Leiming Chen

Simpson Thacher & Bartlett LLP

35th Floor, ICBC Tower

Three Garden Road

Central, Hong Kong

(852) 2514-7600

 

David T. Zhang

Latham & Watkins

41st Floor, One Exchange Square

8 Connaught Place

Central, Hong Kong

(852) 2522-7886

 

 

Approximate date of commencement of proposed sale to the public:    As soon as practicable after the effective date of this registration statement

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering.    ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered(1)(2)

   Proposed maximum aggregate
offering price(3)
   Amount of
registration fee

Ordinary shares, par value US$0.001 per ordinary share

   US$400,000,000    US$28,520

 

 

(1)  

American depositary shares issuable upon deposit of the ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333-            ). Each American depositary share represents              ordinary shares.

(2)  

Includes (i) ordinary shares represented by American depositary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public and (ii) ordinary shares represented by American depositary shares that may be purchased by the underwriters pursuant to an option to purchase additional ordinary shares represented by American depositary shares. The ordinary shares are not being registered for the purposes of sales outside of the United States.

(3)  

Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (SUBJECT TO COMPLETION)

ISSUED                      , 2010

            AMERICAN DEPOSITARY SHARES

LOGO

China Ming Yang Wind Power Group Limited

Representing                      Ordinary Shares

 

 

This is the initial public offering of American depositary shares, or ADSs, each representing              ordinary shares of China Ming Yang Wind Power Group Limited. We are offering             ADSs. Prior to this offering, there has been no public market for our ordinary shares or ADSs. We anticipate that the initial offering price of the ADSs will be between US$             and US$             per ADS.

We have applied for the listing of the ADSs on the New York Stock Exchange under the symbol “MY.”

Investing in the ADSs involves a high degree of risk. See “Risk Factors” beginning on page 13.

 

 

PRICE US$             PER ADS

 

 

 

       Price to
Public
     Underwriting
Discounts and
Commissions
     Proceeds to
Us

Per ADS

     US$              US$              US$        

Total

     US$              US$              US$        

The underwriters have an option to purchase up to              additional ADSs from us at the public offering price, less underwriting discounts and commissions, within 30 days from date of this prospectus, to cover over-allotments of ADSs.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

The underwriters expect to deliver the ADSs to purchasers on or about                     , 2010.

 

Morgan Stanley   Credit Suisse   BofA Merrill Lynch

 

 

The date of this prospectus is                     , 2010.


Table of Contents

 

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   13

Special Note Regarding Forward-Looking Statements

   46

Use of Proceeds

   48

Dividend Policy

   49

Capitalization

   50

Dilution

   51

Exchange Rate Information

   53

Enforceability of Civil Liabilities

   54

Our Corporate Structure and History

   56

Selected Consolidated Financial and Operating Data

   62

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   67

Our Industry

   103

 

     Page

Our Business

   114

Regulation

   146

Management

   152

Principal Shareholders

   161

Related Party Transactions

   164

Description of Share Capital

   173

Description of American Depositary Shares

   185

Shares Eligible for Future Sale

   194

Taxation

   196

Underwriting

   203

Expenses Relating to this Offering

   209

Legal Matters

   209

Experts

   210

Where You Can Find Additional Information

   211

Index to Consolidated Financial Statements

   F-1

 

 

You should rely only on the information contained in this prospectus and in any free writing prospectus we may authorize to be delivered or made available to you. We have not authorized anyone to provide you with information that is different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, the ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs.

We have not taken any action to permit a public offering of the ADSs outside of the United States or to permit the possession or distribution of this prospectus or any filed free writing prospectus outside the United States. Persons outside of the United States who come into possession of this prospectus or any filed free writing prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of this prospectus or any filed free writing prospectus outside of the United States.

Until                     , 2010 (the 25th day after the commencement of the offering), all dealers that buy, sell, or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus and in any free writing prospectus we may authorize to be delivered or made available to you. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under “Risk Factors,” before deciding whether to buy the ADSs.

In this prospectus, “Mingyang,” “we,” “us,” “our company” and “our” refer to China Ming Yang Wind Power Group Limited, a company organized under the laws of the Cayman Islands, and its consolidated entities and, unless otherwise indicated, its predecessor, Guangdong Mingyang Wind Power Industry Group Co., Ltd., or Guangdong Mingyang; “China” or “PRC” refers to the People’s Republic of China, excluding, for the purposes of this prospectus only, Taiwan and the special administrative regions of Hong Kong and Macau.

Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their over-allotment option to purchase additional ADSs.

Overview

We are a leading and fast-growing wind turbine manufacturer in China, focusing on designing, manufacturing, selling and servicing megawatt-class wind turbines. We were the largest non-state owned or controlled wind turbine manufacturer in China, as measured by installed capacity of wind turbines at the end of 2009, with a 4.1% market share in terms of newly installed capacity in 2009, according to BTM Consult ApS, or BTM, an independent consulting firm specializing in renewable energy. We were also among the five largest domestic branded wind turbine manufacturers in China as measured by newly installed capacity in 2009, according to BTM. Also according to BTM, China had advanced to first place in the world in terms of newly installed capacity of wind turbines, with 13,750 megawatts, or MW, in 2009, and second place in the world in terms of cumulative installed capacity, with 25,853MW by the end of 2009. We believe that we are well-positioned to benefit from the projected significant growth in China’s wind power equipment industry.

We were founded in June 2006 and have since experienced significant growth. As of June 30, 2010, we had entered into sales contracts with 14 end customers to deliver 1,776 units of our wind turbines. Our current products consist of two models of wind turbines, each with a rated power capacity of 1.5MW, currently the most widely used wind turbine model in China, designed and developed to cater to the wind and other weather conditions and power grids in China. We cooperate with aerodyn Energiesysteme, one of the world’s leading wind turbine design firms based in Germany, to develop our 1.5MW wind turbines and share intellectual property rights. We also have obtained exclusive licenses from aerodyn Asia Co., Ltd., or aerodyn Asia, to manufacture and distribute in China wind turbines utilizing its advanced super-compact drive, or SCD, technology, with a rated power capacity ranging from 2.5MW to 3MW, or the 2.5/3.0MW SCD wind turbines, and a rated power capacity of 6.0MW, or the 6.0MW SCD wind turbine. Rated power capacity of a wind turbine refers to the maximum power output that a wind turbine can generate at suitable wind speeds and a higher rated power capacity indicates a larger amount of energy a wind turbine is able to generate in a given period. We completed our first 2.5/3.0MW SCD wind turbine prototype in May 2010.

Our customers include the five largest Chinese state-owned power producers: China Datang Corporation, or China Datang; China Huadian Corporation, or Huadian; China Guodian Corporation, or Guodian; China Power Investment Corporation, or CPIC; and China Huaneng Group, or Huaneng; or their alternative energy subsidiaries, such as China Longyuan Power Group Corporation Limited, or Longyuan, which is a subsidiary of Guodian and a company listed on the Hong Kong Stock Exchange. According to the Chinese Wind Energy Association, a member of the World Wind Energy Association, these customers were among the top wind farm operators in China as measured by newly installed wind capacity in 2009, with an aggregate installed capacity

 

 

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accounting for more than 50% of China’s newly installed capacity that year. We also sell wind turbines to regional alternative energy investment companies, regional power producers and privately owned wind farm operators.

Our facilities are currently located in Guangdong, Tianjin and Jilin, China. We expanded our designed annual production capacity of 1.5MW wind turbines from 288 units as of December 31, 2007 to approximately 1,340 units as of June 30, 2010. In anticipation of growing market demand, we plan to further expand the production capacity at our existing facilities in Zhongshan, Guangdong and are currently establishing new facilities in Tianjin and Rudong, Jiangsu.

We have grown rapidly since our delivery of the first wind turbine we manufactured in 2008 as demonstrated by the following.

 

     Year Ended December 31,     Six Months Ended
June 30, 2010
 
     2008    2009    

Wind turbines we delivered (units)

   69    378      144   

Wind turbines commissioned for which we recognized revenue (units)

   16    152      310   

Revenue recognized (in millions)

   RMB119.3    RMB1,169.2      RMB2,315.1   
      (US$172.4   (US$341.4

Wind turbines we delivered for which we have yet to recognize revenue (units)

   53    279      113   

Deferred revenue (in millions)

   RMB385.7    RMB1,899.6      RMB698.5   
      (US$280.1   (US$103.0

We incurred losses of RMB22.6 million, RMB499.7 million and RMB223.1 million (US$32.9 million) in 2007, 2008 and 2009, respectively. We became profitable beginning in the first quarter of 2010 and generated a profit of RMB300.5 million (US$44.3 million) in the first six months of 2010.

Our Industry

Wind power technology is cost-efficient and mature compared with other types of renewable energy technologies. According to Global Wind Energy Council, wind power is one of the fastest growing renewable energy technologies in the world. According to International Wind Energy Development, a report issued by BTM in March 2010, wind power accounted for 1.6% of the total global electricity production as of the end of 2009 and is expected to account for 8.4% of the electricity production by 2019. Global cumulative wind installed capacity grew from approximately 25 gigawatts, or GW, to approximately 160GW, representing a compound annual growth rate, or CAGR, of 26.2% from 2001 to 2009, according to BTM, and is expected to continue increasing at a CAGR of 22.8% from 2009 to 2014, reaching approximately 448GW by the end of 2014. In particular, China’s cumulative installed capacity increased from 406MW in 2001 to 25,853MW in 2009, representing a CAGR of 68.1%. China has advanced to first and second places in the world in terms of new and cumulative installed capacity by the end of 2009, respectively. According to BTM, China is expected to have a cumulative installed capacity of 104,853MW by the end of 2014, accounting for approximately 23% of the global cumulative installed capacity at that time.

The number of wind turbine manufacturers has increased significantly in the past few years, especially in China, due primarily to the strong support from the Chinese central government. According to BTM, domestic wind turbine manufacturers increased their market shares in China significantly in recent years, as measured by installed capacity, from 41% in 2006 to 87% in 2009. The installed capacity of domestic manufacturers of wind turbines are expected to reach 5,000MW per annum by the end of 2010, according to the 11th Five-Year Development Plan for Renewable Energy of China. Although China has recently implemented measures to curb

 

 

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the over-expansion of wind turbine manufacturing industry, we believe smaller companies and new market entrants will more likely be negatively affected by this policy change while the impact on larger companies like us will be less significant because of their existing scale, advanced technology and relationships with customers.

Our Competitive Strengths

We believe that the following competitive strengths enable us to compete effectively in China’s wind power equipment industry and to capitalize on its rapid growth:

 

   

advanced product offering with high adaptability, high energy output, low energy production cost and comprehensive post-sales services;

 

   

strong research and development capabilities through collaborative partnerships;

 

   

established customer relationships with leading Chinese state-owned and local power producers;

 

   

strategic locations close to wind resources;

 

   

vertical integration and optimized supply chain; and

 

   

experienced management team with a proven track record.

Our Strategies

We seek to grow rapidly to become China’s leading megawatt-class wind turbine manufacturer and build a world-class brand in the global wind power industry through the following strategies:

 

   

maintain our technological leadership and improve our competitiveness through research and development initiatives;

 

   

expand our production capacity and further strengthen cost control by continuing to enhance our supply chain management;

 

   

increase our market share by strengthening our strategic relationships with customers and providing additional value-added services and solutions; and

 

   

establish an international presence.

Our Challenges and Risks

We believe our business is subject to risks and uncertainties that may materially and adversely affect us, including:

 

   

our limited operating history and our ability to maintain profitability;

 

   

our ability to continually maintain and expand our customer base;

 

   

our ability to introduce and tailor products that meet market demands and specific requirements from our customers and to enhance the reliability and quality of our products;

 

   

our ability to effectively manage our production capacity expansion and to manufacture and deliver wind turbines to customers in a timely manner;

 

   

our ability to maintain and enhance our brand recognition and to explore new markets; and

 

   

uncertainties with respect to policies and regulations in the wind power equipment industry in China.

See “Risk Factors” and other information included elsewhere in this prospectus for a discussion of these and other risks and uncertainties.

 

 

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Shareholding and Corporate Structure

The following chart sets forth our shareholding and corporate structure immediately after the completion of this offering (assuming no exercise of the underwriters’ over-allotment option):

LOGO

 

 

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Corporate Information

Our principal executive offices are located at Jianye Road, Mingyang Industry Park, National Hi-Tech Industrial Development Zone, Zhongshan, Guangdong 528437, People’s Republic of China. Our telephone number at this address is +(86) 760-28138666, and our fax number is +(86) 760-28138667.

Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is www.mywind.com.cn. The information contained on our website is not a part of this prospectus. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 400 Madison Avenue, 4th Floor, New York, New York 10017.

 

 

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The Offering

 

ADSs offered by us

                     ADSs

 

ADSs outstanding immediately after this offering

                     ADSs (or                      ADSs if the underwriters exercise their over-allotment option in full)

 

Ordinary shares outstanding immediately after this offering

                     ordinary shares (or                      ordinary shares if the underwriters exercise their over-allotment option in full), excluding ordinary shares issuable upon the exercise of outstanding share options and ordinary shares reserved for issuance under our 2010 equity incentive plan.

 

The ADSs

Each ADS represents                      ordinary shares, par value US$0.001 per share. The ADSs may be evidenced by ADRs, if issued.

The depositary will be the holder of the ordinary shares underlying your ADSs, and you will have the rights of an ADS holder as provided in the deposit agreement among us, the depositary and owners and beneficial owners of ADSs from time to time.

You may instruct the depositary to vote the number of deposited ordinary shares your ADSs represent. The depositary will notify registered ADS holders of shareholders’ meetings and arrange to deliver our voting materials to you if we ask it to. Otherwise, you will not be able to exercise your right to vote unless you withdraw the ordinary shares. However, you may not know about the meeting enough in advance to withdraw the ordinary shares.

Subject to the terms of the deposit agreement, you may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange.

We may amend or terminate the deposit agreement for any reason without your consent. If an amendment becomes effective and you continue to hold your ADSs, you will be bound by the deposit agreement as amended.

To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

 

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Depositary

Citibank, N.A.

 

Option to purchase additional ADSs

We have granted the underwriters an over-allotment option, exercisable within 30 days from the date of this prospectus, to purchase up to              additional ADSs.

 

Use of proceeds

We estimate that we will receive net proceeds from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, of approximately US$             million, assuming an initial public offering price of US$             per ADS, midpoint of the estimated public offering price range set forth on the cover of this prospectus. We intend to use the net proceeds we receive from this offering for the following purposes:

 

   

approximately US$             for the expansion of our production capacity and value chain including:

 

   

approximately US$             for building our manufacturing facilities for wind turbines and key components;

 

   

approximately US$             for purchasing manufacturing equipment; and

 

   

approximately US$             for potential acquisitions of, or investments in, component suppliers, although we are not currently negotiating for any such acquisitions or investments; and

 

   

approximately US$             for research and development, including:

 

   

approximately US$             for the development of wind turbine technologies, including large multi-megawatt wind turbines and SCD wind turbines, as well as the development of our solar-wind hybrid systems; and

 

   

approximately US$             for the construction of our Guangdong Mingyang Wind Power Technology Research Institute and other research platforms.

We may use the remaining portion of the net proceeds we receive from this offering for working capital and general corporate purposes. See “Use of Proceeds” for additional information.

 

Risk factors

See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in the ADSs.

 

Lock-up

We, our directors, our executive officers and all of our existing shareholders have agreed, or are expected to agree, for a period of 180 days after the date of this prospectus, subject to certain exceptions, not to sell, transfer or otherwise dispose of any of our ordinary shares or ADSs. See “Underwriting.”

 

Listing

We have applied for the listing of the ADSs on the New York Stock Exchange, or the NYSE, under the symbol “MY.” Our ordinary shares will not be listed on any other exchange or quoted for trading on any over-the-counter trading systems.

 

 

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Summary Consolidated Financial and Operating Data

The following summary consolidated statement of comprehensive income data for the years ended December 31, 2007, 2008 and 2009 (other than loss per ADS data) and the summary consolidated statement of financial position data as of December 31, 2008 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statement of comprehensive income data for the six months ended June 30, 2009 and 2010 and the summary consolidated statement of financial position data as of June 30, 2010 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited condensed consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in the opinion of management, all adjustments necessary, which include only normal recurring adjustments, for the fair statement of the financial information contained in those statements.

You should read the summary consolidated financial and operating data in conjunction with those financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. Our historical results are not necessarily indicative of our results expected for any future periods.

 

 

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    Year Ended December 31,     Six Months Ended June 30,  
    2007     2008     2009     2009     2010  
    RMB     RMB     RMB     US$     RMB     RMB     US$  
    (in thousands, except share and per share and per ADS data)  

Consolidated Statement of Comprehensive Income Data

             

Revenue

  —        124,677      1,172,692      172,925      601,565      2,318,610      341,902   

Cost of sales

  —        (160,830   (1,096,724   (161,723   (593,161   (1,862,802   (274,689
                                         

Gross (loss)/profit

  —        (36,153   75,968      11,202      8,404      455,808      67,213   

Other income

  —        1,590      268      40      100      7,122      1,050   
                                         

Selling and distribution expenses

  (5,886   (17,738   (90,862   (13,399   (28,782   (54,902   (8,096

Administrative expenses

  (13,157   (413,951   (67,475   (9,950   (27,004   (45,492   (6,708

Research and development expenses

  (3,321   (11,980   (52,789   (7,784   (12,620   (23,247   (3,427

(Loss)/profit from operations

  (22,364   (478,232   (134,890   (19,891   (59,902   339,289      50,032   
                                         

Net finance expense

  (278   (21,512   (49,577   (7,311   (23,266   (43,143   (6,362

Share of loss of an associate, net of income tax expense

  —        —        (154   (23   —        (1,161   (171
                                         

(Loss)/profit before income tax expense

  (22,642   (499,744   (184,621   (27,225   (83,168   294,985      43,499   

Income tax (expense)/benefit

  —        —        (38,495   (5,676   (1,391   5,480      808   
                                         

(Loss)/profit for the period

  (22,642   (499,744   (223,116   (32,901   (84,559   300,465      44,307   
                                         

Total comprehensive (loss)/income for the period

  (22,642   (499,744   (223,116   (32,901   (84,559   300,465      44,307   

Attributable to

             

Shareholders of our company

  (22,416   (494,493   (221,313   (32,635   (83,049   297,733      43,904   

Non-controlling interest

  (226   (5,251   (1,803   (266   (1,510   2,732      403   

Net (loss) income per share—basic and diluted

  (0.22   (4.94   (2.21   (0.33   (0.83 )    2.98      0.44   

Weighted average number of shares used in computation—basic and diluted(1)

  100,000,000      100,000,000      100,000,000      100,000,000      100,000,000      100,000,000      100,000,000   

 

(1)  

The calculation of the weighted average number of ordinary shares for the purpose of basic and diluted net income per share has been retroactively adjusted to reflect: (i) the 1:1000 share subdivision effected in February 2010, (ii) our reorganization which was completed in May 2010, and (iii) our incorporation in February 2009, as if these events had occurred at the beginning of the earliest period presented and such shares had been outstanding for all periods.

 

 

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     As of December 31,     As of June 30,  
     2008     2009     2010  
     RMB     RMB     US$     RMB     US$  
     (in thousands)  

Consolidated Statement of Financial Position Data

          

Property, plant and equipment

   106,871      152,455      22,481      210,923      31,103   

Intangible assets

   27,590      22,241      3,280      92,023      13,570   

Trade and other receivables

   5,606      57,461      8,473      29,382      4,333   

Prepayments

   31,040      51,484      7,592      33,125      4,885   

Deferred tax assets

   —        2,820      416      22,306      3,289   

Total non-current assets

   179,804      331,420      48,871      446,386      65,824   

Inventories

   680,043      1,972,993      290,938      1,507,972      222,366   

Trade and other receivables

   394,707      1,627,025      239,921      1,661,680      245,031   

Prepayments

   96,064      123,370      18,192      168,567      24,857   

Pledged bank deposits

   66,903      145,995      21,528      95,126      14,027   

Cash and cash equivalents

   41,753      722,233      106,500      971,773      143,298   

Total current assets

   1,279,470      4,633,616      683,273      4,433,856      653,816   

Total assets

   1,459,274
  
  4,965,036
  
  732,144      4,880,242      719,640   

Issued share capital

   —        —        —        682      101   

Capital reserve

   809,937      1,288,756      190,040      1,326,472      195,602   

Accumulated loss

   (520,104   (741,417   (109,329   (443,684   (65,426

Total equity attributable to

          

Shareholders of the company

   289,833      547,339      80,711      883,470      130,277   

Non-controlling interest

   7,216      29,450      4,343      56,255      8,295   

Total equity

   297,049      576,789      85,053      939,725      138,572   

Deferred tax liabilities

   —        1,647      243      744      110   

Provisions

   3,017      19,154      2,824      51,310      7,566   

Trade payables

   1,644      20,140      2,970      33,879      4,996   

Total non-current liabilities

   4,948      44,664      6,586      182,594      26,925   

Trade and other payables

   705,383      2,203,118      324,872      2,523,797      372,159   

Short-term bank loans

   65,000      181,673      26,790      452,129      66,671   

Income tax payable

   —        33,748      4,976      18,633      2,748   

Provisions

   921      22,364      3,298      63,449      9,356   

Deferred revenue

   385,700      1,899,626      280,119      698,477      102,997   

Total current liabilities

   1,157,277      4,343,583      640,505      3,757,923      554,143   

Total liabilities

   1,162,225      4,388,247      647,091      3,940,517      581,069   

Total equity and liabilities

   1,459,274      4,965,036      732,144      4,880,242      719,640   

 

 

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     Year Ended
December 31,
    Six Months Ended
June 30,
     2007    2008     2009     2009     2010

Other Consolidated Financial Data (in percentages)

           

Gross margin

   —      (29.0   6.5      1.4      19.7

Operating margin

   —      (383.6   (11.5   (10.0   14.6

Net margin

   —      (400.8   (19.0   (14.1   13.0

Selected Operating Data (in units of wind turbines)

           

New orders

   132    452      574      134      618

Total deliveries(1)

   —      69      378      92      144

Total units commissioned(2)

   —      16      152      78      310

Order book(3)

   132    515      711      557      1,158

 

      Year Ended
December 31,
    Six Months Ended June 30,
     2007     2008     2009     2009     2010
     RMB     RMB     RMB     US$     RMB     RMB    US$
     (in thousands)

Non-IFRS Financial Data (in thousands)

               

Adjusted EBITDA(4)

   (19,314   (88,369   (107,416   (15,840   (46,254   357,060    52,652

 

(1)  

Delivery of a wind turbine refers to the arrival of the wind turbine at the customer’s designated wind farm and the completion of preliminary inspection and acceptance by the customer.

(2)  

Commissioning of a wind turbine refers to grid-connection commissioning, whereby the wind turbine is installed and a functionality test is performed to ensure proper connection to the grid. Commissioning generally represents the point of revenue recognition. A durability test is conducted following commissioning.

(3)  

Represents cumulative orders signed minus cumulative deliveries.

(4)  

EBITDA refers to earnings before net finance expense, income tax expense and depreciation and amortization. Adjusted EBITDA refers to EBITDA adjusted to exclude share-based compensation expenses.

 

     Adjusted EBITDA is used by management to evaluate our financial performance and determine the allocation of resources and provides management with the ability to determine our return on capital expenditure. Items that are eliminated from the calculation of Adjusted EBITDA are collectively managed by our senior executive officers, including our chief executive officer and chief financial officer, taking into consideration our strategic, business and financial goals. In addition, we believe that Adjusted EBITDA will be a key metric analyzed in determining the amount of new debt financing that may be available to us, and, therefore, we believe this measure provides investors with additional information about our ability to fund our growth through debt financing, if needed. Furthermore, Adjusted EBITDA eliminates the impact of items that we do not consider indicative of the performance of our business. We believe investors will similarly use Adjusted EBITDA as one of the key metrics to evaluate our financial performance and to compare our current operating results with corresponding historical periods and with other companies in the wind equipment manufacturing industry. The presentation of Adjusted EBITDA should not be construed as an indication that our future results will be unaffected by other charges and gains we consider to be outside the ordinary course of our business.

 

    

The use of Adjusted EBITDA has certain limitations. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our operating and financial performance. Depreciation and amortization expense, income tax expense, interest expense and interest income as well as share-based compensation expenses have been and will be incurred in our business and are not reflected in the presentation of Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, Adjusted EBITDA does not consider capital expenditures and other investing activities and should not be considered as a measure of our liquidity. We compensate for these limitations by providing the relevant disclosure of our depreciation and amortization expense, interest

 

 

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expense and interest income, income tax expense, capital expenditures as well as share-based compensation expenses and other relevant items both in our reconciliations to IFRS financial measures and in our consolidated financial statements, all of which should be considered when evaluating our performance. The term Adjusted EBITDA is not defined under IFRS, and Adjusted EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with IFRS. When assessing our operating and financial performance, you should not consider this data in isolation or as a substitute for our net income, operating income or any other operating performance measure that is calculated in accordance with IFRS. In addition, our Adjusted EBITDA may not be comparable to Adjusted EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate Adjusted EBITDA in the same manner as we do.

The following table is a reconciliation of Adjusted EBITDA to loss for the year, the most directly comparable financial measure calculated and presented in accordance with IFRS:

 

     Year Ended December 31,     Six Months Ended June 30,  
     2007     2008     2009     2009     2009     2010  
     RMB     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

(Loss)/profit for the period

   (22,642   (499,744   (223,116   (32,901   (84,559   300,465      44,307   

Income tax expense/(benefit)

             38,495      5,676      1,391      (5,480   (808

Net finance expense

   278      21,512      49,577      7,311      23,266      43,143      6,362   

Depreciation and amortization

   3,050      10,372      27,628      4,074      13,648      18,932      2,791   

EBITDA

   (19,314   (467,860   (107,416   (15,840   (46,254   357,060      52,652   

Share-based compensation expenses

        379,491                            

Adjusted EBITDA

   (19,314   (88,369   (107,416   (15,840   (46,254   357,060      52,652   

 

 

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RISK FACTORS

You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before investing in our ADSs. Any of the following risks and uncertainties could have a material and adverse effect on our business, financial condition, results of operations and prospects. Additionally, the market price of our ADSs could decline due to any of these risks and uncertainties, and you may lose all or part of your investment.

Risks Relating to Our Company

Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operations.

We were founded as a subsidiary of Mingyang Electrical and commenced operations in June 2006. Our limited operating history provides a limited basis for you to evaluate the viability and sustainability of our business. We successfully installed our first wind turbine prototype in October 2007 in Guangdong Province, and we made our first commercial delivery of wind turbines in May 2008 to a wind farm located in Inner Mongolia. Installation of a wind turbine refers to the erection of the wind turbine at the customer’s designated wind farm after the delivery. We delivered 69 units, 378 units and 144 units of wind turbines in 2008 and 2009 and in the first six months of 2010, respectively, of which 16 units, 152 units and 310 units were commissioned, and for which we recognized RMB119.3 million, RMB1,169.2 million (US$172.4 million) and RMB2,315.1 million (US$341.4 million) of revenue, in 2008 and 2009 and in the first six months of 2010, respectively.

To sustain our growth, we must, among other things, further expand our production capacity and customer base. The growth of our business will impose substantial demands on our managerial, operational, financial and other resources as well as increase our working capital needs. Our ability to grow our business is subject to other risks and uncertainties, including the following, some of which are commonly experienced by other China-based early-stage companies:

 

   

retain and acquire customers and accurately assess and meet their needs and market demands;

 

   

design products tailored for the wind and weather conditions in China, particularly in areas where our products are intended to be installed, that meet the demands of our customers;

 

   

competitively price our products and services;

 

   

maintain and expand our relationships with technology partners;

 

   

respond to changes in the regulatory environment in the wind power equipment industry as well as the industry in which our customers operate;

 

   

manage risks associated with intellectual property rights;

 

   

increase marketing, sales and post-sales services activities and otherwise increase customer awareness and acceptance of our products and services;

 

   

manage our raw material and component supplies;

 

   

raise sufficient capital to sustain and expand our business; and

 

   

attract, retain and train qualified personnel.

If we are unsuccessful in addressing any of these risks and uncertainties, our business, financial condition, results of operations and future growth would be materially and adversely affected. In addition, the success of our growth strategy depends on a number of external factors that are beyond our control, for example, the expected growth of China’s alternative energy industry in general and wind power equipment industry in particular and the competition from other wind power equipment manufacturers. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our business strategies or respond to competitive pressures.

 

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We incurred losses of RMB22.6 million, RMB499.7 million and RMB223.1 million (US$32.9 million) in 2007, 2008 and 2009, respectively. These losses resulted principally from our high cost of sales due to the relatively high purchase prices of raw materials and high operating expenses as a percentage of our revenues during our ramp-up phase. While we became profitable beginning in the first quarter of 2010 and generated a profit in the amount of RMB300.5 million (US$44.3 million) in the first six months of 2010, we cannot assure you that we will be able to sustain or increase our profitability in the future. Our ability to maintain and increase profitability depends, to a significant extent, on our ability to continue to grow our business and to control our costs, which is subject to the risks and uncertainties associated with our business.

Unanticipated delays, postponements or even cancellations of our wind turbine orders may adversely affect our business, financial condition and results of operations.

Our order book comprises firm purchase orders for our wind turbines for particular wind farms under sales contracts that specify the delivery of wind turbines at predetermined intervals over a period of several months and payments to us in installments. However, there can be no assurance that such orders will not be cancelled, delayed or reduced, or that our customers will perform in full their payment and other obligations in accordance with the sales contracts. Adverse conditions in current global financial markets or other factors beyond our control, or the control of our customers, may cause our customers to delay, postpone or cancel their wind farm projects whether as a result of delays or failures to obtain necessary permits, authorizations, permissions, or as a result of other difficulties or obstructions. We have experienced in the past delays and postponements in delivery schedules in limited cases as a result of delays or postponements in our customers’ wind farm projects or delays by suppliers of our components and we cannot assure you that similar delays and postponements or even cancellations will not occur in the future.

A certain portion of our wind turbine sales contracts do not specify the delivery schedule, and our customers have discretion to decide the timing of delivery. In addition, under many of our sales contracts, including our sales contracts with China Datang, our largest customer as measured by revenue recognized in 2009, our customers have the right to cancel, at any time and at their discretion upon one-month prior written notice, orders for the wind turbines that have not already been assembled and not readied for delivery by the end of the notice period, provided that the customers compensate us for a portion of the cancelled units at a mutually agreed amount or purchase certain additional remaining units under such sales contract at the contract price. Due to the nature of the wind turbine business and common practice in the wind power industry in China, wind farm operators usually are in a stronger bargaining position than turbine suppliers and consequently in most cases the terms and conditions of wind turbine sales contracts used in this industry in China are generally favorable to wind farm operators. As we negotiate the terms in sales contracts with our customers on a project-by-project basis, we cannot predict for which projects the customers will have the right to cancel orders. Except for a postponement by an affiliate of GreenHunter Inc. of the delivery of two units of wind turbines under a purchase order in 2008 due to the worsening of its financial condition as a result of the global financial crisis, we have not experienced any other cancellation or postponement since our inception. However, we cannot assure you that customers will not exercise the right to cancel all or part of purchase orders in the future. Furthermore, most of our sales contracts do not provide for additional penalties for failures to purchase or delays caused by our customers, and even if the contracts provide for such penalties, the full value of the sales contracts may not be recoverable. Accordingly, our order book is not a guarantee of our future revenues, but, rather, it represents business that is considered likely to be engaged. In addition, we may need to order special components in connection with certain wind turbine sales contracts, and in the event such wind turbine sales contracts are delayed or cancelled in the future, our inventory level may be higher than planned, and we may need to absorb the cost for the already purchased components.

If we fail to deliver wind turbines on time, we may be required to pay penalties and our orders may be cancelled and our results of operations may be negatively affected.

We are required to deliver wind turbines according to the delivery schedules set out in the sales contracts or as we and the respective customers may otherwise agree. If we fail to deliver our wind turbines on time, we may

 

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be required to pay a penalty for each week of such delay, calculated as a percentage of the total contract value, which percentage increases together with the length of the delay. Our customers can deduct such penalty amounts from their payments to us. Our customers also have the right to cancel part or all of orders in the event of significant delays as a result of our fault. In 2009, we made a payment in the total amount of RMB7.2 million (US$1.1 million), representing approximately 2.4% of the total value of that particular sales contract, to a customer as payment for the additional installation costs incurred by it due to our delay in the delivery of 11 units of wind turbines for approximately three months as a result of the delay in the supply of one key component by an overseas supplier. We may fail to deliver our wind turbines on time again in the future due to delays in supply of raw materials or components, limitation in production capacity or any other reasons that may be beyond our control and we may not be able to seek compensation from suppliers or other parties. If such delays occur, we may incur penalties, customers may cancel their orders, and our financial condition, results of operations and our reputation may be materially and adversely affected.

Our high customer concentration exposes us to all of the risks faced by our major customers and may subject us to significant fluctuations or declines in revenue.

We currently derive a substantial portion of our sales from a limited number of customers, which are primarily Chinese national or regional large electric power producers, including the five largest state-owned power producers. We recognized revenues in connection with sales of wind turbines to two of our end customers in the year ended December 31, 2008, one of whom, namely CPIC, contributed approximately 90% of our total revenues for that year. We recognized revenues in connection with sales of wind turbines to five end customers in the year ended December 31, 2009, the top three of which, namely China Datang, Guangdong Yudean Group Co., Ltd., or Yudean, and Beijing Energy Investment Holding Co., Ltd., or Beijing Energy, together with their respective affiliates, contributed 41.1%, 22.2% and 20.3%, respectively, of our total revenues and in the aggregate 83.6% of our total revenues for the year. Our largest customer in terms of the units of wind turbines delivered and revenue recognized, China Datang, contributed 51.6% of our total revenue in the first six months of 2010. Since our inception in June 2006 through June 30, 2010, we secured contracts for 1,776 units of wind turbines from 14 end customers. Of these 1,776 units of wind turbines contracted, 79.0% were from our three largest customers as measured by the units of wind turbines delivered, namely China Datang, Huaneng and Huadian. In particular, China Datang, together with its affiliates, accounted for 451 units of wind turbines delivered. 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. Dependence on a few customers will continue to make it difficult for us to satisfactorily negotiate attractive prices for our products and will continue to expose us to the risks of substantial losses if a single, dominant customer stops conducting business with us. Specifically, any one of the following events, among others, may cause material fluctuations or declines in our revenues and have a material and adverse effect on our financial condition, results of operations and prospects:

 

   

reduction of the number or in the price of wind turbines purchased from us by one or more of our significant customers and our failure to identify additional or replacement customers;

 

   

reduction, delay or cancellation of wind farm projects to be or being developed by our customers, due to intense competition in the wind power industry, general decline in the economy or otherwise, which could lead to a decline in wind turbines purchased by our customers;

 

   

the decision by one or more of our significant customers to select one or more of our competitors to supply wind turbines;

 

   

loss of one or more of our significant customers and our failure to obtain additional or replacement customers that can replace the lost sales volume at satisfactory pricing or other terms; or

 

   

the failure or inability of any of our significant customers to make timely payment for our products and services.

 

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These factors may result in a lack of certainty and predictability about our sales, which may fluctuate unpredictably depending on customer demand and orders. We anticipate that our dependence on a limited number of customers will continue for the foreseeable future. We do not enter into long-term contracts with our customers, but instead, enter into wind turbine sales contracts for particular wind farm projects. As a result, we are subject to the negotiation of pricing and other terms on a project-by-project basis. Therefore, the contract selling prices that we are able to agree on with our customers are subject to fluctuation and uncertainty.

We cannot assure you that our customer relationships will continue to improve or if these customers will continue to generate significant revenues for us in the future. Any failure to maintain our existing customer relationships or to expand our existing customer base will materially and adversely affect our results of operations.

In addition, a significant portion of our outstanding trade receivables is derived from sales to a limited number of customers. Our largest and the second largest trade receivable balance were due to us from Datang Jilin Ruifeng Power Co., Ltd. and Jilin CPIC New Energy Co., Ltd., affiliates of China Datang and CPIC, respectively, in the amount of RMB452.0 million and RMB190.4 million, respectively, representing 29.0% and 12.2%, respectively, of the total trade receivables as of June 30, 2010. The failure of any of these customers to meet their payment obligations would materially and adversely affect our financial position, liquidity and results of operations.

Our research and development efforts may not result in successful new products, and market acceptance and profitability of the new products are uncertain.

Our future success highly depends on our ability to keep pace with the rapid technological changes in the wind power equipment industry. In order to maintain and enhance our competitive position that we currently enjoy and to continue to grow our business, we need to design, develop and market new and more cost-efficient wind turbines and introduce new products to meet growing market demands and changing technical standards. The development of new wind turbine models requires considerable investment and our significant expenditures on research and development may not yield as much benefit as we anticipate. Our research and development expenses accounted for approximately 9.6%, 4.5% and 1.0% of our total revenues in 2008 and 2009 and in the first six months of 2010, respectively. We expect to spend a significant portion of our revenues on research and development and to commit significant investments in product development personnel over the next few years. However, research and development activities are inherently uncertain, and the success of our new products will depend on a number of factors, including product quality, competition, customer acceptance, price, general market conditions, government incentives, our ability to integrate customer feedback into our new products, our ability to accurately assess technological trends and customer needs and the strength of our marketing and distribution capabilities. For example, under a mutual agreement with aerodyn Asia Co., Ltd., or aerodyn Asia, an affiliate of aerodyn Energiesysteme GmbH, or aerodyn Energiesysteme, we rescheduled the commencement of the cooperative activities for 6.0MW SCD technologies from February 2009 to January 2010 due to market conditions. We cannot assure you that similar delays and postponement will not reoccur in the future.

Further, our competitors may adopt more advanced technologies or develop products that are more effective or commercially attractive at an even lower cost than we do. For instance, according to the report of Detailed Introduction of Chinese Wind Power Sector and Wind Turbine Manufacturers prepared by BTM, Xinjiang Goldwind Science and Technology Co., Ltd., or Goldwind, a major domestic wind turbine manufacturer, licensed its direct drive technology from a German company for the manufacture of 1.5MW wind turbines that are not equipped with gearboxes. Guodian United Power Technology Company Ltd., another domestic wind turbine manufacturer, also jointly designed its 1.5MW wind turbines with aerodyn Energiesysteme. If our competitors’ products are more effective or commercially attractive than ours, sales of our products may be negatively impacted, which could have a material and adverse effect on our financial position and results of operations.

 

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Our business prospects highly depend on the acceptance and marketability of our new wind turbines utilizing the SCD technology, or the SCD wind turbines.

We have obtained exclusive license rights from aerodyn Asia to manufacture and distribute wind turbines utilizing its advanced SCD technology in China, namely SCD wind turbines, with a rated power capacity ranging from 2.5MW to 3.0MW, or the 2.5/3.0MW SCD wind turbines, and a rated power capacity of 6.0MW, or the 6.0MW SCD wind turbines. The SCD technology is a new technology, and we are not aware of any commercially available wind turbines utilizing such technology in China. While we have completed the 2.5/3.0MW SCD wind turbine prototype in May 2010, we may be unable to timely commence commercial production of our SCD wind turbines, and the SCD wind turbines may perform below expectations. In addition, we may not be able to generate sufficient customer demand and the level of acceptance of the SCD technology by our customers is uncertain. Under our license agreement with aerodyn Asia, we are obliged to pay an advance minimum annual royalty payment for the 2.5/3.0MW and 6.0MW SCD wind turbines we sell during the first three years after the commencement of commercial production of the respective series of SCD wind turbines. These advance amounts will not be refunded. As such, if we cannot generate sufficient market demand for our SCD wind turbines, we may be obliged to make payments to aerodyn Asia even if we do not generate any income from the sales of our SCD wind turbines.

Our SCD wind turbines may be used for offshore applications, which pose unique design, installation and post-sale servicing challenges compared to our onshore models. However, due to the fact that our SCD wind turbines are based on a new technology and that the long-term reliability of such technology has not been proven, it is uncertain whether our SCD wind turbines can be installed on offshore wind farms and will perform as designed. It has not been proven whether the special surface treatment and design of our SCD wind turbines are adequate for the erosive and salty environments that are typical of off-shore wind farms. The installation and maintenance of offshore wind turbines are expected to be more difficult, labor intensive and costly. For example, we intend to install our 6.0MW SCD wind turbines farther offshore than 2.5MW SCD wind turbines to take advantage of stronger and steadier winds found at sea. This requires implementing advanced technologies and incurring additional material and labor costs relating to the construction of platforms that are stable enough to support the weight of the wind turbines and withstand severe weather conditions and strong wave forces under the water. Furthermore, additional costs for transporting raw materials and components during construction as well as maintenance staff to regularly access those offshore wind farms throughout the wind farm operation cycle may not be economically feasible. The operation and maintenance of offshore wind turbines may also be significantly affected by marine weather and water conditions. In addition, it is vital that the wind turbines used in offshore wind farms are reliable in order to minimize maintenance cost.

Moreover, the development of offshore wind turbines and their key components is still in the early stage in China, where wind farm operators have limited operating experience with offshore sites. Offshore wind farms may not be economically sustainable. For example, the cost of building the platforms, placing electric wires underwater and establishing grid connection for offshore wind farms is substantially higher, as compared to that of the on-shore wind farms. Consequently, the development of offshore wind farms may progress more slowly than expected, which will materially and negatively impact the offshore segment of the wind turbine industry, which, in turn, may adversely affect the demand for our SCD wind turbines.

If we are unable to maintain a satisfactory relationship with aerodyn, our business may suffer.

We co-designed and co-developed our 1.5MW wind turbines with aerodyn Energiesysteme after we received relevant technical documents and drawings with respect to their turbine manufacturing technologies from Mingyang Electrical, which initially obtained them from aerodyn Energiesysteme. We also use aerodyn Energiesysteme’s rotor blade technologies to manufacture rotor blades of our 1.5MW wind turbines. We have obtained exclusive license rights from aerodyn Asia under a license agreement to manufacture and distribute 2.5/3.0MW SCD wind turbines and 6.0MW SCD wind turbines in China. Our rights to distribute 2.5/3.0MW SCD wind turbines and 6.0MW SCD wind turbines on an exclusive basis will expire on January 1, 2016 and

 

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January 1, 2019, respectively. If we are unable to maintain a satisfactory relationship with aerodyn or if aerodyn establishes similar or more favorable relationships with our competitors, whether or not in violation of its contractual arrangements with us, our operating results and our business would be harmed. We cannot assure you that aerodyn will not terminate the existing license agreements to our disadvantage or that it will grant us additional licenses for any new products it may develop in the future. Under our license agreement with areodyn Asia, we are prohibited from granting sublicenses to affiliated entities, entering into joint ventures or similar partnerships or contracting subsidiaries other than Guangdong Mingyang to manufacture either the rotor blades or the SCD wind turbines without aerodyn Asia’s consent. Any deterioration of our relationship with aerodyn could harm our business operation and the growth of our business.

Problems with quality or performance in our products as well as product liability claims could result in negative impact on our relationships with customers and our reputation and cause reduced market demand for our products.

We perform a functionality test on our wind turbines after the installation work has been completed in order to test the performance of our wind turbines to make sure they meet all of the specific acceptance criteria of our customers. The completion of the functionality test after the installation indicates that our wind turbines have been commissioned. A durability test, which typically lasts 240 hours but may be as long as 360 or 500 hours on a case-by-case basis upon customers’ request, is subsequently performed to ensure proper and stable connection of our wind turbines to power grids. The warranty period of our wind turbines commences after they pass the durability test. At the early stage of our operation in the past, some of our customers had reported recurring overheating of the nacelle (which refers to the compartment of a wind turbine that houses the gearbox, main shafts, electrical control unit, nacelle level electrical control cabinet, generator and other electrical and mechanical components), gearbox oil leakage and longer than expected pre-heating time during the process of commissioning which we believe are common problems of wind turbines manufactured in China. Although we solved such reported problems in a timely manner, we cannot assure you that it will not occur in the future and if it happens, such problems may have a material and adverse effect on our results of operation.

The performance and operational reliability of the wind turbines we manufacture in the medium- and long-term are uncertain. Although wind turbines are generally designed for a 20-year life cycle, we cannot assure you of the operational life of our wind turbines or about their medium- to long-term performance and operational reliability. We also provide warranty for our wind turbines after the wind turbines have passed the durability test. For details on our warranty, see “Our Business—Our Operations—Distribution, Warranty and Maintenance Support Services.” We are generally obligated to pay a monetary damage of up to 10% of the purchase price of the wind turbine in the case of non-performance or underperformance. Customers can also choose to replace the wind turbines if the annual power output of our wind turbines does not exceed certain designed power output after extensive verification.

Problems with the quality or performance of the wind turbines we manufacture also expose us to potential product liability claims. While we have not yet experienced any significant product liability claims, as a result of our limited operating history, we cannot predict whether product liability claims will be brought against us in the future or the impact of any resulting negative publicity on our business. Any product liability claims or regulatory actions related to problems in the quality or performance of our products could be costly and time-consuming to defend. The successful assertion of product liability claims against us could result in potentially significant damages and require us to make significant payments. We currently do not maintain product liability insurance to cover potential bodily injury or property damages arising from the operations of our products and may be unable to obtain sufficient product liability insurance coverage on commercially reasonable terms, or at all. Moreover, any product liability claim, with or without merit, could result in significant negative publicity and materially and adversely affect the marketability of our products and our reputation. Additionally, a material design, manufacturing or quality failure or defect in our products or other safety issues could warrant a product recall by us and result in increased product liability claims. If the authorities in the jurisdictions where we sell our

 

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products decide that these products failed to comply with applicable quality and safety requirements, we also could be subject to regulatory actions.

Any defect, underperformance or problem of our wind turbines or any perception that our products may contain errors or defects, or any product liability claims related to such errors or defects, may adversely impact our customer relationships and harm our reputation and credibility, resulting in a reduced market demand for our wind turbines, decrease in our revenues, increase in our expenses and loss of market share.

If we are unable to remediate the material weaknesses and significant deficiencies in our internal control over financial reporting, we may be unable to issue accurate financial reports timely and prevent fraud, and investors could lose confidence in the reliability of our financial statements, which in turn could negatively impact the price of our ADSs, or otherwise harm our reputation.

During the course of the preparation and external audit of our financial statements as of December 31, 2008 and 2009 and for each of the years in the three-year period ended December 31, 2009, we and our independent registered public accounting firm identified several control deficiencies in our internal control over financial reporting, including a number of material weaknesses and significant deficiencies. The independent internal control compliance advisor we engaged also identified similar material weaknesses and significant deficiencies.

A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements in financial reporting on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the ability to initiate, authorize, record, process or report external financial data reliably in accordance with IFRS such that there is more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected.

Material weaknesses identified by our independent registered public accounting firm and our internal control compliance advisor include:

 

   

an insufficient number of personnel with the appropriate level of accounting knowledge, experience and training in the application of IFRS and compliance with the SEC reporting requirements;

 

   

inadequate procedures related to the identification, approval and documentation of related party transactions;

 

   

a lack of formal controls and procedures to ensure that transactions are recorded on the accrual basis of accounting; and

 

   

a lack of formal procedures for (i) regularly reviewing and approving inventories provision and (ii) systematically carrying out, and documenting the results of the inventory count.

We have begun taking actions and measures to improve our internal control over financial reporting in order to obtain reasonable assurance regarding the reliability of our financial statements. However, we have not yet implemented all of these actions and measures and tested them. Furthermore, we cannot assure you if or when we will be able to remedy these control deficiencies, that our independent registered public accounting firm will agree with our assessment, or that additional material weaknesses or significant deficiencies in our internal control over financial reporting will not be identified in the future. If the control deficiencies we have identified recur, or if we identify additional deficiencies or fail to implement new or improved controls successfully in a timely manner, we may be unable to issue timely and accurate financial reports and investors could lose confidence in the reliability of our financial statements, which in turn could negatively impact the trading price of our ADSs, or otherwise harm our reputation.

 

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Under current and proposed rules and regulations implementing Section 404 of the U.S. Sarbanes-Oxley Act of 2002, or SOX 404, we expect to be required to, beginning with the fiscal year ending December 31, 2011, deliver a report that assesses the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm will be required to audit and report on the effectiveness of our internal control over financial reporting. We have a substantial effort ahead of us to complete the documentation and testing of our internal control over financial reporting and to remediate any material weaknesses and significant deficiencies identified during that process. We may not be able to complete the required management assessment by our reporting deadline. An inability to complete this assessment in a timely manner or at all would result in receiving something other than an unqualified report from our independent registered public accounting firm with respect to our assessment of internal control over financial reporting. In addition, if material weaknesses or significant deficiencies are identified and not remediated, we would not be able to conclude that our internal control over financial reporting was effective, which would result in the inability of our independent registered public accounting firm to deliver an unqualified report on the effectiveness of our internal control over financial reporting. Inferior internal control over financial reporting could cause investors to lose confidence in the reliability of our financial statements, and such conclusion could negatively impact the trading price of our ADSs or otherwise harm our reputation.

Any delay in revenue recognition may materially and adversely impact our results of operations.

We recognize revenue attributable to the sale of the wind turbines after the wind turbines have been commissioned. The amounts that have been billed by us for the wind turbines that were delivered but not commissioned are recorded as deferred revenue until the wind turbines have been commissioned successfully. It generally takes up to approximately five months for the wind turbines we manufacture for a particular wind farm, which usually amount to 33 units, to be commissioned successfully after they are delivered. However, the length of this period is subject to many factors out of our control, such as on-site weather conditions and the availability of power grids. In addition, a portion of the contract price is attributable to the technical support and maintenance services and is normally recognized over a period of two to five years after the wind turbines pass the durability test. If the operation of a wind turbine is interrupted for a relatively long period of time by any maintenance or repair activities which are proven to be our fault, the warranty period with respect to such wind turbine may be extended for the period of interruption. The period over which we recognize our technical support and maintenance services revenue may be extended. If there are material delays in the revenue recognition, our results of operations may be materially and adversely affected.

We may experience difficulty in collecting trade receivables from our customers and our liquidity and financial condition and results of operations would be negatively impacted.

We derive our revenues from the sale of products and technical and maintenance support services to our customers and are subject to counterparty risks. Due to the high unit prices of our wind turbines, we usually maintain a high trade receivable balance, and our trade receivables are collected over a long period, in accordance with industry practice and contract negotiations.

As of December 31, 2008 and 2009 and as of June 30, 2010, our trade receivable balance, including trade receivables from Mingyang Electrical, was RMB335.5 million, RMB1,544.2 million (US$227.7 million) and RMB1,557.1 million (US$229.6 million), respectively. The average turnover days of our trade receivables were 118 days, 110 days and 93 days for 2008 and 2009 and for the first six months of 2010, respectively. Allowance against trade receivables to the extent amounts are considered to be uncollectible or unlikely to be collected within a reasonable period of time vary depending on the customer’s financial condition, the amount of receivables in dispute, the current receivables aging and current payment patterns as well as overall market conditions and historical losses. We will only deem trade receivables uncollectible after careful consideration and after having attempted to collect such trade receivables from our customers. Although we have been improving our trade receivable balance by providing additional payment options to customers, including discounts for early settlement, we expect neither the collectability nor the age of our receivables to improve significantly in the

 

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foreseeable future. In addition, we cannot assure you that our customers will meet the payment obligations on time or in full or that the level of bad debts will not increase. Any inability on the part of our customers to settle amounts owed to us on time may have a material and adverse effect on us. As our business continues to expand and current industry payment and collection practices as well as our own billing practices remain the same, we may be expected to maintain high trade receivable balances, which could negatively affect our cash flows, particularly our short-term cash flows. If the age of our receivables increases, our exposure to the credit risk of our customers would increase as well. If we incur bad debt expenses as a result, our results of operations would be negatively impacted.

In addition, our customers make payments in installments after they have signed the sales contracts with us. This is a typical arrangement in China’s wind power equipment industry as necessitated by the substantial capital investment requirement in connection with wind farm projects. If we do not offer this arrangement, we could lose our customers and be unable to sustain our future business growth. For specifics on our payment arrangement, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” This installment arrangement exposes us to additional business and credit risk and uncertainty, in particular, the risk of default or delay by customers in payment under the wind turbine sales contracts. Such risks may become more prominent in an economic slowdown or recession, which may result in increased delinquencies, foreclosures and losses. Our litigation and servicing costs may also increase as a result. Our inability to collect payments from our customers in a timely and sufficient manner may adversely affect our liquidity, financial condition and results of operations.

We may be unable to receive compensation from suppliers for defective raw materials or components used in our wind turbines and warranty provisions in our supply contracts may be insufficient.

In the event that we become subject to product liability or warranty claims caused by defective raw materials or components from third-party suppliers, we can attempt to seek compensation from the relevant suppliers. However, warranties provided by suppliers may be for periods shorter than the warranty periods we provide to our customers and warranty claims against suppliers may be subject to certain conditions precedent which may not be satisfied. Further, our supply contracts usually do not have provisions to cover lost profits and indirect or consequential losses. If no claim can be asserted against a supplier, or amounts that we claim cannot be recovered from the supplier, to the extent that such amounts cannot be covered by insurance coverage, if any, we may be required to bear customer claims or replace the wind turbines or components at our own costs. Our business, financial condition and results of operations could be materially and adversely affected.

We may not be able to protect our patents and other intellectual property rights, or we may be subject to claims for the infringement of intellectual property rights of others.

As of June 30, 2010, we had one copyright and 18 patents and had 16 patent applications pending in China, of which six were granted initial approval. Our success depends in part on our ability to obtain and maintain patents and other intellectual property protection for our products and technologies and our ability to successfully protect such intellectual properties and to defend ourselves against third-party challenges. We cannot assure you, however, the protection measures we currently implement are adequate to enforce such protection efficiently or to prevent any unauthorized use of our intellectual property by third parties, nor can we assure you that our competitors will not independently develop or license from third parties the technologies that are equivalent or superior to our technologies, in which case we would not be able to gain or keep our competitive advantage.

Our success also depends largely on our ability to develop and use our technology and know-how through cooperation with our technology partners without infringing the intellectual property rights of third parties as well as our ability to use the technology we license from our technology partners. However, we cannot assure you that our technology partners actually have the requisite intellectual property rights, nor can we assure you that they have not infringed other third parties’ patents, trade secrets, know-how or other intellectual property rights. We have obtained exclusive license rights from aerodyn Asia to manufacture and distribute wind turbines

 

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by using its SCD technologies in China. We have non-exclusive rights transferred from Mingyang Electrical to use aerodyn Energiesysteme’s blade technologies for our 1.5MW wind turbines. Our technology partners including aerodyn may license their relevant technologies to our competitors or other third parties. To the extent these technologies provide us any competitive advantage, such licenses to competitors may allow them to compete against us more effectively. In addition, our competitors may have greater resources and may develop advanced technologies or processes based on these licensed intellectual property rights. If our current licenses with our technology partners are terminated, there can be no assurance that we will be able to independently develop equivalent technology successfully or obtain licenses for alternative technologies, or that we will be able to redesign our production lines to eliminate the need for such a license.

On the other hand, the existence of an intellectual property right may not necessarily protect us from competition, as it may be challenged, invalidated or held to be unenforceable. Competitors may successfully challenge our patents, produce similar products that do not infringe our patents or produce products in countries that do not recognize our patents. Our patent priority in the PRC may be defeated by third-party patents issued on a later date if the applications for such patents were filed before us. Additionally, the existence of a patent does not provide assurance that the manufacturing, sale or use of our products does not infringe others’ patent rights. Third parties may also have blocking patents that could be used to prevent us from marketing our own patented products or utilizing our patented technologies or processes. As it may take years for patent applications to be approved, there may be pending applications, known or unknown to us, that may later result in issued patents upon which we may infringe on. Therefore, we may initiate lawsuits to defend our ownership or proprietary design of our products and trade secrets, or we may also encounter future litigation brought by third parties based on claims that we have infringed upon the intellectual property rights of others or that we have misappropriated the trade secrets of others, either of which will be time-consuming and costly to defend. We cannot assure you that we can achieve a favorable outcome in the litigation, if a claim is asserted. If we are unable to sufficiently protect our patents, trademarks and other intellectual property rights, or successfully defend ourselves from infringement claims, our reputation, financial condition and results of operation may be materially and adversely affected.

We rely on a limited number of key suppliers, and we are subject to risks associated with availability and volatility in the prices of raw materials, components and utilities.

Although we typically have multiple suppliers for each raw material or component, we place a substantial percentage of our orders as measured by cost with a limited number of key suppliers. For example, in 2009, we purchased approximately 40% of our components from our five largest suppliers, as measured by cost, and approximately 10% of our components from our largest supplier, namely Nanjing High Speed & Acurrate Gear Group Co., Ltd., or Nanjing High Speed. With limited exceptions, we do not have long-term supply contracts with our suppliers. Instead, we typically place orders with our suppliers after we secure our wind turbine sales contracts. As such, an increase in demand for our raw materials and components in the future may result in the interruption or delay in the supply of our raw materials and components, which may adversely affect our ability to meet market demand for our products or expand our business as planned. We cannot assure you that such delays will not occur in the future.

Moreover, we may be subject to significant fluctuation in the prices of our raw materials and components, which may increase our operating costs if we are unable to fully pass along such increase to our customers. If we are unable to effectively control our manufacturing costs, in particular, the costs of raw materials and components of our wind turbines, we may not be able to maintain our competitiveness and achieve profitability. Certain components are manufactured or customized for us. If we are unable to secure alternative supply sources in a timely and cost-effective manner or without a reduction in quality, this may harm our reputation, reduce our sales or gross margins, and cause us to lose market share. We have in the past experienced delays in the supply of gearboxes from one of our overseas suppliers, which caused a three-month delay in the delivery of our wind turbines and consequent compensation payments in the amount of RMB7.2 million (US$1.1 million), representing approximately 2.4% of the total value of that sales contract, to the affected customer in 2009.

 

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We may from time to time purchase certain of our key components from overseas suppliers upon requests from our customers. We may also need to source components for our SCD wind turbines from overseas suppliers in the future if such components are not widely available in China. As we import components, we may be required to devote additional effort and time and incur additional transportation costs. If certain of our overseas suppliers fail to deliver the components we purchase in a timely manner, we may have difficulty or incur higher costs identifying replacement suppliers, or we may suffer from reduced product availability, which will further harm our operating results.

We may fail to compete effectively in the wind power equipment industry and may be unable to increase or maintain our market share.

The wind power equipment industry is highly competitive, especially in China. Factors affecting our competitive position include performance of our wind turbines, reliability, product quality, technology, price and the scope and quality of our technical and maintenance support services. Since our inception, we have spent considerable resources on the designing, manufacturing and marketing of wind turbines. However, some of our competitors may have greater brand recognition, greater resources and larger customer bases than we do, and new competitors may also emerge and rapidly acquire significant market share. Most of our existing or prospective customers are large state-owned national and regional electric power producers, some of which may leverage their financial and technological advantage to develop and manufacture wind turbines themselves and become our competitors. Furthermore, we expect increasing competition from overseas manufacturers which are expanding or may expand their presence in China, particularly given the cancellation of certain governmental policies supporting domestic manufacturers. For example, the National Development and Reform Commission, or the NDRC, policy requiring at least 70% of all equipment used in a single wind farm project be manufactured in China was terminated in December 2009. Growing competition may result in a decline in our market share or may force us to reduce the prices of our products and technical and maintenance support services, which will negatively affect our revenues and margins. We cannot provide any assurance that we will be able to compete successfully against our competitors.

Our cooperative framework agreements with local governmental authorities and wind farm operators may not be enforceable under PRC law and our business, financial condition, results of operations and prospects may be materially and adversely affected if these agreements are not performed as intended.

In April 2008, we entered into a cooperative agreement with one of our then joint venture partners and a local governmental authority in Jilin, Jilin Province. In December 2008 and June 2009, we entered into framework agreements with wind farm operators and certain local governmental authorities in Fuxin, Liaoning Province and Rudong, Jiangsu Province, respectively. Under these agreements, we agreed to invest and establish facilities in these regions, in exchange for which, we obtained land and other policy incentives from local governments and these wind farm operators agreed to purchase our wind turbines with the first priority. King & Wood PRC Lawyers, our PRC counsel, has advised us that the local governments may not have the authority or power to provide us with the tax, land and other policy incentives and that the obligations of the local governments to provide us with tax, land and other policy incentives and the obligations of the wind farm operators to purchase our wind turbines may not be enforceable under PRC law as the performance of these obligations may violate rules and regulations of the PRC government, including the Opinions on Curtailing Over-capacity and Excessive Construction in Certain Industries and Guiding the Healthy Development of Such Industries jointly issued by the NDRC and nine other government authorities in September 2009, or the NDRC Opinions, which aims to curb the over-development and investment in industry sectors, including steel, concrete, polysilicon and wind power equipment. Under the NDRC Opinions, among other things, the requirement imposed by local authorities during the bidding process to use locally manufactured wind power equipment or to build wind power equipment production capacity locally is strictly prohibited.

We cannot assure you that those framework agreements we have entered into are enforceable at all and our capital commitments contemplated under these agreements to build factories in the local regions will generate

 

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anticipated returns, or that any performance of the local governments or wind farm operators of their respective obligations under these agreements, if any, would not cause unintended negative consequences as a result of potential conflicts with other responsibilities or obligations these local governments or wind farm operators ought to perform.

Failure to maintain inventory levels that approximate the demands for our products could cause us to lose sales or result in excessive inventory.

We schedule the procurement of raw materials and components, manufacturing and assembly activities and arrangement of logistics for delivery of our wind turbines primarily on the basis of wind turbine orders and adjust monthly upon actual production and delivery progress. Although we have not experienced material delays in our supply since our inception, estimates are inherently uncertain and our customers may cancel or delay their orders under the turbine sales contracts. We cannot assure you that our scheduled manufacturing and assembly activities approximate actual customer delivery needs. If our scheduled manufacturing and assembly is not able to meet the actual delivery needs, we may not be able to maintain an adequate inventory level for our wind turbines and may lose sales and market share to our competitors. In addition, even if we are able to increase our manufacturing and assembly levels to meet unanticipated demands, we may experience significant lead-time for turbine delivery or may not have procured adequate raw materials or components to manufacture the wind turbines. On the other hand, we may also be exposed to increased inventory risks as we may accumulate excess inventory of our products or raw materials or components for our wind turbines resulting from the cancellation of wind turbine sales contracts by our customers. Therefore, our failure to maintain an inventory level that approximates the demands for our wind turbines could have a material and adverse effect on our business, financial condition and results of operations.

If we fail to significantly expand our production capacity and output, we may lose market share.

Our future success depends on our ability to significantly increase our production capacity and output. If we are unable to do so, we may be unable to meet customer needs and market demand, benefit from economies of scale to decrease our costs per wind turbine, apply capital efficiently, maintain our competitive position and improve our profitability. Our ability to increase our production capacity and output is subject to significant risks and uncertainties, including:

 

   

the need to raise significant additional funds to purchase additional production equipment or to build additional factories, which we may be unable to obtain on commercially viable terms or at all;

 

   

failure or inability to acquire necessary land use rights at suitable locations or otherwise secure locations within geographic proximity to regions with abundant wind resources;

 

   

cost overruns and delays as a result of a number of factors, many of which are beyond our control, such as problems with equipment delivery;

 

   

delays or denial of required approvals by relevant government authorities;

 

   

failure to obtain production inputs in sufficient quantities or at acceptable cost; and

 

   

failure to execute our expansion plan effectively, including insufficient managerial capacity or failure to obtain adequate resources, such as land or buildings that are suitable for our manufacturing facilities.

As we expand our production capacity, our choice of locations for new factories or decision to expand existing factories may become less advantageous to our business, economically or otherwise, due to changes in the market conditions, local government policies, changes in wind conditions or other factors that may be beyond our control. We may need to halt the construction or to delay the commencement of production and may be unable to recover any costs that we may have already spent. At times, we may also need to relocate one or more of our factories to other locations, which will increase our operational costs and cause interruption to our production. For example, we delayed the commencement of wind turbine production at our new Tianjin facilities

 

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from early 2010 to the end of October 2010 as we decided to fill additional customer orders using our existing manufacturing facility in Jilin which has sufficient manufacturing capacity and was located closer to such customers.

Inability of our customers to obtain financing for wind farm projects may have a significant adverse influence on our business, financial condition and results of operations.

Most of our customers require bank financing for wind farm projects and therefore the financing terms available in the market have a significant influence on the demand for our wind turbines. Higher level of interest rate causes wind farm projects to become more costly and less attractive. The ability to obtain financing for a wind farm project also depends on the willingness of banks and other financing institutions to provide loans to the wind power industry. In particular, the global capital and credit markets have been experiencing volatility and disruption since early 2008. Concerns over inflation or deflation, energy costs, geopolitical issues, the availability and cost of credit, the mortgage market and a declining residential real estate market in the United States and elsewhere in the world have contributed to market volatility and diminished expectations for the global economy and the capital markets in the future. These factors led to an economic slowdown and may cause difficulties for certain of our customers to access adequate funding to pay for wind turbines they have ordered in a timely manner. Although the global economy has experienced increased growth in recent periods, renewed concerns about the sustainability of economic recovery may cause our customers to delay or cancel their investments in wind farm projects and financial institutions may implement more stringent procedures to approve and grant credit facilities or other financial supports.

If we are unable to effectively identify and capture international market opportunities or if we fail to market, sell and provide technical and maintenance support services for our products in overseas markets, our business prospects may be affected.

We intend to expand into selected major overseas wind power markets. To market, sell, deliver and install our wind turbines and provide technical and maintenance support services internationally may expose us to a number of risks, including:

 

   

fluctuations in currency foreign exchange rates;

 

   

difficulties in engaging and retaining distributors or direct sales force who are knowledgeable about, and capable to function effectively in, overseas markets;

 

   

increased operating costs associated with maintaining marketing and sales efforts in various countries and regions;

 

   

increased operating costs associated with transporting our products and the provision of technical and maintenance support services internationally;

 

   

difficulty and cost relating to compliance with different commercial and legal requirements of the overseas markets in which we intend to offer our products and services, including but not limited to any permits, licenses, registrations or certificates that may be required in those markets;

 

   

inability to obtain, maintain or enforce intellectual property rights; and

 

   

trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make us less competitive in some countries and regions.

As we have limited experience and resources operating in the international market, we may be unable to efficiently expand our business abroad as we have planned. In addition, our exclusive license rights from aerodyn Asia to manufacture and distribute our 2.5/3.0MW and 6.0MW SCD wind turbines is limited to China and, as such, our ability to expand in overseas markets depends on our ability to obtain additional licenses from aerodyn Asia. We are in the process of negotiating with aerodyn Asia to extend our license to other territories, including

 

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in the United States. However, we cannot assure you that we will be able to obtain such additional licenses within a reasonable timeframe or at reasonable costs, if at all.

Our success depends substantially on the continuing efforts of our executive management team and other key personnel, and losing their services would severely disrupt our business and materially and adversely impact our results of operations.

Our future success depends substantially on the continuing services of our senior management team, in particular, Mr. Chuanwei Zhang, our chairman and chief executive officer, who founded Mingyang Electrical and us. Mr. Zhang has approximately 20 years of relevant experience in the electrical equipment sector and the wind power equipment industry and works on a full-time basis for our company. We also rely on the continuing services of Mr. Xian Wang, one of our founders and senior vice president, Mr. Song Wang, one of our founders and senior vice president who has over 20 years of research and industry experience, Mr. Jiawan Cheng, our vice president in charge of engineering and services who is a wind power expert with over 20 years of experience in procurement, five of which were spent in the wind power equipment industry. If one or more of our senior executives or other key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, and our business may be disrupted and our financial condition and results of operations may be materially and adversely affected.

We do not maintain key-man insurance for members of our management team or any of our other key personnel. If we lose the services of any senior management and key personnel, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt our business and prospects. In addition, if any of our senior management or any of our other key personnel joins a competitor or forms a competing company, we may lose some of our customers and trade secrets. While we protect our trade secrets by entering into non-disclosure/confidentiality and non-competition agreements with each of our executive officers as well as key personnel who have access to sensitive and confidential information, we cannot assure you that, in light of uncertainties associated with the PRC legal system, these agreements could be enforced in China.

Our business depends on our ability to maintain a skilled labor force, and our business may be adversely disrupted if we fail to continue to attract, train and retain our highly qualified technical personnel.

Our success depends, to a significant extent, on our ability to attract, train and retain our technical experts, research and development personnel, engineers, post-sales services personnel and sales and marketing personnel. In particular, Mr. Song Wang and Mr. Jiawan Cheng are two of the ten recognized experts in China’s wind power industry. Dr. Renjing Cao, our chief technology officer, is an award-winning scholar in the field of turbine design and Mr. Wenqi Wang, our special consultant and a wind power equipment specialist in China with more than 20 years of industry experience, provided valuable services in leading our research and development efforts on our 1.5MW and SCD wind turbines. Recruiting and retaining capable personnel, particularly those with expertise and experience in the wind power equipment industry, are vital to our success. There is substantial competition for research and development personnel, qualified technical experts, engineers, post-sales service providers and sales and marketing professionals, and there can be no assurance that we will be able to continuously attract or retain these individuals. If we are unable to attract and retain valuable employees, to keep pace with our expected growth, our business may be materially and adversely affected.

If we fail to obtain or maintain applicable licenses, or registrations for our products, or if such license or registrations are delayed, we will be unable to commercially manufacture, distribute and market our products at all or in a timely manner, which could significantly disrupt our business and materially and adversely affect our sales and profitability.

The manufacturing of our rotor blades and wind turbines and the selling and servicing of our wind turbines are subject to regulations in China and may be subject to regulations of the countries where we plan to conduct

 

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our business. For instance, we are required to obtain land use right certificates, property ownership certificates, planning permits, construction permits, pollution discharge permits and fire safety permits for each of our manufacturing factories built by ourselves, prior to the commencement of production, some of which may be subject to periodical renewal and inspection. In addition, our subsidiaries in China are required to obtain business licenses, tax registration certificates and social insurance registration certificates for the ongoing business operation. Our production facilities must meet certain production safety requirements and pass safety inspections conducted by relevant government authorities. We are also required to obtain the pollutant discharge permits and comply with relevant environmental and safety regulations for our rotor blade and turbine production. See “—Noncompliance with environmental regulations may result in potentially significant monetary damages and fines as well as adverse publicity” and “Regulation—Environmental Regulations.” Failure to obtain or maintain or delay in obtaining any of these permits, licenses and registrations may subject us to fines or penalties or business interruption and therefore could have a material and adverse effect on our business and prospects.

Our failure to obtain or maintain product certifications may negatively affect the sales of our wind turbines.

We have obtained several certifications for our products, including the statements of compliance for design assessment for MY1.5s and MY1.5se models from GL, a product design certificate from China General Certification Center, or CGC, for our MY1.5se model wind turbines and a certificate for our regular rotor blades from China Classification Society Certification Company, or CCSC. We are currently at various stages of applications for additional certifications, such as type certificates for our MY1.5s and MY1.5se models with GL. We believe these certifications for our products enhance the credibility of our products and our brand reputation. However, we may experience an unanticipated delay in securing a necessary certification or failure to renew our existing certifications, which may impair our established reputation and prevent us from attracting new customers. For example, certain procedures of the issuance of product certifications, such as type certificate from GL, may involve on-site data collection and examination, which may be delayed due to unexpected adverse weather conditions or unavailability of power grids. In addition, some of our customers have required that our wind turbines be certified. While we have obtained such requisite certificates for the wind turbines we have manufactured and commissioned, and the current industry practice in China does not require mandatory certification, we may be required to provide various certifications in the future if wind farm operators begin to require product certificates as a prerequisite for participation in the competitive bidding process they organize, and under that circumstance, any delay in obtaining or failure to maintain such certificates for the wind turbines we produce in the future may cause us to lose sales.

We may not be able to identify suitable targets for or finance future acquisitions or strategic alliances or we may fail to integrate acquired businesses into our businesses successfully.

To grow our business, we may pursue acquisitions or strategic alliances that are complementary to our business. In particular, we plan to selectively acquire component manufacturers in order to ensure quality of supply and to provide additional sources of revenue. However, we may not be able to identify and secure suitable opportunities. Our ability to consummate and integrate effectively any future acquisitions or enter into strategic alliances on terms that are favorable to us may be limited by a number of factors, such as suitable targets at appropriate valuations and, to the extent necessary for larger acquisitions, our ability to obtain financing on satisfactory terms, if at all.

Moreover, if a potential candidate is identified, we may fail to enter into a cooperation agreement or acquisition agreement for the candidate on commercially reasonable terms or at all due to the lack of cooperation from counterparties or for other reasons. The negotiation and completion of potential acquisitions or strategic alliances, whether or not ultimately consummated, could also require significant diversion of management’s time and resources and potential disruption of our existing business. Further, the expected synergies from future acquisitions or strategic alliances may not actually materialize. In addition, future acquisitions or strategic

 

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alliances could result in the incurrence of additional indebtedness, costs and contingent liabilities. Future strategic alliances or acquisitions may also expose us to potential risks, including risks associated with:

 

   

the integration of new operations, services and personnel;

 

   

unforeseen or hidden liabilities;

 

   

the diversion of financial or other resources from our existing businesses and technologies;

 

   

our inability to generate sufficient revenue to recover costs and expenses of the strategic alliances or acquisitions; and

 

   

potential loss of, or harm to, relationships with employees or customers.

Any of the above risks could significantly impair our ability to manage our business and materially and adversely affect our business, results of operations and financial condition.

We may incur additional costs, experience manufacturing disruptions or fail to satisfy our contractual requirements if we relocate from our leased properties during the lease term.

We lease properties at some of our facilities. We currently lease in Zhongshan, Guangdong Province approximately 2,000 square meters for our wind turbine assembly and administrative activities from Mingyang Electrical, a related party of us. We also lease in Zhongshan, Guangdong Province approximately 14,000 square meters from Mingyang Electrical for our rotor blade manufacturing activities. Although we have completed registration for these tenancy agreements, our landlord, Mingyang Electrical, has not obtained relevant property right certificates for these properties. We also lease in Tianjin a space of approximately 25,000 square meters as our new manufacturing facility and local branch offices, starting from January 1, 2010 for a term of two years, from Tianjin Jinneng Mingyang Wind Power Technology Co., Ltd., or Jinneng Mingyang, a PRC company that is currently 34.94% owned by us and 65.06% owned by Tianjin Jinneng Investment Co., Ltd., or Tianjin Jinneng. We also lease from Jinneng Mingyang in Tianjin a parcel of land and buildings for the production of wind turbines with a term from June 9, 2010 to June 8, 2012. We have not completed registration for the Tianjin tenancy agreements because Jinneng Mingyang is still in the process of obtaining valid property ownership certificates which is requisite for the registration. We cannot assure you that our occupation and use of such leased properties will not be disrupted because of the incomplete registration. In addition, our PRC legal advisor, King & Wood PRC Lawyers, has advised us that due to the lack of the relevant property ownership certificates, we cannot be certain that the landlord’s ownership of these properties is not subject to any dispute or that all requisite governmental approvals have been obtained in connection with the construction of these properties.

In January 2008, we entered into a lease agreement with Tianjin Feilong Concrete Admixture Co., Ltd., or Tianjin Feilong, in connection with the lease of the manufacturing facility and ancillary buildings with an aggregate gross floor area of approximately 34,545 square meters. The total rent was RMB6.6 million for the two-year term of the lease agreement from April 2008 to March 2010. As we ceased production in our old Tianjin facility in late 2009 and planned to relocate it to our new facility in Tianjin, we gave a prior notice to Tianjin Feilong to terminate this lease agreement. On December 1, 2009, Tianjin Feilong brought a lawsuit in local court against us alleging breach of the lease agreement and claiming, among other things, specific monetary damages of approximately RMB3.6 million and other related losses. On December 28, 2009, we responded to the charge and brought a counterclaim against Tianjin Feilong. The case is currently being litigated in the local court. We cannot assure you that we will obtain the judgment favorable to us from the local court and we may be required to make the monetary compensation to Tianjin Feilong if we lose the case.

In addition, we leased approximately 5,600 square meters for our old production facility in Xi’an, Shaanxi Province, with a term of three years from September 2007 to September 2010. We ceased the production at Xi’an facility in December 2009 and are relocating the operation to our new facility in Tianjin.

 

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Moreover, we cannot assure you that we will successfully renew our lease agreements upon expiration at favorable terms with the landlords, or that the landlords will have the valid right to own or lease the properties under our lease agreements. If we fail to renew our lease agreements or our lease agreements are subject to challenge by third parties, our operation will also be adversely affected. All of these consequences could have a material adverse effect on our business, financial condition, results of operations and prospects.

Noncompliance with environmental and safety regulations may result in potentially significant monetary damages and fines as well as adverse publicity.

As our rotor blade production generates glass fiber dusts, we are required to comply with national and local environmental regulations applicable to us. We believe we are currently in compliance with applicable environmental regulations in all material aspects and have all necessary environmental permits to operate our business as it is presently conducted, except that we are in the process of completing the environmental assessment procedure for our new Tianjin facility for the production of wind turbines, which is expected to commence formal production by the end of October 2010. However, if more stringent regulations are adopted in the future, the costs of compliance with these new regulations could be substantial. If we fail to comply with present or future environmental regulations, we may be required to pay substantial fines, suspend production or cease operations and may be subject to adverse publicity. In addition, our production and assembly processes may involve dangerous activities. We are required to comply with all safety requirements and standards applicable to us. If work injury accidents occur, which may result in personal injuries or fatalities and damage to property or equipment, we may be subject to civil or criminal claims and penalties against us. If we are held liable for damages in the event of contamination or injury, it could have a material and adverse effect on our financial condition and results of operations. In our ordinary course of business, we have been subject to fines of nonmaterial amount and other penalties for our failure to obtain pollutant discharge permit as required by environmental regulations and other alleged violation of environmental regulations. We have subsequently obtained a confirmation of no material environmental pollution from relevant environmental authority. However, we cannot assure you that we will not be subject to further penalties imposed by the government as a result of the past violations and that similar violations will not reoccur, which may subject us to future fines and or penalties that may interrupt our operations and damage our reputation.

Our insurance coverage may be inadequate to protect us from potential losses.

We do not maintain business interruption insurance. As the insurance industry in China is in its early stage of development, the business interruption insurance and the product liability insurance available in China offer limited coverage compared to that offered in many other countries, especially in the United States. Any business disruption or natural disaster could result in substantial costs and a diversion of resources, which would have a material and adverse effect on our business and results of operations. On the other hand, our business operations, particularly our production facilities, involve risks and hazards that could result in damage to, or destruction of, property and machinery, personal injury, business interruption and possible legal liability. In addition, we do not have product liability insurance covering body injuries and property damage caused by the products we sell, supply or distribute. Therefore, as with other wind turbine manufacturers in China, we are exposed to risks associated with product liability claims and may need to bear the litigation cost if the use of our products results in body injury or property damage. We do not carry key-man life insurance, and if we lose the services of any senior management and key personnel, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt our business and prospects. Furthermore, we do not have property insurance and as such we are exposed to risks associated with losses in values of our equipment, facilities and inventory due to fire, earthquake, flood and a wide range of natural disasters. We do not have personal injury insurance and accidental medical care insurance. Although we require that the third-party transportation companies we engage maintain insurance policies with respect to inland transit risks for our products, the coverage may be inadequate to protect us from potential claims against us and the losses that may result.

 

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Our failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.

We are required by PRC laws and regulations to contribute towards various government sponsored employee benefit plans, including housing, pension, work-related injury benefits, maternity insurance, medical and unemployment benefit plans, in amounts equal to pre-determined percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government where we operate our businesses from time to time. Our total contribution for such employee benefits as required by applicable PRC regulations amounted to RMB0.9 million, RMB5.2 million, RMB11.2 million (US$1.7 million) and RMB8.8 million (US$1.3 million) for 2007, 2008 and 2009 and for the first six months of 2010, respectively, which were recorded in our cost of sales, operating expenses and inventories. We failed to make these contributions in full and underpaid RMB0.8 million, RMB4.1 million, RMB7.6 million (US$1.1 million) and RMB5.5 million (US$0.8 million) in 2007, 2008 and 2009 and in the first six months of 2010, respectively. The aggregate amount due reached approximately RMB5.2 million, RMB12.8 million (US$1.9 million) and RMB19.0 million (US$2.8 million) as of December 31, 2008 and 2009 and as of June 30, 2010, respectively, which amounts were recorded as accrued expenses and other payables.

King & Wood PRC Lawyers, our PRC legal counsel, has advised us that any failure to make requisite contributions may subject us to a late fee and persons in charge may be subject to fines ranging from RMB1,000 to RMB10,000, imposed by administrative authorities or labor arbitrations and relevant employees may have the right to claim compensation from us. We do not currently have plans to settle such underpayments. Such fines or other penalties may be imposed upon us, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Our articles of association contain anti-takeover provisions that could have a material and adverse effect on the rights of holders of our ordinary shares and ADSs.

We will adopt our amended and restated articles of association, which will become effective immediately upon completion of this offering. Our new articles of association limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, restrictions, preferences, privileges, and payment obligations, any or all of which may be greater than the rights associated with our ordinary shares in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.

If we grant employee share options, restricted shares or other share-based compensation in the future, our net income could be adversely affected.

Our shareholders adopted our 2010 equity incentive plan on August 31, 2010. We are required to account for share-based compensation in accordance with IFRS 2 Share-based Payments, which requires a company to recognize, as an expense, the fair value of share options and other share-based compensation to employees based on the fair value of equity awards on the date of the grant, with the compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. On the effective date of the registration statement, of which this prospectus is a part, we will grant options to purchase an aggregate of 4,600,000 ordinary shares under our 2010 equity incentive plan to certain directors, officers and other employees. Consequently, we expect to start incurring share-based compensation expenses associated with these grants commencing in the quarter ending September 30, 2010. The exercise price of the options will be

 

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equal to 60% of the price to public per ADS divided by              ordinary shares underlying each ADS. Based upon US$             per ADS, the midpoint of the estimated public offering price range set forth on the cover of this prospectus, we would incur share-based compensation expenses of RMB             (US$            ) for the quarter ended September 30, 2010 and RMB             (US$            ) for the fiscal year 2010. If we grant options, restricted shares and other equity incentives in the future, we could incur significant compensation charges and our net income could be adversely affected.

In addition, we are required to measure the cost of share-based payments in accordance with IFRS, which accounting treatment may have a material and adverse impact on our results of operation. We recognized share-based payment expense in the amount of RMB379.5 million in 2008 as a result of the share-based compensation awards that our then-existing principal shareholder granted to three of our senior management members. We cannot assure you that we will not grant other share-based payments in the future.

Our future liquidity needs are uncertain and we may need to raise additional funds in the future and as a result you may experience dilution.

We may need to raise additional funds to expand our production capacity to meet unexpected increase in market demand or to engage in strategic acquisitions or other activities such that our expenditures exceed our current expectations. If this is the case, we will need to raise additional funds within the next 12 months. Our ability to raise additional funds in the future is subject to a variety of uncertainties, including:

 

   

our future financial condition, results of operations and cash flows;

 

   

general market conditions for capital-raising activities by China-based companies; and

 

   

economic, political and other conditions in China and elsewhere.

If we need to obtain external financing, we cannot assure you that the financing will be available in amounts or on terms acceptable to us, if at all. Our future liquidity needs and other business reasons could require us to sell additional equity or debt securities or obtain bank loans. The sale of additional equity or equity-linked securities could result in additional dilution to our shareholders and a decrease in the price of our ADSs. The incurrence of additional debt would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations or our ability to distribute dividends.

We will incur increased costs as a result of being a public company.

As a public company, we will incur significantly more legal, accounting and other expenses than we did as a private company. In addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and the NYSE, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

Risks Relating to Our Industry

Uncertainties and adverse changes in government initiatives and policies that affect the alternative energy industry in general and the wind power industry in particular may have an adverse effect on our business and results of operations.

We believe government initiatives, incentives and other favorable policies have been one of the major growth drivers for the alternative energy industry in general and the wind power industry in particular. The alternative energy industry faces intense competition from conventional energy technologies. Due to the relatively high generation costs compared to most other energy sources, alternative energy industries, including the wind power industry, are generally not competitive without government incentive programs. There can be no

 

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assurance, however, that government support will continue at the same present level or at all. Any decrease or elimination of government incentives currently available to industry participants may result in increasing operating costs incurred by our current customers or discourage our potential customers from investing in our products and services. Most of our customers are highly dependent on the government initiatives, incentives or other favorable policies to support their operation at a relatively acceptable cost level. These initiatives, incentives and policies include preferential tax treatment, government spending, government financial funds and grants, government incentives for the electricity industry or preferential tariffs on power generated from wind power. For example, China’s long-term renewable energy policy has been shaped by the government’s central planning agency, the NDRC. In August 2007, the NDRC issued the Medium and Long-term Development Plan for Renewable Energy, or the NDRC Plan, which describes the national government’s financial incentives for the renewable energy industry for the multi-year period ending 2020, with an estimated required investment amount of approximately RMB2,000 billion. The NDRC Plan also calls for increasing the electricity generated from non-hydro renewables in areas covered by major grids to reach 1% of the overall electricity supply by 2010 and 3% by 2020.

Some of our customers have enjoyed commercial benefits based on certain international arrangements aiming at global environment protection. For example, pursuant to the Kyoto Protocol, a protocol to the United Nations Framework Convention on Climate Change, which became effective on March 21, 1994 and ratified by the PRC government in August 2002, some of our customers generate incomes from selling emission reduction credits generated from their clean development mechanism projects by using alternative energies as certified under the Kyoto Protocol. If the Kyoto Protocol is not renewed prior to its expiration on December 31, 2012, or if the PRC government discontinues its support for these arrangements, the viability of alternative energy projects may be adversely affected. Therefore, any uncertainties and adverse changes in government initiatives, incentives or policies will materially and adversely affect the investment plans of our customers and consequently our growth.

Uncertainties and adverse changes in government policies relating to the wind power equipment industry may have an adverse impact on us.

Wind turbine manufactures have benefited from various policies that promote and encourage renewable energies consumption, such as Renewable Energy Law, Relevant Provisions for the Administration of the Generation of Electricity by Renewable Energy, the NDRC Plan, and Guidance Catalog for the Development of Renewable Energy Industry. Adverse changes in government policies will affect our competitiveness and may have a material and adverse effect on our business and results of operations. Under the NDRC Opinions issued in September 2009, which aim to curb the overheated development and investment in industrial sectors, including steel, concrete, polysilicon and wind power equipment, existing wind turbine manufacturers are expected to be required to comply with more stringent product quality standards and higher research and development requirements. In addition, no new wind turbine manufacturing companies will be approved and future government support will be primarily focused on wind turbines for offshore applications and wind turbines with a rated power capacity exceeding 2.5MW. As the detailed guidelines or rules for approval criteria or timeline under the NDRC Opinions have not yet all been promulgated, it is currently unclear as to what higher product quality standards, more stringent research and development requirements or production capacity must be met by existing wind turbine manufacturers and how long it will take to approve the establishment or expansion of wind turbine manufacturing projects. We cannot assure you that our current operation and future expansion will not be materially and adversely affected by the NDRC Opinions. Other unfavorable changes in governmental policies may adversely affect our business prospect. For instance, competition from overseas manufacturers may increase upon the cancellation of a NDRC requirement announced in November 2009 which was in favor of domestic wind power equipment manufactures, requiring that at least 70% of all equipment used in a single wind farm project must be manufactured domestically. We cannot assure you that there will not be any further changes in government policies, promoting other alternative energy industries or providing incentives exclusively to our competitors, which may adversely affect our business prospects.

 

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Wind power may not be considered as a viable base load source of electricity, therefore its contribution to overall electricity generation might be limited; as a result, our future growth prospects may be adversely affected due to the gradually competitive wind power generation market.

We cannot assure you that wind power will be a viable base load source of electricity due to the limited and unsophisticated technologies currently available. This means that while demand for wind energy is expected to increase, it may be unlikely that wind power will be considered a large-scale substitute for conventional energy sources such as nuclear or fossil-fuel generated power and for alternative energy from more reliable sources, such as hydropower or solar power. Our future growth prospects may be adversely affected due to the gradually competitive market. Any decrease in the price of the conventional fuels resulting from the exploitation of new energy sources or discovery of large deposits of oil, gas or coal may enhance the price competitiveness of electricity generated from those conventional sources, which in turn will have an adverse impact on the demand for electricity generated from wind power. Additionally, there is a risk that innovative technologies could lead to other and more cost competitive alternatives, thereby taking market share away from wind technology. Wind power has inherent disadvantages. For instance, the voltage and frequency of the wind power generated electricity are typically unstable as a result of wind conditions. In addition, wind turbines only generate electricity under pre-determined weather conditions and wind patterns, which further adds volatility of the electricity generated. Special technologies have been employed to adjust and stabilize the electricity generated before it is transmitted onto local power grids. Improved pitch control system, a control system that regulates the rotor blades pitch angle in order to control the speed of rotation and prevents the rotor blades from rotating when the wind speed is outside of a predetermined range, generator and rotor blades design are also believed to enable the wind turbines to generate electricity under a broader range of conditions. However, we cannot assure you that advanced wind technologies would be available in the near future and wind power can remain a competitive alternative energy source. Although the demand for wind power is expected to rise steadily, developments or innovations in other such sectors may adversely affect the future growth prospects of the wind power industry in general, which in turn, will materially and adversely affect the demand of our products.

Our customers rely substantially on grid companies to purchase electricity, provide grid connection and provide electricity transmission and dispatch services. If these wind farm operators are unable to sell the electricity they generate or to establish grid connections efficiently, demands for our wind turbines may decrease and our business may be adversely affected.

According to the Renewable Energy Law and its implementing rules, grid companies generally must purchase all electricity generated by renewable energy producers within their grids. The electricity sales of the wind farms highly benefit from the mandatory purchase obligations of grid companies imposed by the Renewable Energy Law. However, we cannot assure you that such favorable statutory requirements will not be changed or eliminated in the future due to policy changes at the national or local level in the PRC, or that the wind energy or other renewable energy sectors will not mature to reach a level playing ground to compete with coal power. Furthermore, as the statutory purchase obligation is a relatively new concept in the PRC law, changes to or uncertainties of the methods by which the local governments choose to implement this requirement on grid companies may also negatively impact the statutory support from which we currently benefit. Any adverse change or elimination of the statutory purchase obligations or other relevant support measures may materially and adversely affect the sales of electricity generated from the wind farms operated by our customers, which in turn may decrease the demand for our products.

According to the Renewable Energy Law and its implementing rules, grid companies generally must provide grid connection services to renewable energy producers within their grids. However, some of the wind farms owned by our customers are located in remote areas where the grids may not be able to accept all the electricity that the wind farms generate when operating at full capacity. The wind farm operators typically rely on local grid companies to construct and maintain the infrastructure and provide the electricity transmission and dispatch services necessary to connect to the grids, and we cannot assure you that the local grid companies will do so in a timely manner, or at all.

 

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Moreover, the transmission and dispatch of the full output of the wind farms may be curtailed as a result of various grid constraints, such as grid congestion, restrictions on transmission capacity of the grid and restrictions on electricity dispatch during certain periods. Electricity transmission lines may experience unplanned outages due to system failures, accidents and severe weather conditions, or planned outages due to repair and maintenance, construction work and other reasons beyond our control. As electricity generated from the wind farms is not stored and must be transmitted or used once it is generated, some of the wind turbines of a wind farm may be turned off during such period when electricity is unable to be transmitted due to grid congestion or other grid constraints. Such events could reduce the actual net power generation of the wind farms. In addition, a number of other factors may further decrease electricity output, including wind speed or wind direction or other severe weather condition. As a result, our wind farm operator customers may experience significant financial losses from the inefficient electricity outputs, which may in turn cause the decrease in the demand for our products and our business and financial condition will be adversely affected.

Risks Relating to Doing Business in China

Adverse changes in political and economic policies of the PRC government could have a material and adverse effect on the overall economic growth of China, which could reduce the demand for our services and materially and adversely affect our competitive position.

We conduct substantially all of our business and have historically derived all of our revenues in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:

 

   

the degree of government involvement;

 

   

the level of development;

 

   

the growth rate;

 

   

the control of foreign exchange;

 

   

access to financing; and

 

   

the allocation of resources.

While the Chinese economy has experienced significant growth in the past 30 years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese economy has also experienced certain adverse effects due to the recent global financial crisis. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our operating results and financial condition may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us, and by government policies or guidance aimed at curtailing the perceived over-capacity of certain industry sectors, such as steel, concrete, polysilicon and wind power equipment. See “Regulation—Laws and Regulations Promoting the Development of the Renewable Energy Industry—Other Wind Power Electricity Industry Regulations.” The Chinese government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, which could in turn reduce the demand for our products and services and materially and adversely affect our operating results and financial condition.

The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is

 

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still owned by the Chinese government. The continued control of these assets and other aspects of the national economy by the Chinese government could materially and adversely affect our business.

The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

Any adverse change in the economic conditions or government policies in China could have a material and adverse effect on overall economic growth and the level of investments in renewable energy industries in China, which in turn could lead to a reduction in demand for our products and consequently have a material and adverse effect on our businesses.

Uncertainties with respect to the PRC legal system could limit the protections available to you and us.

The PRC legal system is a civil law system based on written statutes. Unlike in common law systems, 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. We conduct all of our business through our consolidated entities established in China. These entities are generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to Sino-foreign joint ventures. However, since many laws, rules and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. For example, we may have to resort to administrative and court proceedings to enforce the legal protections that we enjoy either by law or contract.

However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of PRC administrative and court proceedings and the level of legal protection we enjoy in China than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into with our business partners, our customers, and suppliers for raw materials and components. Currently, all governmental approvals relating to our operations and production capacity expansion plans have been issued by the relevant competent local government authorities. However, if a central government agency requires us to obtain its approval and if we fail to obtain such approval in a timely manner, or at all, we may be subject to the imposition of fines against us, or the suspension or cessation of our production capacity expansion plans. In addition, under the NDRC Opinions, we will need to seek pre-approval from the NDRC if we plan to further expand our production capacity. In general, the government authorities would take more stringent scrutiny in approving production capacity expansion projects. As the detailed guidelines for approval criteria or timeline under these measures have not yet all been promulgated, we cannot assure you that we will obtain the required approval from the NDRC in time or at all if we plan to further expand our production capacity.

In addition, such uncertainties, including the inability to enforce our contracts, could materially and adversely affect our business and operations. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the alternative energy industry or the wind power equipment industry in China, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.

 

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We rely on dividends paid by our subsidiaries for our cash needs, and any limitation on the ability of our subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.

We conduct all of our business through our subsidiaries established in China. We rely on dividends paid by these subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities established in China is subject to limitations. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Each of our PRC subsidiaries that is a domestic company is also required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves or statutory capital reserve fund until the accumulative amount of such reserves reach 50.0% of its respective registered capital. As of June 30, 2010, the accumulated profits of our PRC subsidiaries, on a consolidated basis under PRC accounting standards, that were unrestricted and were available for distribution amounted to RMB317.0 million (US$46.7 million). Our restricted reserves are not distributable as cash dividends. In addition, if any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability, limit our ability to inject capital into our consolidated PRC entities, limit the ability of our consolidated PRC entities to distribute profits to us, or otherwise adversely affect us.

The PRC State Administration of Foreign Exchange, or SAFE, issued a public notice in October 2005, or the SAFE notice, requiring PRC residents to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of capital financing with assets or equities of PRC companies, referred to in the notice as an “offshore special purpose company.” PRC residents that are shareholders of offshore special purpose companies established before November 1, 2005 were required to register with the local SAFE branch before March 31, 2006. Further, PRC residents are required to file amendments to their registrations with the local SAFE branch if their special purpose companies undergo material events involving changes in capital, such as changes in share capital, mergers and acquisitions, share transfers or exchanges, spin-off transactions or long-term equity or debt investments. Mr. Chuanwei Zhang, Mr. Xian Wang and Mr. Song Wang, each a PRC resident, collectively beneficially own 30.92% of our equity interests. We are advised that they have completed their registration with local SAFE branch as required under the SAFE notice in connection with their initial acquisition of their beneficial interests in offshore special purpose companies. We are also advised that they have amended such registration in connection with their exchanging their equity interests in the offshore special purpose vehicles for beneficial ownership in us. See “Our Corporate Structure and History—Our History.” The failure of these beneficial owners to timely amend their SAFE registrations pursuant to the SAFE notice or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in the SAFE notice may subject such beneficial owners to fines and legal sanctions and may also limit our ability to contribute additional capital into our consolidated PRC entities, limit our consolidated PRC entities’ ability to distribute dividends to us or the offshore entities set up by our beneficial owners or otherwise materially and adversely affect our business.

Failure to comply with PRC regulations regarding the registration requirements for employee equity incentive plans may subject our PRC citizen employees or us to fines and other legal or administrative sanctions.

On March 28, 2007, the SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Share Option Plan of Overseas-Listed Company, or the Share Option Rule. Under the Share Option Rule, PRC citizens who are granted share options or other employee equity incentive awards by an overseas publicly-listed company are required, through a PRC agent who may be a PRC subsidiary of such overseas publicly-listed company, to register with the SAFE and

 

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complete certain other procedures related to the share options or other employee equity incentive plans. We and our PRC citizen employees who are granted share options or other equity incentive awards under our 2010 equity incentive plan, or PRC optionees, will be subject to the Share Option Rule once our company becomes an overseas publicly-listed company. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and legal sanctions.

The enforcement of new labor contract law and its implementation rules and increase in labor costs in the PRC may adversely affect our business and our profitability.

China adopted the PRC Employment Contract Law, or the new Labor Contract Law, effective January 1, 2008 and the implementation rules effective September 18, 2008. The new Labor Contract Law and its implementation rules impose more stringent obligations on employers for, among others, entering into written employment contracts, hiring temporary employees, dismissing employees, setting compensations for dismissal and protecting certain sick or disabled employees from dismissal and setting forth detailed requirements relating to the contents of the employment contracts. The implementation of the new Labor Contract Law may increase our operating expenses, in particular our personnel expenses, as the continued success of our business depends significantly on our ability to attract and retain qualified personnel. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the new Labor Contract Law may also limit our ability to effect those changes in a manner that we believe to be cost-effective or desirable, which could adversely affect our business and results of operations.

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds we receive from this offering to make loans or additional capital contributions to our PRC operating subsidiaries.

In utilizing the proceeds we receive from this offering in the manner described in “Use of Proceeds,” as an offshore holding company with PRC subsidiaries, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries.

Any loans to our PRC subsidiaries are subject to PRC regulations and approvals. For example, loans to our PRC subsidiary Guangdong Mingyang, which is a foreign-invested enterprise, to finance its activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange in China, or SAFE, or its local counterpart. Loans by us to domestic PRC enterprises must be approved by the relevant government authorities and must also be registered with the SAFE or its local counterpart.

Any capital contributions to our PRC subsidiaries must be approved by the Ministry of Commerce in China or its local counterpart. On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of foreign currency into Renminbi by restricting how the converted Renminbi may be used. The notice requires that Renminbi converted from the foreign currency-denominated capital of a foreign-invested company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise. In addition, SAFE strengthened its oversight over the flow and use of Renminbi funds converted from the foreign currency-denominated capital of a foreign-invested company. The use of such Renminbi may not be changed without approval from SAFE, and may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Rules.

We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to our future loans or capital contributions to our direct or indirect subsidiaries. If we fail to receive such registrations or approvals, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and ability to fund and expand our business.

 

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Any requirement to obtain prior approval from the China Securities Regulatory Commission, or the CSRC, could delay this offering and a failure to obtain this approval, if required, could have a material and adverse effect on our business, operating results, reputation and trading price of our ADSs.

On August 8, 2006, six PRC regulatory agencies, namely, the 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 CSRC and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the 2006 M&A Rule, which became effective on September 8, 2006. The 2006 M&A Rule purports, among other things, to require offshore special purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. While the application of the 2006 M&A Rule remains unclear, we believe, based on the advice of our PRC counsel, King & Wood PRC Lawyers, that CSRC approval is not required in the context of this offering as, among other reasons, we are not considered a special purpose vehicle formed or controlled by PRC companies or PRC individuals. However, we cannot assure you that the relevant PRC government agency, including the CSRC, would reach the same conclusion as our PRC counsel. If the CSRC or other PRC regulatory body subsequently determines that we need to obtain the CSRC’s approval for this offering, we may face regulatory actions or other sanctions by the CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, or take other actions that could have a material and adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that such settlement and delivery may not occur.

We cannot predict when the CSRC will promulgate additional rules or other guidance, if at all. If implementing rules or guidance is issued prior to the completion of this offering, and, consequently, we conclude that we are required to obtain CSRC approval, this offering will be delayed until we obtain CSRC approval, which may take several months or longer. Moreover, implementing rules or guidance, to the extent issued, may fail to resolve current ambiguities under the 2006 M&A Rule. Uncertainties or negative publicity regarding the 2006 M&A Rule also could have a material and adverse effect on the trading price of our ADSs.

The 2006 M&A Rule establishes more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

The 2006 M&A Rule establishes additional procedures and requirements that could make some acquisitions of PRC companies by foreign entities, such as our company, more time-consuming and complex, including requirements in some instances that the approval of the Ministry of Commerce shall be required for transactions involving the shares of an offshore listed company being used as the acquisition consideration by foreign entities, including Sino-foreign joint ventures. In the future, we may grow our business in part by acquiring complementary businesses. Complying with the requirements of the 2006 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.

Fluctuation in the value of the Renminbi may have a material and adverse effect on your investment.

The change in value of the Renminbi against the U.S. dollar is affected by, among other things, changes in PRC’s political and economic conditions. From 1995 until July 2005, the People’s Bank of China intervened in the foreign exchange market to maintain an exchange rate of approximately RMB8.3 per U.S. dollar. On July 21,

 

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2005, the PRC government changed this policy and began allowing modest appreciation of the Renminbi versus 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. This change in policy caused the Renminbi to appreciate approximately 21.5% against the U.S. dollar over the following three years. As a consequence, the Renminbi has fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. It is difficult to predict how long the current situation may last and when and how it may change again. There remains significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi against the U.S. dollar.

Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars we receive from this initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

Governmental control of currency conversion may affect the value of your investment.

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive all our revenues in Renminbi. Under our current corporate 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 other payments to us, or otherwise satisfy their foreign currency-denominated obligations. Under 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 SAFE by complying with certain procedural requirements. However, approval from SAFE or its local branch 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 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.

Our China-sourced income is subject to PRC withholding tax under the new Enterprise Income Tax Law of the PRC, and we may be subject to PRC enterprise income tax at the rate of 25% when more detailed rules or precedents are promulgated.

We are a Cayman Islands holding company with substantially all of our operations conducted through our operating subsidiaries in China. Under the new PRC Enterprise Income Tax Law, or the new EIT Law, and its implementation rules, both of which became effective on January 1, 2008, China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent, is generally subject to a 10% withholding tax. Under an arrangement between China and the Hong Kong Special Administrative Region, which became effective on January 1, 2007, such dividend withholding tax rate is reduced to 5% for dividends paid by a PRC company to a Hong Kong resident enterprise if such Hong Kong entity owns at least 25% of the equity interest of the PRC company. As such, dividends paid to us by our PRC subsidiaries through our Hong Kong subsidiaries may be subject to a reduced withholding tax at a rate of 5% under this arrangement, provided that our Hong Kong subsidiaries are deemed as “beneficial owners” of such income, and provided further that neither our company nor our Hong Kong subsidiaries are deemed to be PRC tax resident enterprises as described below. However, pursuant to the Notice on Interpretation and Determination of “beneficial owner” under tax treaties, or Circular 601, “beneficial owner” should carry out substantial business activities and own or have

 

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control over the income, rights or assets which give rise to such income. Specifically, agents and conduit companies will not be regarded as the “beneficial owner” of such income. If our Hong Kong subsidiaries are not deemed beneficial owner under Circular 601, they may not be able to enjoy the 5% preferential tax treatment and as a result the dividends distributed by our PRC subsidiaries through these Hong Kong subsidiaries will be adversely affected. Circular 601 further lists several factors that would be more unlikely for relevant authorities to identify a company to be a beneficial owner of certain specific income, including (i) the company is obligated to pay or distribute all or substantial part of the income to a third country resident in a prescribed time period, (ii) the company does not or barely engages in other operating activities other than holding the assets or interests from which the income derives, (iii) the assets, business size and employees of the company are relatively limited and could not reasonably match the income, (iv) the company has no or little control over the assets or interests from which the income derives and bears no or little risks; (v) certain income are non-taxable or exempted from tax in the other contracting country, or the tax rate is extremely low, if any, (vi) apart from the loan agreement under which the interest payment is provided, there is other loan or deposit agreements between the lender and a third party with similarity terms of amount, interest rate and execution date, and (vii) apart from the transfer agreement of copy right, patent or technology under which the license fee is provided, there is other transfer agreement relating to the use right or ownership to the copy right, patent or technology between the company to a third party.

The new EIT Law, however, also provides that enterprises established outside China whose “de facto management bodies” are located in China are considered “tax resident enterprises” and will generally be subject to the uniform 25% enterprise income tax rate as to their global income. Under the implementation rules, “de facto management bodies” are defined as the bodies that have, in substance, overall management control over such aspects as the production and business, personnel, accounts and properties of an enterprise. In April 2009, the PRC tax authority promulgated the Notice on Determination of Tax Resident Enterprises of Chinese-controlled Offshore Incorporated Enterprises in accordance with Their De Facto Management Bodies, or Circular 82, to clarify the criteria for determining whether the “de facto management bodies” are located within the PRC for enterprises incorporated overseas with controlling shareholder being PRC enterprises. However, the relevant PRC laws and regulations remain unclear as for how the PRC tax authorities will treat an overseas enterprise invested or controlled by another overseas enterprise as in our case. All of our management team members are residing in the PRC. If most of them continue to reside in the PRC, our Company may be deemed a PRC resident enterprise and therefore subject to the PRC enterprise income tax at a rate of 25% on our worldwide income, which excludes the dividends received directly from another PRC resident enterprise. Furthermore, in connection with the new EIT Law and Tax Implementation Regulations, the Ministry of Finance and State Administration of Taxation jointly issued, on April 30, 2009, the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59, which became effective retrospectively on January 1, 2008. In 2009 and 2010, in preparation for this offering, we and our subsidiaries underwent certain reorganizations as described in “Our Corporate Structure and History—Our History.” As Circular 59 has only recently been promulgated, it is uncertain to us as to how it will be implemented and the respective tax base and the tax exposure cannot be determined reliably at this stage. In case we are required to pay the income tax on capital gains by the relevant PRC tax authorities, our financial conditions and results of operations could be adversely affected.

Dividends payable by us to our foreign investors and gain on the sale of our shares may become subject to taxes under PRC tax laws.

Under the new EIT law and its implementation rules, to the extent that we are considered a “resident enterprise” which is “domiciled” in China, PRC income tax at the rate of 10% is applicable to dividends payable by us to investors that are “non-resident enterprises” so long as such “non-resident enterprise” investors do not have an establishment or place of business in China or, despite the existence of such establishment or place of business in China, the relevant income is not effectively connected with such establishment or place of business in China. Similarly, any gain realized on the transfer of our shares or ADSs by such investors is also subject to a 10% PRC income tax if such gain is regarded as income derived from sources within China and we are considered a “resident enterprise” which is domiciled in China for tax purposes. Additionally, there is a

 

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possibility that the relevant PRC tax authorities may take the view that our purpose is that of a holding company, and the capital gain derived by our overseas shareholders or ADS holders from the share transfer would be deemed China-sourced income, in which case such capital gain may be subject to PRC withholding tax at the rate of up to 10%. If we are required under the new EIT law to withhold PRC income tax on our dividends payable to our foreign shareholders and ADS holders who are “non-resident enterprises”, or if you are required to pay PRC income tax on the transfer of our shares or ADSs under the circumstances mentioned above, the value of your investment in our shares or ADSs may be materially and adversely affected. It is unclear whether, if we are considered a PRC “resident enterprise,” holders of our shares or ADSs would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas.

The strengthened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on our acquisition strategy.

In connection with the new EIT Law, the Ministry of Finance and State Administration of Taxation jointly issued, on April 30, 2009, the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December 10, 2009, the State Administration of Taxation issued the Notice on Strengthening the Management on Enterprise Income Tax for Non-resident Enterprises Equity Transfer, or Circular 698. Both Circular 59 and Circular 698 became effective retrospectively on January 1, 2008. By promulgating and implementing these circulars, the PRC tax authorities have strengthened their scrutiny over the direct or indirect transfer of equity interest in a PRC resident enterprise by a non-resident enterprise. For example, Circular 698 specifies that the PRC State Administration of Taxation is entitled to redefine the nature of an equity transfer where offshore vehicles are interposed by abusing corporate structures for tax-avoidance purposes and without reasonable commercial intention. We consistently pursue acquisitions as one of our growth strategies, and have conducted and may conduct acquisitions involving complex corporate structures. For the details, see “Our Corporate Structure and History.” We cannot be assured that the PRC tax authorities will not, at their discretion, adjust the capital gains thus causing us to incur additional acquisition costs.

Any future outbreak of H1N1 influenza, also known as swine flu, avian influenza or severe acute respiratory syndrome in China, or similar adverse public health developments, may severely disrupt our business and operations.

In May and June 2009, occurrences of H1N1 influenza were reported in Hong Kong and other parts of China. Since 2005, there have been reports on the occurrences of avian influenza in various parts of China, including a few confirmed human cases that resulted in fatalities. In addition, from December 2002 to June 2003, China and other countries experienced an outbreak of a new and highly contagious form of atypical pneumonia now known as severe acute respiratory syndrome, or SARS. On July 5, 2003, the World Health Organization declared that the SARS outbreak had been contained. Since September 2003, however, a number of isolated new cases of SARS have been reported, most recently in central China in April 2004. During May and June of 2003, many businesses in China were temporarily closed by the PRC government to prevent transmission of SARS. Any prolonged recurrence of H1N1 or avian influenza, SARS or other adverse public health developments in China could require the temporary closure of our facilities. Such closures could severely disrupt our production and business operations and materially and adversely affect our results of operations. We have not adopted any written preventive measures or contingency plans to combat any future outbreak of H1N1 influenza, avian influenza, SARS or any other epidemic.

 

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Risks Relating to Our ADSs and This Offering

There has been no public market for our ordinary shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

Prior to this initial public offering, there has been no public market for our ordinary shares or ADSs. We have applied to have our ADSs listed on the NYSE. Our ordinary shares will not be listed on any other exchange or quoted for trading on any over-the-counter trading system.

The initial public offering price for our ADSs will be determined by negotiations between us and the underwriters and may bear no relationship to the market price for our ADSs after this initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.

The market price for our ADSs may be volatile which could result in substantial loss to you.

The market price for our ADSs is likely to be highly volatile and subject to wide fluctuations in response to factors, including the following:

 

   

announcements of competitive developments;

 

   

regulatory developments in China affecting us, our clients or our competitors;

 

   

announcements regarding litigation or administrative proceedings involving us;

 

   

actual or anticipated fluctuations in our quarterly operating results;

 

   

changes in financial estimates by securities research analysts;

 

   

additions or departures of our executive officers;

 

   

release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs; and

 

   

sales or perceived sales of additional ordinary shares or ADSs.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. For example, since August 2008, multiple exchanges in the United States and other countries and regions, including China, experienced sharp declines in response to the growing credit market crisis and the recession in the United States. Prolonged global capital markets volatility may affect overall investor sentiment towards our ADSs, which would also negatively affect the trading prices for our ADSs.

Since the initial public offering price is substantially higher than our net tangible book value per share, you will incur immediate and substantial dilution.

If you purchase our ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately US$             per ADS (assuming no exercise by the underwriters of their option to purchase additional ADSs), representing the difference between our net tangible book value per ADS as of             , after giving effect to this offering at an assumed initial public offering price of US$             per ADS, the midpoint of the estimated public offering price range set forth on the cover of this prospectus. In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of share options. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon completion of this offering.

 

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

Sales of our ADSs or ordinary shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have              ordinary shares outstanding, including              ordinary shares represented by              ADSs. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or the Securities Act. The remaining ordinary shares outstanding after this offering will be available for sale upon the expiration of certain lock-up arrangements entered into among us, the underwriters and other shareholders as further described under “Underwriting” and “Shares Eligible for Future Sale.” In addition, ordinary shares that certain option holders will receive when they exercise their share options will not be available for sale until the expiration of any relevant lock-up periods, subject to volume and other restrictions that may be applicable under Rule 144 and Rule 701 under the Securities Act. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs.

Our controlling shareholders have substantial influence over our company and their interests may not be aligned with your interests.

As of the date of this prospectus, Mr. Chuanwei Zhang, our founder, chairman and chief executive officer, beneficially owns approximately 28.73% of our outstanding ordinary shares. Clarity China Partners, L.P., Clarity MY Co-Invest, L.P. and Clarity China Partners (AI), L.P., or Clarity Investors, collectively, beneficially own approximately 16.47% of our outstanding ordinary shares. China Opportunity S.A. SICAR beneficially owns approximately 13.30% and ICBC International Investment Management Limited beneficially owns approximately 10.99% of our outstanding ordinary shares, respectively. Upon completion of this offering, approximately             %,             %,             % and             % of our outstanding ordinary shares will be beneficially held by Mr. Zhang, Clarity Investors, China Opportunity S.A. SICAR and ICBC International Investment Management Limited, respectively, assuming no exercise of the underwriters’ option to purchase additional ADSs. As such, they have substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs in this offering. Moreover, this concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs.

In addition, Mr. Zhang may have potential conflicts of interest with us arising from his ownership interests in Mingyang Electrical and Mingyang Electrical’s immediate holding company, Mingyang Electrical Appliances, which is majority-owned by Mr. Zhang. As a result, the interests of Mr. Zhang as a controlling shareholder of these entities and the interests of our company may conflict. We cannot assure you that if conflicts of interest arise, Mr. Zhang will act in the best interests of our company or that any conflict of interest will be resolved in our favor.

We are exempt from some of the corporate governance requirements of the NYSE.

As a foreign private issuer, we are exempt from some of the corporate governance requirements of the NYSE by virtue of being a foreign private issuer. We are required to provide a brief description of the significant differences between our corporate governance practices and the corporate governance practice required to be followed by U.S. domestic companies under the NYSE rules. The standards applicable to us are considerably different than the standards applied to U.S. domestic issuers. For instance, we are not required to:

 

   

have a majority of the board be independent (other than due to the requirements for the audit committee under the Securities Exchange Act of 1934, as amended, or the Exchange Act);

 

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have a minimum of three members on our audit committee;

 

   

have a compensation committee, a nominating or corporate governance committee;

 

   

provide an annual certification by our chief executive officer that he or she is not aware of any non-compliance with any corporate governance rules of the NYSE;

 

   

have regularly scheduled executive sessions with only non-management directors; or

 

   

have at least one executive session of solely independent directors each year.

We intend to rely on some or all of these exemptions. As a result, you are not provided with the benefits of certain corporate governance requirements of the NYSE.

The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.

Under the deposit agreement for the ADSs, the depositary will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings if you do not vote, unless:

 

   

we have failed to timely provide the depositary with our notice of meeting and related voting materials;

 

   

we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

   

we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting; or

 

   

a matter to be voted on at the meeting would have an adverse impact on shareholders.

The effect of this discretionary proxy is that you cannot prevent our ordinary shares underlying your ADSs from being voted, absent the situations described above, and it may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise their rights.

Holders of our ADSs do not have the same rights as our shareholders and may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under our amended and restated memorandum and articles of association, to be effective immediately upon the commencement of trading of our ADSs on the NYSE, the minimum notice period required to convene a general meeting is 21 days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you request. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.

 

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You may not receive distributions on our ordinary shares or any value for them if such distribution is illegal or if any required government approval cannot be obtained in order to make such distribution available to you.

Although we do not expect to pay dividends in the foreseeable future, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses and any applicable taxes and government charges. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities whose offering would require registration under the Securities Act but not so properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not reasonably practicable to distribute certain property. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under the U.S. securities laws any offering of ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

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 either both the rights and any related securities are registered under the Securities Act, or the distribution of them to ADS holders is 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. If the depository does not distribute the rights, it may, under the deposit agreement, either sell them, if possible, or allow them to lapse. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

We are a Cayman Islands company, and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law, you may have less protection than if you were a shareholder of a United States corporation.

Our corporate affairs are governed by our memorandum and articles of association, the Cayman Islands Companies Law (as amended) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as that from English common law, which has persuasive, but not binding authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some states in the United States, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. Furthermore, shareholders of Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. As a result, our public shareholders may have more difficulties in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as shareholders of a United States public company.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that relate to our current expectations and views of future events. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Industry” and “Our Business.” These statements relate to events that involve known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. You should not place undue reliance on these forward-looking statements.

In some cases, these forward-looking statements can be identified by words or phrases such as “aim,” “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “is/are likely to,” “may,” “plan,” “potential,” “will” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things, statements relating to:

 

   

our expectations regarding the worldwide demand for electricity and the market for wind power energy;

 

   

our expectations regarding policies and regulations supporting the alternative energy industry and the wind power industry in China and elsewhere;

 

   

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

 

   

our goals and growth strategies, including our ability to expand our manufacturing and research and development facilities and capabilities;

 

   

our ability to attract additional orders from existing and potential customers;

 

   

our expectations regarding revenue growth, our ability to achieve or maintain or increase profitability and our production volumes;

 

   

our ability to establish strategic relationships with industry-leading research and development institutes;

 

   

our ability to secure sufficient funds to meet our cash needs for our future operation and capacity expansion;

 

   

fluctuations in general economic and business conditions.

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

This prospectus also contains data related to the wind power equipment industry in China and worldwide, and we have derived such data from (i) Detailed Introduction of Chinese Wind Power Sector and Wind Turbine Manufacturers, prepared by BTM and commissioned by us in April 2010, (ii) International Wind Energy Development—World Market Update 2009, published by BTM in March 2010, (iii) Due Diligence Key Finding Report for Guangdong Mingyang Wind Power Industry Group Co., Ltd., prepared by Black & Veatch and commissioned by us in May 2010, or the Black & Veatch report, (iv) World Energy Outlook 2009 issued by International Energy Agency in 2010, (v) Report on Installed Capacity in China 2009 issued by China Wind Energy Association in 2010, and other publicly available data as indicated elsewhere in this prospectus. These market data include projections that are based on a number of assumptions that are inherently uncertain.

 

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There is limited data in China on China’s wind power equipment industry and the wind turbine market. The wind power equipment industry and the wind turbine market in China and globally may not grow at the rates projected by the market data, if at all. The failure of the wind power equipment industry and the wind turbine market in China and globally to grow at the projected rates may have a material and adverse effect on our business, financial condition, results of operations and the market price of our ADSs.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, of approximately US$             million, or approximately US$             million if the underwriters exercise their over-allotment option in full, in each case, assuming an initial public offering price of US$             per ADS, the midpoint of the estimated public offering price range set forth on the cover of this prospectus. A US$1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS would increase (decrease) the net proceeds received by us from this offering by US$             million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and assuming the underwriters do not exercise the over-allotment option to purchase additional ADSs.

We intend to use the net proceeds we receive from this offering for the following purposes:

 

   

approximately US$             for the expansion of our production capacity and value chain including:

 

   

approximately US$             for building our manufacturing facilities for wind turbines and key components;

 

   

approximately US$             for purchasing manufacturing equipment; and

 

   

approximately US$             for potential acquisitions of, or investments in, components suppliers, although we are not currently negotiating for any such acquisitions or investments; and

 

   

approximately US$             for research and development, including:

 

   

approximately US$             for the development of wind turbine technologies, including large multi-megawatt wind turbines and SCD wind turbines, as well as the development of our solar-wind hybrid systems; and

 

   

approximately US$             for the construction of our Guangdong Mingyang Wind Power Technology Research Institute and other research platforms.

We may use the remaining portion of the net proceeds we receive from this offering for working capital and general corporate purposes.

To the extent any net proceeds from this offering allocated to capital expenditures are not sufficient, we intend to use cash from operations and available lines of credit to fund the balance of our planned capital expenditures.

The foregoing use and allocation of our net proceeds from this offering represents our current intentions based upon our present plans and business condition. The amounts and timing of any expenditure will vary depending on the amount of cash generated by our operations, competitive developments and the rate of growth, if any, of our business. Accordingly, our management will have significant flexibility and discretion to apply the net proceeds we will receive from this offering. Depending on future events and other changes in the business climate, we may determine at a later time to use the net proceeds for different purposes. Pending their use, we intend to place our net proceeds in short-term bank deposits.

In utilizing the proceeds from this offering we are permitted, under PRC laws and regulations as an offshore holding company, to provide funding to our consolidated PRC entities only through loans or capital contributions and to other entities only through loans. Subject to satisfaction of applicable government registrations or approvals, we may extend inter-company loans or make additional capital contributions to our consolidated PRC entities to fund their capital expenditures or working capital requirements. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Relating to Doing Business in China—PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds we receive from this offering to make loans or additional capital contributions to our PRC operating subsidiaries.”

 

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DIVIDEND POLICY

Since our incorporation, we have never declared or paid any dividends, nor do we have any present intention to pay any cash dividends on our ordinary shares for the foreseeable future. We currently intend to retain all of our available funds and any future earnings to operate and expand our business.

Our board of directors has complete discretion on whether to pay dividends. 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, shareholders’ interests and any other factors our board of directors may deem relevant.

We are a holding company incorporated in the Cayman Islands. Our ability to pay dividends depends on the ability of our subsidiaries to pay dividends to us. In particular, each of our PRC subsidiaries may pay dividends only out of any accumulated distributable profits as determined in accordance with its articles of association and the accounting standards and regulations in China. Moreover, pursuant to relevant PRC laws and regulations applicable to our PRC subsidiaries, a certain percentage of each of our PRC subsidiaries’ after-tax profits are required to be set aside in a statutory common reserve fund. These reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires; an annual appropriation of 10% of after-tax profit (as determined under accounting principles generally accepted in the PRC at each year-end) for our PRC subsidies, except for Guangdong Mingyang; or (ii) an appropriation of after-tax profit as decided by the board of directors of Guangdong Mingyang, a Sino-foreign joint venture; and the other fund appropriations are at our PRC subsidiaries’ discretion. Allocations to these statutory reserves may only be used for specific purposes and are not distributable to us in the form of loans, advances or cash dividends. See “Regulation—Dividend Distribution.” Furthermore, if any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us.

If we pay any dividends, the depositary will pay our ADS holders the dividends it receives on our ordinary shares, after deducting its fees and expenses and any applicable taxes and government charges, as provided in the deposit agreement. See “Description of American Depositary Shares.” Cash dividends, if any, on our ordinary shares will be paid in U.S. dollars.

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2010:

 

   

on an actual basis; and

 

   

on an as adjusted basis to reflect the issuance and sale of                 ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$             per ADS, the midpoint of the estimated public offering price range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

As of the date of this prospectus, there has been no material change to our capitalization as set forth below. You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and “Selected Consolidated Financial and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of June 30, 2010
     Actual     As Adjusted
     RMB     US$     RMB    US$
     (unaudited)
     (in thousands, except share and per share date)

Total equity attributable to our company’s shareholders:

         

Ordinary shares,
US$0.001 par value per share, 1,000,000,000
shares authorized; 100,000,000 shares issued and
outstanding (actual)
(1) and                      shares issued
and outstanding (as adjusted)
(1)

   682      101        

Capital reserve

   1,326,472      195,602        

Accumulated loss

   (443,684   (65,426     
                     

Total equity attributable to our company’s shareholders

   883,470      130,277        

Non-controlling interest

   56,255      8,295        
                     

Total capitalization

   939,725      138,572        
                     

 

(1)  

Excludes 4,600,000 ordinary shares issuable upon the exercise of options to purchase our ordinary shares outstanding, which will be granted to certain directors, officers and other employees on the effective date of the registration statement, of which this prospectus is a part.

Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of the underwriting discounts and commissions and the estimated offering expenses payable by us, a US$1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS, the midpoint of the estimated public offering price range set forth on the cover of this prospectus, would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by US$              million.

 

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DILUTION

If you invest in our ADSs, your investment will be diluted for each ADS you purchase to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.

Our net tangible book value as of June 30, 2010 was approximately RMB847.7 million (US$125.0 million), or RMB8.48 (US$1.25) per ordinary share and US$             per ADS. Net tangible book value represents the amount of our total assets minus the amount of our total liabilities and intangible assets. Dilution is determined by subtracting net tangible book value per ordinary share, from the assumed initial public offering price per ordinary share, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Without taking into account any other changes in such net tangible book value after June 30, 2010, other than to give effect to our sale of the ADSs offered in this offering, at the assumed initial public offering price of US$             per ADS, the midpoint of the estimated public offering price range set forth on the cover of this prospectus, and after deduction of underwriting discounts and commissions and estimated offering expenses payable by us, our adjusted net tangible book value as of                      would have increased to US$             million or US$             per ordinary share and US$             per ADS assuming no exercise of the underwriters’ over-allotment option to purchase additional ADSs. This represents an immediate increase in net tangible book value of US$             per ordinary share and US$             per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$             per ordinary share and US$             per ADS to investors purchasing ADSs in this offering. The following table illustrates such per ordinary share dilution:

 

Estimated initial public offering price per ordinary share

   US$     

Net tangible book value per ordinary share as of June 30, 2010

   US$ 1.25

Amount of dilution in net tangible book value per ordinary share to new investors in this offering

   US$     

Amount of dilution in net tangible book value per ADS to new investors in this offering

   US$     

A US$1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS would increase (decrease) our pro forma net tangible book value after giving effect to the offering by US$             million, or by US$             per ordinary share and US$             per ADS, assuming no exercise of the underwriters’ over-allotment option to purchase additional ADSs, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes the number of ordinary shares purchased from us as of June 30, 2010, the total consideration paid to us and the average price per ordinary share/ADS paid by existing investors and by new investors purchasing ordinary shares evidenced by ADSs in this offering at the assumed initial public offering price of US$            per ADS, after giving effect to underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Ordinary Shares
Purchased
    Total Consideration     Average
Price per
Ordinary
Share
   Average Price
per ADS
     Number    Percent     Amount    Percent       

Existing shareholders

                 US$                            US$                US$            

New investors

        US$                   US$                US$        
                             

Total

      100.0   US$                 100.0     
                             

 

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A US$1.00 increase (decrease) in the assumed initial public offering price of US$            per ADS would increase (decrease) the total consideration paid by new investors, total consideration paid by all shareholders and the average price per ADS paid by all shareholders by US$             million, US$             million and US$            , respectively, assuming no change in the number of ADSs sold by us as set forth on the cover page of this prospectus and without deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The dilution to new investors will be US$            per ordinary share and US$            per ADS if the underwriters exercise in full their over-allotment option to purchase additional ADSs.

The foregoing discussion and tables do not include the impact of any exercise of outstanding share options to be granted to certain directors and employees on the effective date of the registration statement of which this prospectus is a part. As of the date on which the registration statement, of which this prospectus is a part, becomes effective, there will be 4,600,000 ordinary shares issuable upon the exercise of outstanding share options at an exercise price equal to 60% of the initial public offering price per ADS, divided by the number of ordinary shares underlying each ADS, and 400,000 additional ordinary shares available for future issuance upon the exercise of future grants under our equity incentive plan. The dilution to new investors would be US$             per ordinary share and US$             per ADS if these options are fully exercised, assuming the initial public offering price of US$             per ADS.

 

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EXCHANGE RATE INFORMATION

Our business is primarily conducted in China, and we expect that all of our revenues will be denominated in Renminbi. This prospectus contains translations of Renminbi amounts into U.S. dollars at specified rates solely for your convenience. Unless otherwise noted, all translations from Renminbi amounts to U.S. dollar amounts were made at the rate of RMB6.7815 to US$1.00, the noon buying rate in the City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York as of June 30, 2010. On August 27, 2010, the noon buying rate was RMB6.7977 to US$1.00.

The following table sets forth exchange rate information for the periods indicated.

 

     Noon Buying Rate

Period

   Period End    Average(1)    Low    High
     (RMB per US$1.00)

2005

   8.0702    8.1826    8.2765    8.0702

2006

   7.8041    7.9579    8.0702    7.8041

2007

   7.2946    7.6058    7.8127    7.2946

2008

   6.8225    6.9477    7.2946    6.7800

2009

   6.8259    6.8295    6.8470    6.8176

2010 (through August 27)

   6.7977    6.8108    6.8305    6.7735

February

   6.8258    6.8285    6.8330    6.8258

March

   6.8258    6.8262    6.8270    6.8254

April

   6.8247    6.8256    6.8275    6.8229

May

   6.8305    6.8275    6.8310    6.8245

June

   6.7815    6.8184    6.8323    6.7815

July

   6.7735    6.7762    6.7807    6.7709

August (through August 27)

   6.7977    6.7855    6.8038    6.7670

 

Source:   For all periods prior to January 1, 2009, the exchange rate refers to the noon buying rate as reported by the Federal Reserve Bank of New York. For periods beginning on or after January 1, 2009, the exchange rate refers to the noon buying rate as set forth in the weekly H.10 statistical release of the Federal Reserve Board.

 

( 1 )  

Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.

In addition, all translations of Euro into U.S. dollars have been made at the noon buying rate in effect on June 30, 2010, which was Euro 1.00 to US$1.2291.

We make no representation that the Renminbi, Euro or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Euro or the Renminbi, as the case may be, at any particular rate or at all.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company, such as:

 

   

political and economic stability;

 

   

an effective judicial system;

 

   

a favorable tax system;

 

   

the absence of exchange control or currency restrictions; and

 

   

the availability of professional and support services.

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include:

 

   

the Cayman Islands has a less developed body of securities laws as compared to the United States and provides significantly less protection to investors; and

 

   

Cayman Islands companies do not have standing to sue before the federal courts of the United States.

Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, among us, our officers, directors and shareholders, be subject to arbitration.

Substantially all of our operations are conducted in China, and substantially all of our assets are located in China. In addition, a majority of our directors and officers are nationals or residents of jurisdictions other than the United States, and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon us or such persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed Law Debenture Corporate Services Inc. as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any state in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.

Maples and Calder, our counsel as to Cayman Islands law, and King & Wood PRC Lawyers, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and the PRC, respectively, would:

 

   

recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

 

   

entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the civil liability provision of the securities laws of the United States or any state in the United States.

Maples and Calder has further advised us that:

 

   

a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable with respect to taxes, fines, penalties or similar fiscal or revenue obligations and which was neither obtained in a manner nor is of a kind enforcement which is

 

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contrary to natural justice or the public policy of the Cayman Islands, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation; and

 

   

it is unlikely that a monetary award ordered by a U.S. court as a result of a fine or a penalty arising under the U.S. federal securities laws would be recognized as valid, or enforced, by the courts of the Cayman Islands.

King & Wood PRC Lawyers has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between the PRC and the country where the judgment is made or on reciprocity between jurisdictions, provided that the foreign judgments do not violate the basic principles of laws of the PRC or its sovereignty, security or social and public interest. China does not have any treaties or other agreements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. Accordingly, it is uncertain that a PRC court would enforce a judgment of a United States court.

 

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OUR CORPORATE STRUCTURE AND HISTORY

The following chart sets forth our shareholding and corporate structure immediately after the completion of this offering (assuming no exercise of the underwriters’ over-allotment option):

LOGO

 

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(1)  

Rich Wind Energy Three Corp. holds 19,755,000 ordinary shares in our authorized share capital immediately before the completion of this offering. Rich Wind Energy Three Corp. has additional shareholder rights which will terminate upon the completion of this offering. See “—Our History—2009 and 2010 Investments and Shareholding Restructurings.”

(2)  

Represents 14,160,900 ordinary shares held by Clarity China Partners, L.P., 1,863,000 ordinary shares held by Clarity MY Co-Invest, L.P. and 443,600 ordinary shares held by Clarity China Partners (AI), L.P., respectively, in our authorized share capital immediately before the completion of this offering. Clarity Investors have additional shareholder rights which will terminate upon the completion of this offering. See “—Our History—2009 and 2010 Investments and Shareholding Restructurings.”

(3)  

China Opportunity S.A. SICAR holds 13,297,900 ordinary shares in our authorized share capital immediately before the completion of this offering. China Opportunity S.A. SICAR has additional shareholder rights which will terminate upon the completion of this offering. See “—Our History—2009 and 2010 Investments and Shareholding Restructurings.”

(4)  

ICBC International Investment Management Limited holds 10,985,400 ordinary shares in our authorized share capital immediately before the completion of this offering. ICBC International Investment Management Limited has additional shareholder rights which will terminate upon the completion of this offering. See “—Our History—2009 and 2010 Investments and Shareholding Restructurings.”

(5)  

First Windy Investment Corp. holds 8,976,300 ordinary shares in our authorized share capital immediately before the completion of this offering. First Windy Investment Corp. has additional shareholder rights which will terminate upon the completion of this offering. See “—Our History—2009 and 2010 Investments and Shareholding Restructurings.”

(6)  

Represents investors that became our shareholders before the completion of this offering, including SCGC Capital Holding Company Limited, Ironmont Investment Co., Ltd., Ace Ambition International Limited, Merrill Lynch PCG, Inc., Faith Crown Investments Limited, Mitsui & Co., Ltd., Chan Ping Che, Lead Success Group Limited, Second Windy Investment Corp., Chan Ping Yee, Best Jolly Investments Limited, Huiming Investment Co., Ltd., Sun Crown Investments Limited, Third Windy Investment Corp., Eapard Investment Management Co., Ltd., Wei Er Investment PTE. Ltd., Powerich Development Limited, Qiu Yane, Peng Kang Yi and Tung Wai Fung. Each of these shareholders holds no more than 4,721,800 ordinary shares in our authorized share capital immediately before the completion of this offering and these shareholders in the aggregate hold 30,517,900 ordinary shares in our authorized share capital immediately before the completion of this offering.

(7)  

Represents public investors that become our shareholders by purchasing our ADSs in this offering.

(8)  

The remaining 40% equity interest is owned by Jiangsu Di Ao Investment Co., Ltd., an independent third party. The equity owners of Jiangsu Mingyang Wind Power Technology Co. Ltd. have identical economic and voting rights in proportion of the respective equity interest they hold.

(9)  

The remaining 65.06% equity interest is owned by Tianjin Jinneng Investment Company, an independent third party. Tianjin Jinneng Mingyang Wind Power Technology Co., Ltd. leases its self-owned properties to us for our facilities. The equity owners of Tianjin Jinneng Mingyang Wind Power Technology Co. Ltd. have identical economic and voting rights in proportion of the respective equity interest they hold.

(10)

Zhongshan Mingyang Wind Power Equipment Co., Ltd. is not currently engaged in any material business operations.

(11)

Zhongshan Mingyang Electrical Appliance Co., Ltd. is wholly owned by Mr. Chuanwei Zhang, our founder, chairman and chief executive officer.

 

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Our Corporate Structure

We conduct all of our business through our operating subsidiaries in the PRC as follows:

 

   

We design, manufacture, sell and service our wind turbines through Guangdong Mingyang, Jilin Mingyang and Jiangsu Mingyang Wind Power Technology Co., Ltd;

 

   

We develop and manufacture rotor blades at Tianjin Blade and Zhongshan Blade; and

 

   

We manufacture and assemble wind turbines at Tianjin Mingyang Wind Power Equipment Co., Ltd.

We own 99.00% of the equity interest in Guangdong Mingyang through several intermediate holding companies, namely:

 

   

First Base Investments Limited, or First Base, a wholly owned holding company incorporated in Hong Kong;

 

   

Keycorp Limited, or Keycorp, a wholly owned holding company incorporated in Hong Kong;

 

   

Sky Trillion Limited, or Sky Trillion, a wholly owned holding company incorporated in the British Virgin Islands;

 

   

King Venture Limited, or King Venture, a wholly owned holding company incorporated in Hong Kong;

 

   

Tech Sino Limited, or Tech Sino, a wholly owned holding company incorporated in Hong Kong;

 

   

Asiatech Holdings Limited, or Asiatech, a wholly owned holding company incorporated in Hong Kong; and

 

   

Rich Wind Energy Two Corp., or Rich Wind Energy Two, a wholly owned holding company incorporated in the British Virgin Islands, which indirectly holds its interest in Guangdong Mingyang through Wiser Tyson Investment Corp. Limited, or Wiser Tyson, its wholly owned holding company incorporated in Hong Kong.

The remaining 1.00% is held by Zhongshan Mingyang Electrical Appliance Co., Ltd., a company incorporated under the laws of the PRC and wholly owned by Mr. Chuanwei Zhang, our founder, chairman and chief executive officer, due to PRC regulations prohibiting wholly foreign owned companies in the industry in which Guangdong Mingyang operate. See “Regulation—Regulations on Foreign Investments.”

Our History

Our predecessor company, Guangdong Mingyang, was incorporated and commenced business operations on June 2, 2006 as a limited liability company in the PRC. At its inception, Mingyang Electrical, Kangyu Industry Development Co., Ltd., or Kangyu, and Mr. Song Wang held approximately 57.00%, 38.00% and 5.00%, respectively, of the equity interests in Guangdong Mingyang. Mingyang Electrical was founded and is indirectly, through Mingyang Electrical Appliances, majority-owned by our founder, chairman and chief executive officer, Mr. Chuanwei Zhang.

2007 and 2008 Investments and Shareholding Restructurings

In July 2007, Kangyu transferred all of its 38.00% equity interest in Guangdong Mingyang to Mingyang Electrical Appliances for a consideration of RMB15.6 million and in August 2007, Mingyang Electrical Appliances transferred 20.00% of the outstanding equity interest in Guangdong Mingyang to Keycorp, a Hong Kong company then owned by China Opportunity S.A. SICAR, or China Opportunity. After the transaction, Guangdong Mingyang became a Sino-Hong Kong joint venture.

 

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As a result of the following investments and capital contributions from October 2007 to September 2008, Mingyang Electrical, First Base, Keycorp, GreenHunter Energy, Inc., or GreenHunter, and Asiatech became the shareholders of 43.52%, 32.19%, 15.27%, 5.98% and 3.04%, respectively, of the equity interests in Guangdong Mingyang at the end of 2008:

 

   

additional capital contributions by Mingyang Electrical, Mingyang Electrical Appliances and Keycorp in October 2007,

 

   

equity interest transfers from Mingyang Electrical Appliances and Mr. Song Wang to First Base, which was then wholly owned by Clarity China Management Ltd., or Clarity China, in trust for Clarity Investors, in December 2007,

 

   

equity interest transfers from First Base to Mingyang Electrical and Keycorp and a capital contribution by First Base in January 2008,

 

   

an investment by GreenHunter in April 2008, and

 

   

investments by Asiatech and First Base and equity interest transfers from Asiatech to First Base and First Base, Asiatech to Mingyang Electrical, Keycorp and GreenHunter in September 2008.

In November 2008, Clarity China, on behalf of Clarity Investors, made the following transfers of equity interests held in First Base for nominal consideration to three senior management members as an award for their past services provided to Guangdong Mingyang:

 

   

the transfer of 32.02% of the equity interests held in First Base to First Windy Investment Corp., or First Windy, a British Virgin Islands company wholly owned by Mr. Chuanwei Zhang,

 

   

the transfer of 8.30% of the equity interests held in First Base to Second Windy Investment Corp., or Second Windy, a British Virgin Islands company wholly owned by Mr. Xian Wang, and

 

   

the transfer of 2.37% of the equity interests held in First Base to Third Windy Investment Corp., or Third Windy, a British Virgin Islands company wholly owned by Mr. Song Wang.

2009 and 2010 Investments and Shareholding Restructurings

On February 26, 2009, we incorporated China Wind Power Equipment Group Ltd. under the laws of Cayman Islands as our ultimate holding company for overseas listing purposes. On May 12, 2009, China Wind Power Equipment Group Ltd. changed its name to China Wind Power Equipment Group Limited.

In August 2009, Mingyang Electrical, First Base, Keycorp and Asiatech made capital contributions in Guangdong Mingyang in exchange for the newly issued equity interest in Guangdong Mingyang. As a result, Mingyang Electrical, First Base, Keycorp, GreenHunter and Asiatech became the shareholders of 43.66%, 32.29%, 15.32%, 5.69% and 3.04%, respectively, of the equity interests in Guangdong Mingyang at the end of August 2009.

In October 2009, Sky Trillion, a British Virgin Islands company then owned by ICBC International Investment Management Limited, or ICBC International, and Tech Sino, a Hong Kong company then owned by Chan Ping Che and Chan Ping Yee, invested approximately RMB342 million (US$50.4 million) and RMB100 million (US$14.7 million), respectively, in Guangdong Mingyang. In October 2009, GreenHunter transferred all of its equity interest in and obligation to Guangdong Mingyang to King Venture, a Hong Kong company then owned by Ace Ambition International Limited, or Ace Ambition, a company then owned by DT Capital China Growth Fund L.P. As a result, Mingyang Electrical, First Base, Keycorp, Sky Trillion, King Venture, Tech Sino and Asiatech became the holder of 37.52%, 27.75%, 13.16%, 10.88%, 4.89%, 3.18% and 2.62%, respectively, of the equity interests in Guangdong Mingyang.

The above investments and share transfers, except for the share-based compensation awards granted by Clarity China to three senior management members in November 2008 and the transfer of equity interest in

 

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Guangdong Mingyang from GreenHunter to King Venture in October 2009 due to its liquidity demand, were primarily made as a result of capital injections from new investors for the growth of our business.

In December 2009, Mingyang Electrical transferred 36.52% of Guangdong Mingyang’s equity interest it held to Wiser Tyson, a Hong Kong company then wholly owned by Ms. Ling Wu, the spouse of our founder, Mr. Chuanwei Zhang, for a consideration of approximately US$24.84 million. Immediately prior to the transfer of Mingyang Electrical’s equity interest in Guangdong Mingyang Mingyang Electrical Appliances, Mr. Chuanwei Zhang, through Mr. Jinfa Wang and Mr. Jianren Wen under a share custody agreement, Mr. Xiaoji Wu, Shenzhen Capital (Hong Kong) Company Limited, or Shenzhen Capital, and Merrill Lynch PCG, Inc., or Merrill Lynch PCG, beneficially owned 71.2%, 5.6%, 2.40%, 12.80% and 8.00% of Mingyang Electrical’s equity interest, respectively.

In January and February 2010, Ms. Ling Wu transferred all of her equity interest in Wiser Tyson to Rich Wind Energy Two, a British Virgin Islands company then wholly owned by Ms. Ling Wu, and issued shares in Rich Wind Energy Two to herself, Best Jolly Investments Limited, or Best Jolly, an entity wholly owned by the spouse of Mr. Xiaoji Wu, SCGC Capital Holding Company Limited, or SCGC, a wholly owned subsidiary of Shenzhen Capital, and Merrill Lynch PCG the other original shareholders of Mingyang Electrical Appliances. Subsequently, Ms. Ling Wu transferred all her equity interests in Rich Wind Energy Two to Rich Wind Energy Three Corp., or Rich Wind Energy Three, a British Virgin Islands company wholly owned by her. As a result, Rich Wind Energy Three, Best Jolly, SCGC and Merrill Lynch PCG, through Rich Wind Energy Two, indirectly held 28.05%, 0.88%, 4.67% and 2.92%, respectively, of the equity interests in Guangdong Mingyang. Effectively, the ownership percentage in Guangdong Mingyang held by each of the investors remained unchanged after these equity transfers.

In anticipation of our initial public offering, the above share transfers were consummated for purposes of setting up our group legal structure in preparation for the share swap, where the shareholders of Guangdong Mingyang exchanged their equity interest in Guangdong Mingyang for the ownership in China Wind Power Equipment Group Limited.

On February 25, 2010, China Wind Power Equipment Group Limited effected a 1:1,000 share subdivision and subsequently increased the authorized share capital by US$950,000 by the creation of 950,000,000 ordinary shares with a par value of US$0.001 each, such that the authorized share capital of China Wind Power Equipment Group Limited became US$1,000,000 comprising of 1,000,000,000 ordinary shares, with a par value of US$0.001 each.

On April 8, 2010, China Wind Power Equipment Group Limited effected a series of share issuances to the then shareholders of Guangdong Mingyang in exchange for 99% of the equity interests in Guangdong Mingyang collectively held by these shareholders.

On April 9, 2010, in connection with the share exchange, Clarity Investors, China Opportunity, ICBC International, Rich Wind Energy Three, First Windy and Mr. Chuanwei Zhang entered into a shareholders’ agreement. The shareholders’ agreement contains various rights among these shareholders such as preemption rights, board nomination rights, information access rights and matters which require special approval by our key shareholders. These rights will terminate upon the completion of this offering.

On April 27, 2010, China Wind Power Equipment Group Limited changed its name to China Ming Yang Wind Power Group Limited.

On May 17, 2010, in anticipation of our initial public offering, China Ming Yang Wind Power Group Limited became our ultimate holding company upon the completion of all the related registration procedures, including registrations in the Cayman Islands and Hong Kong, for the share issuances on April 8, 2010 as part of the share exchange. The reorganization was accomplished upon the completion of the registration procedures.

 

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In July and August 2010, in order to attract additional strategic investors while not diluting the interests of the other shareholders, Rich Wind Energy Three transferred a total of 8,961,500 ordinary shares it held in our company to Faith Crown Investments Limited, a British Virgin Islands company, Mitsui & Co., Ltd., a company incorporated in Japan, Lead Success Group Limited, a British Virgin Islands company wholly owned by CCB International Asset Management Limited, and other investors. In July 2010, Ace Ambition also transferred a total of 1,908,200 ordinary shares it held in our company to Clarity Investors and other investors. In August 2010, Second Windy and Third Windy transferred a total of 700,000 ordinary shares and 100,000 ordinary shares, respectively, to other investors.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated statement of comprehensive income data for the years ended December 31, 2007, 2008 and 2009 (other than loss per ADS data) and the selected consolidated statement of financial position data as of December 31, 2008 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following selected consolidated statement of comprehensive income data for the six months ended June 30, 2009 and 2010 and the selected consolidated statement of financial position data as of June 30, 2010 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited condensed consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in the opinion of management, all adjustments necessary, which include only normal recurring adjustments, for the fair statement of the financial information contained in those statements.

The selected financial data as of December 31, 2007 has been derived from our audited financial statements, which are not included in this prospectus. The selected consolidated statement of comprehensive income data from the inception of our business on June 2, 2006 to December 31, 2006 and the selected consolidated statement of financial position data as of December 31, 2006 have been derived from our unaudited consolidated financial statements, which are not included in this prospectus.

You should read the selected consolidated financial and operating data in conjunction with our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our consolidated financial statements are prepared and presented in accordance with IFRS. Our historical results are not necessarily indicative of our results expected for any future periods.

 

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    Period
from June 2,
2006
(Date of
Inception) to
December 31,

2006
    Year Ended
December 31,
    Six Months Ended June 30,  
      2007     2008     2009     2009     2010  
    RMB     RMB     RMB     RMB     US$     RMB     RMB     US$  
    (in thousands, except share, per share and per ADS data)  

Consolidated Statement of Comprehensive Income Data

               

Revenue

  —        —        124,677      1,172,692      172,925      601,565      2,318,610      341,902   

Cost of sales

  —        —        (160,830   (1,096,724   (161,723   (593,161   (1,862,802   (274,689
                                               

Gross (loss)/profit

  —        —        (36,153   75,968      11,202      8,404      455,808      67,213   

Other income

  —        —        1,590      268      40      100      7,122      1,050   
                                               

Selling and distribution expenses

  —        (5,886   (17,738   (90,862   (13,399   (28,782   (54,902   (8,096

Administrative expenses

  (2,695   (13,157   (413,951   (67,475   (9,950   (27,004   (45,492   (6,708

Research and development expenses

  (620   (3,321   (11,980   (52,789   (7,784   (12,620   (23,247   (3,427
                                               

(Loss)/profit from operations

  (3,315   (22,364   (478,232   (134,890   (19,891   (59,902   339,289      50,032   

Net finance expense

  87      (278   (21,512   (49,577   (7,311   (23,266   (43,143   (6,362

Share of loss of an associate, net of income tax expense

  —        —        —        (154   (23   —        (1,161   (171
                                               

(Loss)/profit before income tax expense

  (3,228   (22,642   (499,744   (184,621   (27,225   (83,168   294,985      43,499   

Income tax (expense)/benefit

  —        —        —        (38,495   (5,676   (1,391   5,480      808   
                                               

(Loss)/profit for the period

  (3,228   (22,642   (499,744   (223,116   (32,901   (84,559   300,465      44,307   
                                               

Total comprehensive (loss)/income for the period

  (3,228   (22,642   (499,744   (223,116   (32,901   (84,559   300,465      44,307   
                                               

Attributable to

               

Shareholders of
our company

  (3,195   (22,416   (494,493   (221,313   (32,635   (83,049   297,733      43,904   

Non-controlling interests

  (33   (226   (5,251   (1,803   (266   (1,510   2,732      403   

Net (loss) income per share—basic and diluted

  (0.03   (0.22   (4.94   (2.21   (0.33   (0.83 )    2.98      0.44   

Weighted average number of shares used in computation—basic and diluted(1)

  100,000,000      100,000,000      100,000,000      100,000,000      100,000,000      100,000,000      100,000,000      100,000,000   

 

(1)  

The calculation of the weighted average number of ordinary shares for the purpose of basic and diluted net income per share has been retroactively adjusted to reflect: (i) the 1:1000 share subdivision effected in February 2010, (ii) our reorganization which was completed in May 2010, and (iii) our incorporation in February 2009, as if these events had occurred at the beginning of the earliest period presented and such shares had been outstanding for all periods.

 

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     As of December 31,     As of June 30,  
     2006     2007     2008     2009     2010  
     RMB     RMB     RMB     RMB     US$     RMB     US$  
     (in thousands)  

Consolidated Statement of Financial Position Data

              

Property, plant and equipment

   1,078      3,582      106,871      152,455      22,481      210,923      31,103   

Intangible assets

     17,912      27,590      22,241      3,280      92,023      13,570   

Trade and other receivables

   —        —        5,606      57,461      8,473      29,382      4,333   

Prepayments

   —        —        31,040      51,484      7,592      33,125      4,885   

Deferred tax assets

   —        —        —        2,820      416      22,306      3,289   

Total non-current assets

   1,078      21,494      179,804      331,420      48,871      446,386      65,824   

Inventories

   —        53,695      680,043      1,972,993      290,938      1,507,972      222,366   

Trade and other receivables

   30,361      8,783      394,707      1,627,025      239,921      1,661,680      245,031   

Prepayments

   —        58,248      96,064      123,370      18,192      168,567      24,857   

Pledged bank deposits

   —        8,345      66,903      145,995      21,528      95,126      14,027   

Cash and cash equivalents

   2,993      125,310      41,753      722,233      106,500      971,773      143,298   

Total current assets

   33,354      254,381      1,279,470      4,633,616      683,273      4,433,856      653,816   

Total assets

   34,432      275,875      1,459,274      4,965,036      732,144      4,880,242      719,640   

Issued share capital

   —        —        —        —        —        682      101   

Capital reserve

   29,700      250,002      809,937      1,288,756      190,040      1,326,472      195,602   

Accumulated loss

   (3,195   (25,611   (520,104   (741,417   (109,329   (443,684   (65,426

Total equity attributable to

              

Shareholders of the company

   26,505      224,391      289,833      547,339      80,711      883,470      130,277   

Non-controlling interest

   267      2,266      7,216      29,450      4,343      56,255      8,295   

Total equity

   26,772      226,657      297,049      576,789      85,053      939,725      138,572   

Deferred tax liabilities

   —        —        —        1,647      243      744      110   

Provisions

   —        —        3,017      19,154      2,824      51,310      7,566   

Trade payables

   —        324      1,644      20,140      2,970      33,879      4,996   

Total non-current liabilities

   —        324      4,948      44,664      6,586      182,594      26,925   

Trade and other payables

   7,660      48,894      705,383      2,203,118      324,872      2,523,797      372,159   

Short-term bank loans

   —        —        65,000      181,673      26,790      452,129      66,671   

Income tax payable

   —        —        —        33,748      4,976      18,633      2,748   

Provisions

   —        —        921      22,364      3,298      63,449      9,356   

Deferred revenue

   —        —        385,700      1,899,626      280,119      698,477      102,997   

Total current liabilities

   7,660      48,894      1,157,277      4,343,583      640,505      3,757,923      554,143   

Total liabilities

   7,660      49,218      1,162,225      4,388,247      647,091      3,940,517      581,069   

Total equity and liabilities

   34,432      275,875      1,459,274      4,965,036      732,144      4,880,242      719,640   

 

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     Year Ended December 31,     Six Months
Ended
June 30,
     2006    2007    2008     2009     2009     2010

Other Consolidated Financial Data (in percentages)

              

Gross margin

   —      —      (29.0   6.5      1.4      19.7

Operating margin

   —      —      (383.6   (11.5   (10.0   14.6

Net margin

   —      —      (400.8   (19.0   (14.1   13.0

Selected Operating Data (in units of wind turbines)

              

New orders

   —      132    452      574      134      618

Total deliveries(1)

   —      —      69      378      92      144

Total units commissioned(2)

   —      —      16      152      78      310

Order book(3)

   —      132    515      711      557      1,158

 

     Year Ended December 31,     Six Months Ended June 30,
     2007     2008     2009     2009     2010
     RMB     RMB     RMB     US$     RMB     RMB    US$
     (in thousands)

Non-IFRS Financial Data

               

Adjusted EBITDA(4)

   (19,314   (88,369   (107,416   (15,840   (46,254   357,060    52,652

 

(1)  

Delivery of a wind turbine refers to the arrival of the wind turbine at the customer’s designated wind farm and the completion of preliminary inspection and acceptance by the customer.

 

(2)  

Commissioning of a wind turbine refers to grid-connection commissioning, whereby the wind turbine is installed and a functionality test is performed to ensure proper connection to the grids. Commissioning generally represents the point of revenue recognition. A durability test is conducted following commissioning.

 

(3)  

Represents cumulative orders signed minus cumulative deliveries.

 

(4)  

EBITDA refers to earnings before net finance expense, income tax expense and depreciation and amortization. Adjusted EBITDA refers to EBITDA adjusted to exclude share-based compensation expenses.

 

     Adjusted EBITDA is used by management to evaluate our financial performance and determine the allocation of resources and provides management with the ability to determine our return on capital expenditure. Items that are eliminated from the calculation of Adjusted EBITDA are collectively managed by our senior executive officers, including our chief executive officer and chief financial officer, taking into consideration our strategic, business and financial goals. In addition, we believe that Adjusted EBITDA will be a key metric analyzed in determining the amount of new debt financing that may be available to us, and, therefore, we believe this measure provides investors with additional information about our ability to fund our growth through debt financing, if needed. Furthermore, Adjusted EBITDA eliminates the impact of items that we do not consider indicative of the performance of our business. We believe investors will similarly use Adjusted EBITDA as one of the key metrics to evaluate our financial performance and to compare our current operating results with corresponding historical periods and with other companies in the wind equipment manufacturing industry. The presentation of Adjusted EBITDA should not be construed as an indication that our future results will be unaffected by other charges and gains we consider to be outside the ordinary course of our business.

 

    

The use of Adjusted EBITDA has certain limitations. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our operating and financial performance. Depreciation and amortization expense, income tax expense, interest expense and interest income as well as share-based compensation expenses have been and will be incurred in our business and are not reflected in the presentation of Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, Adjusted EBITDA does not consider capital expenditures and other investing activities and should not be considered as a measure of our liquidity. We compensate for these

 

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limitations by providing the relevant disclosure of our depreciation and amortization expense, interest expense and interest income, income tax expense, capital expenditures as well as share-based compensation expenses and other relevant items both in our reconciliations to IFRS financial measures and in our consolidated financial statements, all of which should be considered when evaluating our performance. The term Adjusted EBITDA is not defined under IFRS, and Adjusted EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with IFRS. When assessing our operating and financial performance, you should not consider this data in isolation or as a substitute for our net income, operating income or any other operating performance measure that is calculated in accordance with IFRS. In addition, our Adjusted EBITDA may not be comparable to Adjusted EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate Adjusted EBITDA in the same manner as we do.

The following table is a reconciliation of Adjusted EBITDA to loss for the year, the most directly comparable financial measure calculated and presented in accordance with IFRS:

 

    Period from
June 2, 2006
(Date of
Inception) to
December 31,

2006
    Year Ended December 31,     Six Months Ended June 30,  
      2007     2008     2009     2009     2010  
    RMB     RMB     RMB     RMB     US$     RMB     RMB     US$  
          (in thousands)  

(Loss)/profit for the year/period

  (3,228   (22,642   (499,744   (223,116   (32,901   (84,559   300,465      44,307   

Income tax expense/(benefit)

                 38,495      5,676      1,391      (5,480   (808

Net finance (income)/expense

  (87   278      21,512      49,577      7,311      23,266      43,143      6,362   

Depreciation and amortization

  22      3,050      10,372      27,628      4,074      13,648      18,932      2,791   

EBITDA

  (3,293   (19,314   (467,860   (107,416   (15,840   (46,254   357,060      52,652   

Share-based compensation expenses

            379,491                            

Adjusted EBITDA

  (3,293   (19,314   (88,369   (107,416   (15,840   (46,254   357,060      52,652   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial and Operating Data” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a leading and fast-growing wind turbine manufacturer in China, focusing on designing, manufacturing, selling and servicing megawatt-class wind turbines. We were the largest non-state owned or controlled wind turbine manufacturer in China in 2009, as measured by installed capacity of wind turbines, with a 4.1% market share in terms of newly installed capacity, according to BTM. We were also among the five largest domestic branded wind turbine manufacturers in China as measured by newly installed capacity in 2009, according to BTM.

We were founded in June 2006 and have since experienced significant growth. As of June 30, 2010, we had entered into sales contracts with 14 end customers to deliver 1,776 units of our wind turbines. We have grown rapidly since our delivery of the first wind turbine we manufactured in 2008 as demonstrated by the following:

 

     Year Ended December 31,        
     2008    2009     Six Months
Ended
June 30, 2010
 

Wind turbines we delivered (units)

   69    378      144   

Wind turbines commissioned for which we recognized revenue (units)

   16    152      310   

Revenue recognized (in millions)

   RMB119.3    RMB1,169.2      RMB2,315.1   
      (US$172.4   (US$341.4

Wind turbines we delivered for which we have yet to recognize revenue (units)

   53    279      113   

Deferred revenue (in millions)

   RMB385.7    RMB1,899.6      RMB698.5   
      (US$280.1   (US$103.0

We incurred losses in the amount of RMB22.6 million, RMB499.7 million and RMB223.1 million (US$32.9 million) in 2007, 2008 and 2009, respectively. We became profitable beginning in the first quarter of 2010 and generated a profit in the amount of RMB300.5 million (US$44.3 million) in the first six months of 2010.

Factors Affecting Our Results of Operations

Demand for renewable energy and specifically for wind power energy

Changes in prices of oil, coal, natural gas and other conventional energy sources influence the demand for electricity and for alternative energy sources, including wind power. Our business expansion and revenue growth have depended, and will continue to depend, on demand for renewable energy and specifically wind power energy products.

According to BTM, global wind turbine installed capacity grew at a CAGR of 26.2% from 2001 through 2009, bringing cumulative installed capacity to 160,084MW as of December 31, 2009. The addition of 38,103MW of global installed capacity in 2009 set an industry record, notwithstanding wind turbine supply constraints that restricted wind farm development. The strong growth in 2009 was mainly due to growth in the U.S. and China.

 

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China’s cumulative wind turbine installed capacity increased from 406MW in 2001 to 25,853MW in 2009, representing a CAGR of 68.1%. BTM estimates that by the end of 2014, China will become the leading country in the world in terms of cumulative installed capacity.

Future growth of the wind turbine market will also be affected by the growth of the global and regional economies, the stability of financial markets and the ability of wind turbine manufacturers to further expand production capacity and reduce manufacturing costs.

Wind turbine sales to customers

We began commercial delivery of our wind turbines in May 2008. By delivery, we refer to the arrival of the wind turbine at the customer’s designated wind farm and the completion of preliminary inspection and acceptance by the customer. Our sales contracts with customers generally require us to deliver wind turbines to the customers’ location, supervise wind turbine installation and conduct related inspection, and provide technical and maintenance support during the warranty period which is typically two years.

We recognize revenue attributable to sales of wind turbines after (i) the wind turbines have been delivered, the installation supervision services have been provided and (ii) a functionality test has been completed and accepted by our customers. We record in “deferred revenue” in our consolidated statements of financial position the amount of revenue billed to our customers for those wind turbines that have been delivered to our customers’ locations but have not been commissioned.

Consequently, our results of operations have been and will continue to be significantly affected by the number of units of wind turbines we sell and the timing of revenue recognition on such sales at any given period. In addition, as we introduce the 2.5/3.0MW SCD wind turbines and other models in the future, we expect changes to our product mix will also affect our results of operations and margins. See “—Critical Accounting Policies—Revenue Recognition.”

Government polices including tariffs, taxes and duties affecting the wind power sector

Government incentives continue to be one of the main drivers for developing wind energy technology and increasing capacity. Although government support programs differ from country to country, a number of countries have implemented incentive schemes, thus provide various types of subsidies to wind power developers and long term tariffs. The PRC government has also introduced various policies and measures to encourage wind power generation. Historically, we and our customers have benefited from fiscal benefits applicable to investments in the wind power industry by state and local governments in China. Moreover, electricity generated from wind power is subject to a preferential VAT rate of 8.5%, half of the general rate. Changes in these policies have affected, and will continue to affect the investment plans of our customers and us and our business, financial condition and results of operations.

Pricing of wind turbines

Pricing of our wind turbines is principally affected by the overall demand in the wind power equipment industry and by the average wind turbine manufacturing cost. We price our wind turbines with reference to the prevailing market prices when we enter into sales contracts with our customers, taking into consideration our estimated costs and an appropriate gross profit margin we expect. We also consider the size of the contract, the history and strength of our relationship with the particular customer, raw material and component costs and other factors.

In recent years, the supply of wind turbines has increased significantly as many manufacturers worldwide, including our company, have engaged in significant production capacity expansion. Beginning in the fourth

 

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quarter of 2008, this increase in supply resulted in the reductions of prevailing market prices of wind turbines. The average contract selling price for our 1.5MW wind turbines and technical support and maintenance services, excluding value-added taxes, or VAT, on a per kilowatt, or kW, basis, decreased by 9.0% from RMB5,188 per kW in 2008 to RMB4,761 per kW (US$702.1 per kW) in 2009, based on the sales contracts we entered into in relevant periods. The average contract selling price for our 1.5MW wind turbines further declined to RMB4,098 per kW (US$604.3 per kW) in the six months ended June 30, 2010. While our SCD wind turbines are expected to be sold at a higher unit selling price, the average contract selling prices for our wind turbines may continue to decline in response to competitive pricing pressures as well as other market conditions.

Prices of raw materials and components and their availability

Raw materials and components used in the production of our wind turbines are sourced from domestic suppliers as well as international suppliers, and their prices are dependent on various factors in addition to supply and demand. The fluctuations in prices of such raw materials and components and their availability will affect our operating results. We manufacture rotor blades in-house to ensure quality, adequate and timely supply and to capture the higher margin that we believe is offered by rotor blades manufacturing. We purchase our electrical control systems, pitch control systems and frequency converters, a device that converts and controls the frequency of the electric current, each a key component of our wind turbines, from Tianjin REnergy Electrical Co., Ltd., or REnergy, an affiliated entity. Starting from February 2010, we contracted REnergy to supply electrical control cabinets which contain electrical control systems utilizing our proprietary technologies and our brand name. We generally engage two or three suppliers for each of our major components in order to minimize the dependency on any single supplier. We do not currently depend entirely on any single supplier for any major components and raw materials and believe that most components and raw materials we require for our production are generally available. We have also established strategic relationships with key suppliers, including suppliers for gearboxes, frequency converters and main bearings, by entering into cooperation framework agreements that provide for favorable pricing terms and supply priority to us. These cooperation framework agreements reflect the parties’ intention to explore further cooperative opportunities in good faith but do not contain substantive terms and provisions. Our cost of raw materials, which is based on our recognized revenue and generally has a time lag from the time of sales contract on a per unit basis, decreased from RMB7.2 million in 2008 to RMB6.5 million (US$1.0 million) in 2009, which was partially offset by the decrease in the prices of our wind turbines, and contributed to the change from a gross loss of RMB36.2 million in 2008 to a gross profit of RMB76.0 million (US$11.2 million) in 2009. Our cost of raw materials on a per unit basis further decreased to RMB5.5 million (US$0.8 million) in the six months ended June 30, 2010. We are currently expanding our rotor blade manufacturing capabilities and may selectively acquire certain component manufacturers in the future in order to produce these components in-house and reduce our dependency on external suppliers for these components. As a result of our multiple-supplier strategy and our good relationships with our key suppliers, we do not expect to experience any shortage in the supply of our major components and raw materials in the near future.

In addition, the primary raw materials used in some of our components include steel and copper. Consequently, the prices we pay to our suppliers for such components may be affected by movements in prices for these raw materials.

Ability to design and market technologically advanced and cost-competitive turbine models

Although we have successfully launched our 1.5MW wind turbines, our operating results and future growth depend on our ability to continue to develop or license technologies, manufacture and market technologically advanced and cost competitive wind turbines. We have completed the prototype of our new 2.5/3.0MW SCD wind turbines, and expect to complete our 6.0MW SCD wind turbines prototype in 2011. We expect to continue to optimize the performance of our products under diverse operating conditions such as in low and high temperatures, high altitudes, low wind velocity and coastal areas. As our customers’ needs evolve, the wind turbine specifications they require typically change as well. Our ability to design and develop new products that meet these changing requirements has been and will continue to be critical to our ability to maintain and increase

 

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our installed capacity sold and profitability. As a result, we expect to continue to make significant investments in research and development, particularly with respect to designing and developing more technologically advanced and cost-competitive products and core components.

Our ability to source and manage working capital requirements

Our business operations require significant working capital. Our operating results and future growth depend on our ability to optimize the working capital cycle time and to source adequate working capital commensurate with the size of our business. Some of our suppliers require us to make prepayments in advance of shipment. As we participate in public bidding to secure our sales contracts, we are required to deposit a certain amount, which is normally calculated at 1% of the contracted amount, which amount will be refunded to us upon the completion of the public bidding. Typically, approximately 5% to 10% of the contract price allocable to the delivery of wind turbines will be retained by our customers and is payable within one month after the end of warranty period. We have currently started providing our customers with alternative payment options, such as letters of guarantee, for exchange of their early payments of such retention monies. Letters of guarantee are financial instruments issued by financial institutions to our customers as a guarantee for our compliance with terms of wind turbine sales contracts until the completion of warranty periods. Historically, we have managed to optimize our working capital cycle time and to source the required working capital from banks and internal cash accruals.

In addition, we have established a strategic relationship with Guangdong Provincial Branch of Industrial and Commercial Bank of China, or ICBC Guangdong, by entering into a strategic cooperative agreement in September 2009, under which ICBC Guangdong granted us a maximum credit line of RMB5.0 billion (US$737.3 million) with a term of two years upon our request from time to time, subject to requirements and restrictions of relevant laws and regulations. A loan agreement with detailed and specific terms and provisions will be separately executed for each borrowing granted under this credit line. ICBC Guangdong also agreed to provide us with various financial services. We agreed to select ICBC Guangdong as our financial advisor and provider of other financial services with first priority. Subsequently in May 2010, we entered into a further elaborated cooperation agreement with ICBC Guangdong, in particular for overseas financial services collaborations, including extension of credit and lease financing arrangements for overseas wind farm projects that intend to purchase our wind turbines. These agreements have a term of one year and will be automatically renewed for another year upon the expiration. We believe we will be able to obtain more financial support from ICBC Guangdong in the future and expect to continue to develop similar strategic relationships with other commercial banks in China to meet our increasing demand for capital as we expand our business.

Seasonality in our operations

Wind turbine sales in China are affected by seasonal variations. Our customers typically award winning bids in the first and fourth quarters primarily because most of them arrange biddings for wind farm projects in these periods according to their internal operational schedules and annual budget requirements. In order to satisfy the delivery schedules, we manufacture most of our wind turbines during the second and third quarters each year, and we deliver and install most of them in the third and fourth quarters due primarily to the favorable weather conditions in these quarters that are suitable for the construction of wind farms located in northern areas to which we supply most of our wind turbines. We expect that the seasonality will gradually lessen as we obtain more purchase orders for wind farms located in southeastern areas in China where the effect of weather conditions on construction is moderate.

 

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Components of Results of Operations

Revenue

Our revenue is derived from the sales of wind turbines, including the provision of installation supervision services, the provision of technical and maintenance support services during the warranty period and the sales of raw materials. Our net revenues are net of VAT collected on behalf of tax authorities. See “—Taxation.”

The following table sets forth our revenue for the periods indicated:

 

     Year Ended December 31,    Six Months Ended June 30,
         2007        2008    2009    2009    2010
     (RMB)    (RMB)    (RMB)    (US$)    (RMB)    (RMB)    (US$)
     (in thousands)

Sales of wind turbines

   —      119,338    1,169,170    172,405    600,953    2,315,084    341,382

Maintenance services

      —      1,042    154    —      3,526    520

Sales of raw materials

   —      5,339    2,480    366    612    —      —  
                                  

Total revenue

   —      124,677    1,172,692    172,925    601,565    2,318,610    341,902
                                  

Sales of wind turbines. Our revenue from the sales of wind turbines, including the provision of installation supervision services, is determined by the units of wind turbines commissioned as well as the amount of contract consideration allocated to the sales of wind turbines.

The following table sets forth the number of wind turbines we secured contract for, delivered and commissioned, at which point we recognized revenue attributable to the sales of wind turbines under IFRS during the periods indicated:

 

Quarter

   New
Orders
Signed
   Cumulative
Orders
Signed(1)
   Delivery     Cumulative
Delivery(1)
   Commissioning    Cumulative
Commissioning(1)

2008

                

First Quarter

   99    231    —        —      —      —  

Second Quarter

   66    297    7 (2)    7    —      —  

Third Quarter

   287    584    17      24    —      —  

Fourth Quarter

   —      584    45      69    16    16

2009

                

First Quarter

   99    683    49      118    20    36

Second Quarter

   35    718    43      161    58    94

Third Quarter

   359    1,077    94      255    29    123

Fourth Quarter

   81    1,158    192      447    45    168

2010

                

First Quarter

   265    1,423    67      514    128    296

Second Quarter

   353    1,776    77      591    182    478

 

(1)  

As of the end of the quarter.

(2)  

Includes our first prototype which was installed in October 2007 but was preliminarily inspected and accepted by the customer in 2008 after comprehensive on-site testing and examinations.

We secured contracts for 132 units of wind turbines in 2007 through Mingyang Electrical, 452 units, 574 units and 618 units in 2008 and 2009 and in the six months ended June 30, 2010, respectively, directly with customers. We delivered 69 units, 378 units and 144 units of wind turbines but began to recognize revenue for 16 units, 152 units and 310 units of wind turbines, which amounted to RMB119.3 million, RMB1,169.2 million (US$172.4 million) and RMB2,315.1 million (US$341.4 million), in 2008 and 2009 and in the six months ended

 

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June 30, 2010, respectively. We did not recognize revenue for the sales of 53 units, 279 units and 113 units of wind turbines delivered as of December 31, 2008 and 2009 and June 30, 2010, respectively, which represented approximately RMB385.7 million, RMB1,899.6 million (US$280.1 million) and RMB698.5 million (US$103.0 million) of deferred revenue, respectively. At the point of revenue recognition, the amount of inventory associated with the delivered wind turbines, which represented approximately RMB391.7 million, RMB1,616.6 million (US$238.4 million) and RMB629.8 million (US$92.9 million) of finished goods inventory, will be included in the cost of sales.

Provision of maintenance services. Our revenue from the provision of technical and maintenance support services during the warranty period is determined by the units of wind turbines in warranty period and amount of contract consideration allocated to the provision of technical and maintenance support services. We recognized revenues from the provision of technical and maintenance support services in the amount of RMB1.0 million (US$147,460) and RMB3.5 million (US$516,110) in the year ended December 31, 2009 and in the six months ended June 30, 2010, respectively.

Sales of raw materials. Our revenue from sales of raw materials is determined by the quantities of raw materials we sell and the average selling price of the raw materials. We derived revenue in the amount of RMB5.3 million and RMB2.5 million (US$368,650) from the sales of the gearboxes, generators, pitch control systems, bearings and other components in the years ended December 31, 2008 and 2009, respectively, but we did not derive such revenue in the six months ended June 30, 2010. We may occasionally sell raw materials to other turbine manufacturers in the future but we do not expect to engage in such sales as part of our ordinary business operation.

Cost of sales

Our cost of sales consists of raw material cost, manufacturing overhead, estimated cost of warranty and related expenses and inventory provision.

 

   

Raw material cost. Raw material cost includes (i) cost of raw materials used in the assembly of wind turbines, such as rotor hubs, main shafts, main frames, gearboxes, bearings, generators, frequency converters, transformers, pitch control systems and electrical control systems, and (ii) cost of raw materials in the manufacturing of rotor blades, such as glass fiber, balsa wood, PVC foam and epoxy resin. Our cost of raw materials, on a per unit basis, amounted to RMB7.2 million, RMB6.5 million (US$1.0 million) and RMB5.5 million (US$0.8 million) in 2008 and 2009 and in the six months ended June 30, 2010, respectively.

 

   

Manufacturing overhead. Our manufacturing overhead includes salaries and benefits for personnel directly involved in the manufacturing activities, depreciation of manufacturing equipment and facilities, consumables, rent, traveling expenses, utilities and other expenses associated with the manufacturing of our products. Variable production overheads are allocated to each unit of production based on the actual use of our production facilities. Fixed manufacturing overhead allocated to cost of sales and inventories are based on the normal capacity of our production facilities. Depreciation of manufacturing equipment and facilities is provided on a straight-line basis over their estimated useful life, taking into account their estimated residual value. Due to our capacity expansion, depreciation in absolute terms has increased significantly from 2007 to 2009, resulting from our purchases of more property, plant and equipment. We expect this trend to continue as we continue to expand our production capacity.

 

   

Estimated cost of warranty and related expenses. We typically provide a two-year warranty for our wind turbines after the wind turbines have passed the durability test, during which time period, we provide technical and maintenance support services and cover parts and labor for non-maintenance repairs and replacement. As required by relevant bidding procedures for certain wind farm projects, we have offered key customers a warranty over a longer period of up to five years. Among 1,776 units of wind turbines we secured contracts for as of June 30, 2010, we offered warranty for a two-year period for 825 units and for periods longer than two years for 951 units of wind turbines. Under the sales contracts, we offer to provide the customers with certain spare parts at prices determined with reference to fair market prices at

 

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the time of the sales contracts, or at estimated fair market prices at the time of delivery of such spare parts. During the warranty period, we typically guarantee the availability and performance of our wind turbines. We are generally obligated to pay a monetary damage of up to 10% of the purchase price of the wind turbine in case of non-performance or underperformance. Customers can also choose to replace a wind turbine if the power output curve of an individual wind turbine does not exceed certain designed power output curve set in the sales contracts after extensive verification. As of December 31, 2009, our accrued warranty costs amounted to RMB41.5 million (US$6.1 million). We have not experienced significant warranty claims since commencing deliveries in 2008. We compared our warranty practice and the design and technology of our wind turbines with those of our competitors that are public companies and believe that the design and technology of our wind turbines and our warranty practice are in accordance with industry standard. Accordingly, we estimate the amount of potential future claims during the warranty periods with reference to our limited historical experience and the warranty accrual practice of our competitors that are public companies. We accrued the equivalent of 3.3% of revenues from sale of wind turbines for each of 2008 and 2009 and the six months ended June 30, 2010 as the best estimate of the cost of future warranty obligations.

In addition, under a majority of the sales contracts we historically entered into, we are also obligated to replace key components, including gearbox, electric generator, main shaft and nacelle, throughout the design life of 20 years of the wind turbine at no additional cost to our customers in a timely manner if such defects are due to our design in wind turbines. Given the stable performance of our wind turbines that have been commissioned and are in operation, we were able to renegotiate and cancel our potential obligations under those sales contracts for the wind turbine design life with respect to sales contracts for which we recognized revenues as of June 30, 2010. We are currently in the process of negotiating with relevant customers to cancel such potential obligations under the rest of the sales contracts we entered into in the past. Therefore, we did not accrue additional warranty provision for such requirement for the replacement of key components during the design life time.

 

   

Inventory provision. Our inventories are stated at the lower of cost or net realizable value. We record inventory provision in cost of sales. We incurred RMB30.7 million and RMB8.3 million (US$1.2 million) in inventory provision in 2008 and 2009, respectively, but we did not incur such inventory provision in the first six months of 2010.

Our cost of sales in connection with the sales of wind turbines and the provision of technical and maintenance support services during the warranty period is affected primarily by our ability to control raw material and component costs by efficiently managing our supply chain and achieving economies of scale in our operations.

Other Income

Other income represents government grants in the amount of nil, RMB1.6 million, RMB0.3 million (US$44,000) and RMB7.1 million (US$1.0 million) in 2007, 2008 and 2009 and in the first six months of 2010, respectively.

Selling and distribution expenses

Our selling and distribution expenses consist primarily of wind turbine and component transportation costs, bidding charges, salaries and benefits for our selling and distribution staff, travelling expenses, sales commission paid to an affiliate entity owned by our chairman and chief executive officer in the amount of RMB15.3 million (US$2.3 million) and RM6.0 million (US$0.9 million) in 2009 and the first six months of 2010, respectively, for its services in our sales promotion which included assisting us in entering into sales contracts and assisting our customers to obtain lease financing from commercial banks, advertising and promotion expenses and depreciation and amortization expenses that are allocable to our selling and distribution activities and other selling expenses including expenses relating to on-site surveying and meetings. We engage third-party transportation companies to transport and deliver wind turbines to wind farms and include the related transportation costs in the selling and distribution expenses. As we participate in certain public biddings

 

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organized by agents engaged by our customers, we are required to pay a bidding success fee to the agent after we win the bid, which amount is calculated at a percentage ranging from 0.1% to 0.5% of the contracted amount and included in the selling and distribution expenses. Our selling and distribution expenses amounted to RMB5.9 million, RMB17.7 million, RMB90.9 million (US$13.4 million) and RMB54.9 million (US$8.1 million) in 2007, 2008 and 2009 and in the first six months of 2010, respectively. We expect that our selling and distribution expenses will increase in the future as we sell more wind turbines and increase our sales efforts and hire additional sales personnel to accommodate the growth of our business as we expand our customer base in the domestic market and enter the overseas markets.

Administrative expenses

Our administrative expenses consist primarily of share-based compensation expenses for the compensatory award granted by one of our principal equityholders to three of our senior management members, salaries and benefits for our administrative, finance and human resources personnel, bank charges, entertainment expenses, rent, professional service fees, stamp duty and other taxes, business travel expenses, office expenses, depreciation and amortization expenses that are allocable to our administrative finance and human resources departments and other costs, including insurance premium, conference fees and utilities expenditures. Our administrative expenses amounted to RMB13.2 million, RMB414.0 million, RMB67.5 million (US$10.0 million) and RMB45.5 million (US$6.7 million) in 2007, 2008 and 2009 and in the first six months of 2010, respectively.

We expect our administrative expenses to increase as we hire more personnel and incur expenses to accommodate our business expansion and to support our operation as a public company, including compliance-related expenses.

Research and development expenses

Research and development expenses consist primarily of professional service fees paid to third-party service providers for outsourced research and development projects, materials consumed in research and development activities, salaries, bonuses and other benefits for research and development personnel, travel expenses, depreciation expenses that are allocable to our research and development department and other expenses, including reimbursement and allowance for research and development personnel. Our research and development expenses were RMB3.3 million, RMB12.0 million, RMB52.8 million (US$7.8 million) and RMB23.2 million (US$3.4 million) in 2007, 2008 and 2009 and in the first six months of 2010, respectively. All costs associated with research and development activities are expensed as incurred. We expect the research and development expenses to increase as we hire additional research and development personnel and devote more resources to research and development efforts.

Taxation

Cayman Islands

We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments made by us are not subject to withholding tax in the Cayman Islands.

Hong Kong

We did not have any assessable profits subject to the Hong Kong profits tax in 2007, 2008 and 2009 and in the first six months of 2010. We do not anticipate having any income subject to income taxes in Hong Kong in the foreseeable future.

 

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People’s Republic of China

Our subsidiaries incorporated in the PRC are governed by applicable PRC income tax laws and regulations. We expect our net income to be derived primarily from Guangdong Mingyang and its subsidiaries. We expect that all of our revenues will be denominated in RMB and stated net of VAT.

Prior to January 1, 2008, Guangdong Mingyang was subject to PRC enterprise income tax at a statutory tax rate of 33%. The new EIT Law and the implementation rules issued by the PRC State Council, became effective as of January 1, 2008. The new EIT Law provides that all enterprises in China, including foreign-invested companies, are subject to a uniform 25% enterprise income tax rate and all tax reduction or exemption as well as incentives previously provided to foreign-invested enterprises were to be cancelled. Under the new EIT Law, entities that qualify as “advanced and new technology enterprises” are entitled to the preferential EIT rate of 15% after the transition period under the new EIT Law, if any, expires.

The recognition criteria and procedures for the “advanced and new technology enterprise” under the new EIT law were not issued until April 2008. Guangdong Mingyang was granted the “advanced and new technology enterprise” certificate. The certificate is valid for a period of three years effective from January 1, 2008. Further, in June 2009, Jilin Mingyang obtained the “advanced and new technology enterprise” certificate, which is valid for a period of three years effective from January 1, 2009. Accordingly, Guangdong Mingyang and Jilin Mingyang are entitled to the preferential income tax rate of 15% from 2008 to 2010 and from 2009 to 2011, respectively. If we fail to remain qualified as an “advanced and new technology enterprise,” which is subject to periodic renewal, we may not be entitled to the preferential tax rate of 15%.

The new EIT Law also provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate as to their worldwide income. Under the implementation rules for the new EIT Law issued by the PRC State Council, “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. Although all of our operational management is currently based in the PRC, it is unclear whether PRC tax authorities would require (or permit) us to be treated as a PRC resident enterprise.

Under the new EIT Law and the implementation rules issued by the State Council, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises,” which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their sources within the PRC. Similarly, any gain realized on the transfer of ADSs or shares by such investors is also subject to PRC income tax at a rate of 10% if such gain is regarded as income derived from sources within the PRC. If we are considered a PRC “resident enterprise,” it is unclear whether dividends we pay with respect to our ordinary shares or ADSs, or the gain you may realize from the transfer of our ordinary shares or ADSs, would be treated as income derived from sources within the PRC and be subject to PRC tax. It is also unclear whether, if we are considered a PRC “resident enterprise,” holders of our ordinary shares or ADSs might be able to claim the benefit of income tax treaties entered into between China and other countries.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB, which requires us to make judgments, estimates and assumptions that affect: (i) the reported amounts of our assets and liabilities; (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (iii) the reported amounts of revenue and expenses during each reporting period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions,

 

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which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates.

We believe that any reasonable deviation from those judgments and estimates would not have a material impact on our financial condition or results of operations. To the extent that the estimates used differ from actual results, however, adjustments to the statement of comprehensive income and corresponding statement of financial condition accounts would be necessary. These adjustments would be made in future financial statements.

When reading our financial statements, you should consider (i) our critical accounting policies; (ii) the judgment and other uncertainties affecting the application of such policies; and (iii) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements. We have not made any material changes in the methodology used in these accounting policies during the past three years.

Revenue Recognition

We derive revenue principally from the sales of wind turbines, including the provision of installation supervision services, the provision of technical and maintenance support services during the warranty period and the sales of raw materials. Our revenue is net of business tax as well as value-added tax collected on behalf of tax authorities with respect to the sale of merchandise. Value-added tax collected from customers, net of value-added tax paid for purchases, is recorded as a liability in the balance sheet until it is paid to the tax authorities.

Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods and the amount of revenue can be measured reliably. Also, revenue is recognized only when it is probable that the economic benefit associated with the transaction will flow to us. In addition to these general revenue recognition criteria, the following specific revenue recognition policies are followed:

Sales of wind turbines and provision of maintenance support services

Revenue from the sale of wind turbines is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. Also, revenue is recognized only when it is probable that the economic benefit associated with the transaction will flow to us.

Our arrangements with customers with respect to wind turbines contain multiple deliverables consisting of (i) the delivery of the wind turbines to the customers’ location, and the provision of installation supervision services, known as the sale of wind turbines (ii) providing technical and maintenance support for a period ranging from two to five years.

Revenue attributable to the sale of wind turbines is recognized when the installation supervision services have been provided by us, which is the point of time when the wind turbine has been delivered and accepted by the customer, the wind turbine has been installed under our supervision, and inspection testing of the wind turbine has been completed and accepted by the customer and any remaining obligation is not significant. The durability test, which typically lasts 240 hours and is performed subsequent to the inspection testing, is a test to ensure proper and stable connection of our wind turbines to the power grids, and not a significant performance obligation with respect to the sale of wind turbines.

 

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The amounts that have been billed by us for wind turbines that have been delivered to the customer locations but the related installation service and the functionality test have not been completed, which generally occurs three to six months after the delivery date, are recorded in “deferred revenue” in the consolidated balance sheets. As of December 31, 2008 and 2009 and June 30, 2010, deferred revenue amounted to RMB385.7 million, RMB1,899.6 million (US$280.1 million) and RMB698.5 million (US$103.0 million), respectively. In 2009, we reduced such amount by a discount granted to a customer in exchange for its payment ahead of payment schedule in the amount of RMB7.7 million (US$1.1 million). Such settlement discount is recorded as a reduction of deferred revenue when: (i) settlement from customers is made ahead of schedule, and (ii) the amount of settlement discount is agreed with our customers, and subsequently recognized as a reduction of revenues when the related wind turbines have been installed and the functionality test has been completed and the results accepted by the customer. For the years ended December 31, 2007, 2008 and 2009 and the six months ended June 30, 2010, none of the settlement discounts are recognized as a reduction to revenues.

Revenue attributable to provision of technical and maintenance support services is recognized on a straight-line basis over the warranty period, which generally ranges from two to five years.

Pursuant to the wind turbine sale arrangements entered into between us and the customers, we normally receive non-refundable advance payments of up to 30% of the contract sales prices from the customers prior to the delivery of wind turbines to the customers’ location. Upon receipt of the advance payments, we record the amounts as “advance payments from customers” in our consolidated balance sheet.

Sales of raw materials

We recognize revenues from the sale of raw materials when the risk and rewards of ownership and title to the raw materials have been transferred to the buyer, which coincides with delivery and acceptance of the products by the buyer.

Depreciation and Amortization

Our long-lived assets mainly include property, plant and equipment and intangible assets with definite life. We depreciate and amortize our long-lived assets except for goodwill using the straight-line method of accounting over the estimated useful lives of the assets. We make estimates of the useful lives of property, plant and equipment (including the salvage values) and intangibles with definite life in order to determine the amount of depreciation and amortization expenses to be recorded during each reporting period. Leasehold improvements are amortized over the shorter of the lease term or estimated useful lives of the assets. We estimate the useful lives of property, plant and equipment, and intangible assets with definite life at the time the assets are acquired based on historical experience with similar assets as well as anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, we might shorten the useful lives assigned to these assets, which would result in the recognition of increased depreciation and amortization expense in future periods.

When items are retired or otherwise disposed of, income is charged or credited for the difference between the net book value and proceeds received thereon. Ordinary maintenance and repairs are charged to expense as incurred. The estimated useful lives of our property, plant and equipment are as follows:

 

    

Useful Life

Plant and buildings

   20 years

Machinery and equipment

   5 -10 years

Furniture, fixtures and office equipment

   5 years

Motor vehicles

   5 years

Leasehold improvements

  

Shorter of the lease term
and estimated useful life

 

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Costs incurred during the construction of new facilities and offices are initially capitalized as construction in progress and transferred into property, plant and equipment when the assets are ready for their intended use, at which time depreciation commences.

Intangible assets represent unpatented technology and goodwill. Unpatented technology is carried at cost less accumulated amortization and amortized on a straight-line basis over the useful life of four to five years.

There has been no change to the estimated useful lives during the periods presented.

Impairment of long-lived assets

We review our long-lived assets, including property, plant and equipment, intangible assets and goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset to the recoverable amount of the asset. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the carrying amount of the asset exceeds its recoverable amount, an impairment charge is recognized to the extent that the carrying amount of the asset exceeds its recoverable amount. There were no impairment charges on long-lived assets for any of the financial periods presented in this prospectus.

Goodwill impairment testing is performed annually at the end of each reporting period. No goodwill impairment loss was recognized for the years ended December 31, 2008 and 2009 and for the six months ended June 30, 2010.

Share-based Compensation

We account for share-based payments under the provisions of IFRS 2, Share-based Payment, or IFRS 2. Under IFRS 2, we are required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award and recognize the expense in our consolidated statements of comprehensive income over the period during which an employee is required to provide service in exchange for the award. The additional expenses associated with share-based compensation may reduce the attractiveness of our equity incentive plans.

For share-based compensation awards granted to our employees by one of our current investors, we recognize the costs of the share-based compensation awards with a corresponding credit to additional paid-in capital. The cost of the compensation is measured based on the grant date fair value of the award.

November 17, 2008 was determined as the date of grant for the compensatory awards when all parties had reached the common understanding of key terms and conditions of the awards and all requisite approvals relating to the share transfers were obtained. First Base, which at that time owned 32.19% equity interests in Guangdong Mingyang, and Clarity China, an entity which then owned 100% of the equity interest in First Base, entered into share transfer agreements with three companies that are respectively owned by:

 

   

Chuanwei Zhang, our chairman and chief executive officer;

 

   

Xian Wang, our senior vice president; and

 

   

Song Wang, our senior vice president.

Mr. Chuanwei Zhang, Mr. Xian Wang and Mr. Song Wang were our founders and have served as our executive management since our inception in 2006. Mr. Chuanwei Zhang is our chairman and chief executive

 

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officer, who has been responsible for day-to-day management of our company and is in charge of establishing and supervising our overall development strategies. Mr. Xian Wang is our vice president in charge of operations and strategies. Mr. Xian Wang previously served as our chief operating officer and chief financial officer. By leveraging his financial expertise and experience, Mr. Xian Wang has been regularly monitoring the financial conditions of our company and has also contributed to our company by developing relationships with our shareholders and external financial institutions. Mr. Song Wang is our vice president in charge of our technology development, marketing and sales services. As an industrial expert, Mr. Song Wang supervises the performance of our research and development team and administrates the research and development resource allocation. He also played a key role in the establishment of our relationship with aerodyn for the transfer of wind turbine technologies.

Clarity China transferred 42.69% of its equity interests in First Base to these three companies for a total nominal consideration of HK$4,269 as an award for the three senior management members’ past services provided to Guangdong Mingyang. Because First Base is a holding company with no operations and assets other than the equity interests in Guangdong Mingyang, upon the share transfers, the three senior management members effectively received 13.74% equity interests in Guangdong Mingyang for their past services.

Because no future services are required to be performed by these senior management members in exchange for the award and the award does not contain any performance or market condition, the cost of the award, as measured based on the fair value of the transferred shares in First Base, or 13.74% equity interests in Guangdong Mingyang, as of the date of grant, was immediately charged to the statements of comprehensive administrative expenses with a corresponding credit to capital reserve. The estimated fair value of this share-compensation award was RMB379.5 million at the date of the grant.

Our determination of the amount of share-based compensation expense we recognize requires significant judgment, including, most importantly, our determination of the estimated fair value of our equity value as of the date of grant. We engaged an independent appraiser to assist us in our determination of the fair value of our equity value as of the date of grant, for which we take full responsibility. Determining the fair value of our equity value requires making complex and subjective judgments regarding projected financial and operating results, our business risks, the liquidity of our shares and our operating history and prospects at the time of grant.

In assessing the fair value of our equity value, we considered the following principal factors:

 

   

the nature of our business;

 

   

the financial condition of our business and the economic outlook in general;

 

   

the operational contracts and agreements in relation to our business;

 

   

our projected operating results; and

 

   

financial and business risks.

We believe the discounted cash flow, or DCF, method, an income approach technique, to be most relevant and reliable to assess the fair value of the equity of Guangdong Mingyang. The DCF method involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts. The major assumptions used in deriving the fair values are consistent with our business plan, including:

 

   

production and delivery plan of wind turbines and rotor blades;

 

   

unit selling price of wind turbines;

 

   

turnover ratios of inventories, trade receivables and trade payables; and

 

   

gross profit margins.

 

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Other major assumptions used by us in calculating the fair values of our equity value include our weighted average costs of capital, or WACC, of 16.37% was used. This was the combined result of the changes in risk-free rate, industry average beta, and the change in risk premium for a company of our size as we continued to grow and meet important milestones.

The above assumptions used by us in deriving the fair values were consistent with our business plan and major milestones achieved by us. We also used other general inherently uncertain assumptions, including the following:

 

   

no material changes in the existing political, legal, fiscal and economic conditions and wind turbine industry in China;

 

   

no major changes in tax law in China or the tax rates applicable to our subsidiaries and consolidated affiliated entities in China;

 

   

our future growth will not be constrained by the lack of funding;

 

   

our ability to retain competent management and key personnel to support our ongoing operations; and

 

   

industry trends and market conditions for wind turbine and related industries will not deviate significantly from economic forecasts.

We recognized share-based compensation expenses in 2008 in the amount of RMB379.5 million, but did not recognize such expenses in other periods up to June 30, 2010.

Our shareholders adopted our 2010 equity incentive plan on August 31, 2010. On the date on which the registration statement, of which the prospectus is a part, becomes effective, we will grant options to purchase an aggregate of 4,600,000 ordinary shares under our 2010 share incentive plan to certain of our directors, officers and other employees. Such options have an exercise price equal to 60% of the initial public offering price per ADS, divided by the number of ordinary shares underlying each ADS. Consequently, we expect to start incurring share-based compensation expenses associated with these grants commencing in the quarter ending September 30, 2010. Based upon US$             per ADS, the midpoint of the estimated public offering price range set forth on the cover of this prospectus, we expect to incur share based compensation expenses of RMB             (US$                ) for the quarter ended September 30, 2010 and RMB             (US$            ) for fiscal year 2010.

Deferred Income Taxes

We account for deferred income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The realization of the future tax benefits of a deferred tax asset is dependent on future taxable income against which such tax benefits can be applied or utilized, the consideration of the scheduled reversal of deferred tax liabilities and any available tax planning strategies. Deferred tax assets are recognized for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilized. The carrying amount of a deferred tax asset is reviewed at each reporting date and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.

 

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Inventories

Our inventories are stated at the lower of cost or net realizable value, which represents the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The cost of inventories is determined using the weighted average cost method and includes expenditure incurred in acquiring the inventories, production on conversion costs and other costs incurred in bringing the inventories to their existing condition and location. For finished goods and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity.

We record inventories provisions that have cost in excess of estimated market value. If the utility of our inventories were to be impaired by damage, deterioration, obsolescence or other causes, we would write down the cost of our inventories to their net realizable values. The inventories provisions for the years ended December 31, 2007, 2008 and 2009 and for the first six months of 2010 were nil, RMB30.7 million, RMB8.3 million (US$1.2 million) and nil, respectively, and were included in cost of sales in our statements of operations.

Warranty

We perform a functionality test to our wind turbines after the installation in order to test the performance of the wind turbines to make sure they meet all of the specific acceptance criteria of our customers and are properly connected to the power grids. A durability test is subsequently performed to ensure proper and stable connection of our wind turbines to the power grids. The warranty period of our wind turbines commences after they pass the durability test. We typically provide a two-year warranty for our wind turbines after the wind turbines have passed the durability test. As required by relevant bidding procedures for certain wind farm projects, we have offered key customers warranties over a longer period of up to five years. Of 1,776 units of wind turbines for which we secured contracts as of June 30, 2010, we offered warranties for a two-year period for 825 units and for periods longer than two years for 951 units of wind turbines. During the warranty period, we provide technical and maintenance support services and cover parts and labor for non-maintenance repairs and replacement. Upon the occurrence of any repairs and replacements, we typically restart the warranty period for the repaired or replacement components. During the warranty period, we also typically guarantee the availability and performance of our wind turbines. We are generally obligated to pay monetary damages of up to 10% of the purchase price of the wind turbine in the case of non-performance or underperformance. Customers can also choose to replace the wind turbines if the annual power output of our wind turbines does not exceed certain designed power output after extensive verification. In addition, we offer under the sales contracts to provide the customers with certain spare parts at prices which are determined with reference to fair market prices at the time of the sales contracts, or at estimated fair market prices at the time of delivery of such spare parts.

Our first wind turbine passed the durability test in April 2009 and has not been in use for more than the warranty period. Since we have limited historical experience, we have elected to estimate the amount of potential future claims during the warranty periods with reference to the warranty experience of other companies in the same business. We compare the warranty practice, design and technology of our wind turbines with those of our competitors in our industry, and we believe our warranty practice and the design and technology of our wind turbines are in accordance with industry standards and specifications and are comparable to these competitors in terms of the performance and durability. Accordingly, we estimate the amount of potential future claims during the warranty periods based on our limited historical experience and the warranty accrual practice of our competitors that are public companies. We accrued the equivalent of 3.3% of revenues from sale of wind turbines for each of 2008 and 2009, based on the best estimate of the cost of future warranty obligations.

In addition, under a majority of our sales contracts we have entered into, we are obligated to replace key components, including the gearbox, electric generator, main shaft, main frame and nacelle cover (which refers to the cover of the compartment of a wind turbine that houses the gearbox, main shafts, electrical control unit, nacelle level electrical control cabinet and generator), throughout the design life time of the wind turbine of 20-year at no additional cost to our customers in a timely manner if such defects are as a result of our wind

 

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turbine designs. As a result, we bear the risk of warranty claims after we have recognized revenues for wind turbines sold. Any problems with the quality or performance of our wind turbines, if proven by the customer to be our fault, would increase our warranty-related expenses. Given the stable performance of our wind turbines that have been commissioned and are in operation, we were able to renegotiate and cancel our potential obligations for the 20-year design life of wind turbines under sales contracts for which we recognized revenue and are currently in the process of negotiating with relevant customers to cancel such potential obligations under the rest of the sales contracts we entered into in the past. Moreover, we do not expect to enter into similar warranty provisions with our customers in the future. Therefore, no additional warranty costs were accrued for such requirement for replacement of key components during their design life time.

Actual warranty costs will depend on a variety of factors including actual failure rates, material and product delivery costs at the time of failure and other costs incurred to fulfill the obligation to replace or repair the product. Actual warranty costs incurred or claimed are charged against the accrued warranty liability. To the extent that actual warranty costs differ significantly from our estimates, we will revise our warranty provisions accordingly. Any such revisions to our accrued warranty liability will affect our results of operations in the period the revision is made as well as subsequent periods to the extent the amount of estimated warranty provisions of related sales revenues is adjusted.

Internal Control over Financial Reporting

Prior to this offering, we have been a private company with limited accounting and other resources with which to address our internal controls and procedures.

During the course of the preparation and external audit of our consolidated financial statements as of December 31, 2008 and 2009 and for the three-year period ended December 31, 2009, we engaged an independent internal control compliance advisor to assist us in our identification of material weaknesses and significant deficiencies in our internal control over financial reporting, for which we take full responsibility.

Material weaknesses identified by our independent registered public accounting firm and our internal control compliance advisor include:

 

   

an insufficient number of personnel with the appropriate level of accounting knowledge, experience and training in the application of IFRS and compliance with the SEC reporting requirements;

 

   

inadequate procedures related to the identification, approval and documentation of related party transactions;

 

   

a lack of formal controls and procedures to ensure that transactions are recorded on the accrual basis of accounting; and

 

   

a lack of formal procedures for (i) the regular review and approval of inventories provision and (ii) systematically carrying out, and documenting the results of, inventory count.

Significant deficiencies identified by our independent registered public accounting firm and our internal control compliance advisor include:

 

   

a lack of formal policies and procedures to document the process and the results of assessment of creditworthiness of our customers relating to our trade receivables;

 

   

inadequate formal control procedures for the preparation and review of consolidated journal entries;

 

   

insufficient formal procedures for the identification and review of significant contracts and documents; and

 

   

a lack of formal procedures with respect to the preparation and review of bank reconciliation.

 

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We have engaged in, and will continue to engage in, substantial efforts to address these material weaknesses and significant deficiencies in our internal control over financial reporting. We have taken or plan to take the following ongoing initiatives that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting subsequent to December 31, 2009:

 

   

engaging an independent internal control compliance advisor to help us remediate the weaknesses and deficiencies;

 

   

actively hiring additional individuals with IFRS and SEC reporting expertise in addition to our chief financial officer who joined us in January 2010;

 

   

implementing control procedures and preparing accounting policy manuals to assist in preparing financial statements in accordance with IFRS;

 

   

providing training to staff by third party consultants;

 

   

establishing an audit committee upon the completion of this offering and a policy to preapprove related party transactions; and

 

   

implementing a customized IT and ERP system to integrate operation and financial reporting.

These material weaknesses and significant deficiencies in our internal control over financial reporting could result in a material misstatement of our financial statements that will not be prevented or detected. As a result, with the assistance of our independent internal control compliance advisor, we have begun taking actions and measures to significantly improve our internal control over financial reporting in order to obtain reasonable assurance regarding the reliability of our financial statements. However, we have not yet implemented all of these actions and measures and tested them. Furthermore, we cannot assure you if or when we will be able to remedy these control deficiencies, that our independent registered public accounting firm will agree with our assessment, or that additional material weaknesses or significant deficiencies in our internal control over financial reporting will not be identified in the future. If the control deficiencies we have identified recur, or if we identify additional deficiencies or fail to implement new or improved controls successfully in a timely manner, we may be unable to issue timely and accurate financial reports and investors could lose confidence in the reliability of our financial statements, which in turn could negatively impact the trading price of our ADSs, or otherwise harm our reputation.

We are committed to continuing to improve our internal control processes. However, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional actions and measures to address any control deficiencies identified by us or our independent registered public accounting firm. Until remediation of our material weaknesses and significant deficiencies, we will continue to perform and rely on the additional procedures described above and other measures as needed to assist us with meeting the objectives otherwise fulfilled by an effective internal control environment.

Under current and proposed rules and regulations implementing Section 404 of the U.S. Sarbanes-Oxley Act of 2002, or SOX 404, we expect to be required to, beginning with the fiscal year ending December 31, 2011, deliver a report that assesses the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm will be required to audit and report on the effectiveness of our internal control over financial reporting. We have a substantial effort ahead of us to complete the documentation and testing of our internal control over financial reporting, and to remediate any material weaknesses and significant deficiencies identified during that process. We may not be able to complete the required management assessment by our reporting deadline. An inability to complete this assessment in a timely manner or at all would result in receiving something other than an unqualified report from our independent registered public accounting firm with respect to our assessment of internal control over financial reporting. In addition, if material weaknesses or significant deficiencies are identified and not remediated, we would not be able to conclude that our internal control over financial reporting was effective, which would result in the inability of our independent

 

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registered public accounting firm to deliver an unqualified report on the effectiveness of our internal control over financial reporting. Inferior internal control over financial reporting could cause investors to lose confidence in the reliability of our financial statements, and such conclusion could negatively impact the trading price of our ADSs or otherwise harm our reputation.

Our Selected Quarterly Results of Operations

The following table presents our selected unaudited quarterly results of operations for the eight quarters in the period from July 1, 2008 to June 30, 2010. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial statements for the quarters presented below on the same basis as our audited consolidated financial statements. The unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. Our limited operating history makes it difficult to predict future operating results. The historical quarterly results presented below are not necessarily indicative of the results that may be expected for any future quarters or periods.

 

    Three Months Ended  
    September 30,
2008
    December 31,
2008
    March 31,
2009
    June 30,
2009
    September 30,
2009
    December 31,
2009
    March 31,
2010
    June 30,
2010
 
    (in RMB thousands)  

Revenue

  —        124,677      149,576      451,989      231,159      339,968      1,008,074      1,310,536   

Cost of sales

  (15,299   (132,683   (145,604   (447,557   (205,317   (298,246   (801,316   (1,061,486
                                               

Gross (loss)/profit

  (15,299   (8,006   3,972      4,432      25,842      41,722      206,758      249,050   

Other income

  590      1,000      —        100      100      68      2,547      4,575   

Selling and distribution expenses

  (4,347   (9,881   (9,294   (19,488   (26,244   (35,836   (13,965   (40,937

Administrative expenses

  (9,111   (391,543   (12,695   (14,309   (15,693   (24,778   (19,630   (25,862

Research and development expenses

  (3,404   (5,284   (4,550   (8,070   (9,889   (30,280   (14,584   (8,663
                                               

(Loss)/profit from operations

  (31,571   (413,714   (22,567   (37,335   (25,884   (49,104   161,126      178,163   
                                               

Finance income

  1,622      167      94      1,039      2,722      1,642      1,614      1,798   

Finance expense

  (11,769   (8,583   (8,303   (16,096   (15,266   (15,409   (15,707   (30,848
                                               

Net finance expense

  (10,147   (8,416   (8,209   (15,057   (12,544   (13,767   (14,093   (29,050
                                               

Share of loss of an associate, net of income tax expense

  —        —        —        —        (151   (3   (230   (931
                                               

(Loss)/profit before income tax expense

  (41,718   (422,130   (30,776   (52,392   (38,579   (62,874   146,803      148,182   

Income tax (expense)/benefit

  —        —        (1,357   (34   (10,022   (27,082   (8,838   14,318   
                                               

(Loss)/profit for the period

  (41,718   (422,130   (32,133   (52,426   (48,601   (89,956   137,965      162,500   
                                               

Total comprehensive (loss)/income for the period

  (41,718   (422,130   (32,133   (52,426   (48,601   (89,956   137,965      162,500   
                                               

Attributable to:

               

Shareholders of the Company

  (41,287   (417,669   (31,556   (51,493   (48,618   (89,646   136,845      160,888   

Non-controlling interest

  (431   (4,461   (577   (933   17      (310   1,120      1,612   
                                               
  (41,718   (422,130   (32,133   (52,426   (48,601   (89,956   137,965      162,500   
                                               

Basic and diluted (loss)/earnings per share

  (0.41   (4.18   (0.32   (0.51   (0.49   (0.90   1.37      1.61   
                                               

 

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Our quarterly results of operations are affected by seasonal trends caused by wind farm operators’ business practices and customer demand. Since the customers typically award winning bids for wind farm projects in the first and fourth quarters of each year due primarily to their internal budgeting schedules, we generally start manufacturing most of our wind turbines in the second and third quarters, in order to satisfy the delivery schedules under respective sale contracts. As a result, our cost of sales, mainly consisting of raw material costs and manufacturing overhead associated with turbine manufacturing, is typically higher in the second and third quarters of each year. Our selling and distribution expenses varied on a quarter-over-quarter basis, mainly in response to the units of wind turbines we delivered in each quarter. The significant increase in the selling and distribution expenses in the second quarter of 2009 from the first quarter was primarily due to a significant amount of bidding charges we incurred for biddings of wind farm projects we participated in. Our administrative expenses increased significantly in the fourth quarter of 2008 due to the one-time share-based compensation expenses we incurred in that period, and our administrative expenses increased in the fourth quarter of 2009 primarily due to a compensation payment of RMB7.2 million paid to a customer in connection with a delay in delivery of wind turbines to its wind farm. Our research and development expenses varied from quarter to quarter, depending on the research and development activities and expenses incurred. The significantly high research and development expenses in the fourth quarter of 2009 and the first quarter of 2010 primarily reflected the professional service fees we paid to third-party service providers for their services relating to wind turbine technology improvements and the materials we consumed for our research and development activities.

Our total revenue fluctuates from quarter to quarter due in part to the timing of revenue recognition with respect to the completion of the turbine commissioning process for different wind farms throughout the year. Other factors that may cause our quarterly operating results to fluctuate include, among others, changes in general economic conditions in China, the availability and pricing of components and parts, and the impact of unforeseen events, such as unexpected natural disasters or changes in industrial policies from local and central governments.

 

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Results of Operations

The following summary consolidated statements of comprehensive income data for the years ended December 31, 2007, 2008 and 2009 have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The following summary consolidated statement of comprehensive income data for the six months ended June 30, 2009 and 2010 have been derived from our unaudited condensed consolidated financial statements, which are included elsewhere in this prospectus. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

 

    Year Ended December 31,     Six Months Ended June 30,  
    2007   2008     2009     2009     2010  
    RMB     % of
Total
Revenue
  RMB     % of
Total
Revenue
    RMB     US$     % of
Total
Revenue
    RMB     % of
Total
Revenue
    RMB     US$     % of
Total
Revenue
 
    (in thousands, except percentage)  

Revenue

  —        —     124,677      100.0      1,172,692      172,925      100.0      601,565      100.0      2,318,610      341,902      100.0   

Cost of sales

  —        —     (160,830   (129.0   (1,096,724   (161,723   (93.5   (593,161   (98.6   (1,862,802   (274,689   (80.3
                                                                     

Gross (loss)/profit

  —        —     (36,153   (29.0   75,968      11,202      6.5      8,404      1.4      455,808      67,213      19.7   

Other income

  —        —     1,590      1.3      268      40      0.0      100      0.0      7,122      1,050      0.3   

Selling and distribution expenses

  (5,886   —     (17,738   (14.2   (90,862   (13,399   (7.7   (28,782  

(4.8

  (54,902   (8,096   (2.4

Administrative expenses

  (13,157   —     (413,951   (332.0   (67,475   (9,950   (5.8   (27,004  

(4.5

  (45,492   (6,708   (2.0

Research and development expenses

  (3,321  

—