20-F 1 d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the fiscal year ended December 31, 2010   Commission file number: 001-33878

 

 

Gushan Environmental Energy Limited

(Exact name of Registrant as specified in its charter)

 

 

Cayman Islands

(Jurisdiction of incorporation or organization)

 

 

No. 37, Golden Pond Road

Golden Mountain Industrial District

Fuzhou City, Fujian Province

People’s Republic of China

(Address of principal executive offices)

 

 

Securities registered pursuant to Section 12(b) of the Act.

 

Title of each Class

  

Name of each exchange

on which registered

American Depositary Shares, each representing ten ordinary shares, par value HK$0.00001 per share    New York Stock Exchange

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

None

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

None

 

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

 

Ordinary shares, par value HK$0.00001 per share

     190,831,943   

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

If this report is annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

 

Large accelerated filer  ¨   Accelerated filer  x    Non-accelerated filer  ¨

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

 

U.S.GAAP  x   International Financial Reporting Standards as issued by the International Accounting Standards Board  ¨    Other  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

 

 


Table of Contents

GUSHAN ENVIRONMENTAL ENERGY LIMITED

TABLE OF CONTENTS

 

INTRODUCTION      1   
FORWARD-LOOKING STATEMENTS      3   
PART I.   
ITEM 1.  

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     4   
ITEM 2.  

OFFER STATISTICS AND EXPECTED TIMETABLE

     4   
ITEM 3.  

KEY INFORMATION

     4   
 

A. Selected Financial Data

     4   
 

B. Capitalization and Indebtedness

     7   
 

C. Reasons for the Offer and Use of Proceeds

     7   
 

D. Risk Factors

     7   
ITEM 4.  

INFORMATION ON THE COMPANY

     36   
 

A. History and Development of the Company

     36   
 

B. Business Overview

     37   
 

C. Organizational Structure

     54   
 

D. Property, Plant and Equipment

     55   
ITEM 4A.  

UNRESOLVED STAFF COMMENTS

     57   
ITEM 5.  

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     57   
 

A. Operating Results

     57   
 

B. Liquidity and Capital Resources

     84   
 

C. Research and Development

     88   
 

D. Trend Information

     89   
 

E. Off-Balance Sheet Commitments and Arrangements

     89   
 

F. Tabular Disclosure of Contractual Obligations

     89   
ITEM 6.  

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     90   
 

A. Directors and Senior Management

     90   
 

B. Compensation

     93   
 

C. Board Practices

     94   
 

D. Employees

     96   
 

E. Share Ownership

     96   
ITEM 7.  

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     101   
 

A. Major Shareholders

     101   
 

B. Related Party Transactions

     101   
 

C. Interests of Experts and Counsel

     102   
ITEM 8.  

FINANCIAL INFORMATION

     102   
 

A. Consolidated Statements and Other Financial Information

     102   
 

B. Significant Changes

     103   
ITEM 9.  

THE OFFER AND LISTING

     103   
 

A. Offering and listing details

     103   
 

C. Markets

     104   
ITEM 10.  

ADDITIONAL INFORMATION

     104   
 

A. Share capital

     104   
 

B. Memorandum and Articles of Association

     105   

 

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C. Material Contracts

     105   
 

D. Exchange Controls

     105   
 

E. Taxation

     105   
 

F. Dividends and Paying Agents

     111   
 

G. Statement by Experts

     111   
 

H. Documents on Display

     111   
 

I. Subsidiaries Information

     111   
ITEM 11.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     112   
ITEM 12.  

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     113   
 

A. Debt Securities

     113   
 

B. Warrants and Rights

     113   
 

C. Other Securities

     113   
 

D. American Depositary Shares

     114   
PART II.   
ITEM 13.  

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     116   
ITEM 14.  

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

     116   
ITEM 15.  

CONTROLS AND PROCEDURES

     116   
ITEM 16A.  

AUDIT COMMITTEE FINANCIAL EXPERT

     117   
ITEM 16B.  

CODE OF ETHICS

     117   
ITEM 16C.  

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     118   
ITEM 16D.  

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     118   
ITEM 16E.  

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     118   
ITEM 16F.  

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     119   
ITEM 16G.  

CORPORATE GOVERNANCE

     119   
PART III.   
ITEM 17.  

FINANCIAL STATEMENTS

     120   
ITEM 18.  

FINANCIAL STATEMENTS

     120   
ITEM 19.  

EXHIBITS

     120   
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS      F-1   
EX-4.8  

STOCK PURCHASE AGREEMENT BETWEEN GUSHAN ENVIRONMENTAL ENERGY LIMITED, ENGEN INVESTMENTS LIMITED, GOLD HERO HOLDINGS LIMITED AND SILVER HARVEST HOLDINGS LIMITED, DATED SEPTEMBER 22, 2010

  
EX-4.9  

AGREEMENT ON SHARE TRANSFER AND CAPITAL INCREASE OF MIANYANG JIN XIN COPPER COMPANY LIMITED DATED SEPTEMBER 22, 2010

  
EX-4.10  

THE BANK OF NEW YORK MELLON ESCROW AGREEMENT BETWEEN GUSHAN ENVIRONMENTAL ENERGY LIMITED, CARLING TECHNOLOGY LIMITED AND THE BANK OF NEW YORK MELLON, DATED NOVEMBER 30, 2010

  
EX-4.11  

SHARE PURCHASE AGREEMENT BETWEEN GUSHAN ENVIRONMENTAL ENERGY LIMITED, ENGEN INVESTMENTS LIMITED, GOLD HERO HOLDINGS LIMITED AND SILVER HARVEST HOLDINGS LIMITED, DATED DECEMBER 31, 2010

  
EX-4.12  

NONNEGOTIABLE PROMISSORY NOTE (001) OF ENGEN INVESTMENTS LIMITED DATED JANUARY 1, 2011

  

 

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EX-4.13  

NONNEGOTIABLE PROMISSORY NOTE (002) OF ENGEN INVESTMENTS LIMITED DATED JANUARY 1, 2011

  
EX-8.1  

LIST OF SUBSIDIARIES

  
EX-12.1  

CERTIFICATE OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)

  
EX-12.2  

CERTIFICATE OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A)

  
EX-13.1  

CERTIFICATE PURSUANT TO RULE 13A-14(B)

  
EX-15.1  

CONSENT OF KPMG

  
EX-23.1  

CONSENT OF CONYERS DILL & PEARMAN

  
EX-23.2  

CONSENT OF SIDLEY AUSTIN LLP

  
EX-23.3  

CONSENT OF CHEN & CO. LAW FIRM

  
EX-23.4  

CONSENT OF GREATER CHINA APPRAISAL LIMITED

  
EX-23.5  

CONSENT OF DTZ DEBENHAM TIE LEUNG LIMITED

  

 

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INTRODUCTION

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

 

   

“we,” “our,” “us,” “Company,” “our Group,” “the Group,” “Gushan” or “Gushan Environmental” refers to Gushan Environmental Energy Limited, a Cayman Islands company and its predecessor entities and consolidated subsidiaries, as the context requires;

 

   

“China” or the “PRC” refers to the People’s Republic of China, and, for the purposes of this annual report, excludes Hong Kong, Macau, and Taiwan;

 

   

“RMB” or “Renminbi” refers to the legal currency of China;

 

   

“$,” “US$” or “U.S. dollars” refers to the legal currency of the United States;

 

   

“HK$,” “HKD” or “Hong Kong dollars” refers to the legal currency of Hong Kong;

 

   

“production capacity” for any given year is estimated based upon 300 annual working days for our biodiesel and recycled copper operations;

 

   

“tons” refers to metric tons;

 

   

“diesel” refers to conventional, petroleum-based diesel fuel;

 

   

“vegetable oil offal” refers to both acidified and non-acidified vegetable oil offal;

 

   

“2006 Notes” refers to the US$25.0 million zero coupon convertible notes that we issued in February 2006 in an aggregate principal amount of US$25.0 million, all of which were converted into 13,011,943 of our ordinary shares in November and December 2007;

 

   

“ordinary shares” refers to our ordinary shares, par value HK$0.00001 per share;

 

   

“PRC subsidiaries” refers to our subsidiaries incorporated in the People’s Republic of China, including Chongqing Gushan, Hunan Gushan, Shanghai Gushan, Beijing Gushan, Fujian Gushan, Handan Gushan, Sichuan Gushan, Biomass, and Jin Xin;

 

   

“ADSs” refers to our American depositary shares, each of which represents ten of our ordinary shares; and

 

   

“U.S. GAAP” refers to generally accepted accounting principles in the United States.

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

On November 12, 2010, we changed the ratio of our ordinary shares to ADSs from two ordinary shares to one ADS to ten ordinary shares to one ADS. We present all per ADS data and number of ADSs in this annual report as if the ratio change was effective as of the beginning of the earliest period presented.

We and certain selling shareholders of our Company completed our initial public offering of 18,000,000 ADSs (equivalent to 3,600,000 ADSs after the ratio change on November 12, 2010), representing 15,000,000 ADSs (equivalent to 3,000,000 ADSs after the ratio change on November 12, 2010) sold by our Company and 3,000,000 ADS (equivalent to 600,000 ADSs after the ratio change on November 12, 2010) sold by the selling shareholders, on December 24, 2007. On December 19, 2007, we listed our ADSs on the New York Stock Exchange, or NYSE, under the symbol “GU.” In January 2008, the underwriters exercised their over-allotment option for the purchase of an additional 1,227,306 ADSs (equivalent to 245,461 ADSs after the ratio change on November 12, 2010) from the selling shareholders.

Unless otherwise indicated, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi are made at US$1.00 = RMB6.600, the noon buying rate for U.S. dollars in effect on December 31, 2010 in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal

 

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Reserve Bank of New York. See Item 3.A, “Key Information—Selected Financial Data—Exchange Rate Information.” All translations from Hong Kong dollars to U.S. dollars were made at the rate of HK$7.7810 = US$1.00, the noon buying rate reported by the Federal Reserve Bank of New York on December 31, 2010. We make no representation that any amounts in Renminbi, Hong Kong dollars or U.S. dollars could be or could have been converted into each other at any particular rate or at all.

 

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FORWARD-LOOKING STATEMENTS

This annual report on Form 20-F, including in particular Item 3.D, “Key information—Risk Factors,” Item 4, “Information on the Company,” and Item 5, “Operating and Financial Review and Prospects,” contains statements that relate to future events, including our future operating results and conditions, our prospects and our future financial performance and condition. These statements involve known and unknown risks, uncertainties and other 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 such forward-looking statements.

In some cases, these forward-looking statements can be identified by words or phrases such as “anticipate,” “believe,” “expect,” “estimate,” “predict,” “seek,” “potential,” “continue,” “future,” “intend,” “may,” “ought to,” “plan,” “should,” “target,” “will,” negatives of such terms or other 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, without limitation, statements relating to:

 

   

changes in governmental policies, laws or regulations in China, including PRC tax laws that may have uncertain implications on biodiesel and recycled copper companies;

 

   

the effects of price fluctuations for biodiesel, biodiesel by-products and copper;

 

   

estimates of future production capacities, volumes and operating costs;

 

   

the effects of natural disasters;

 

   

the effect of intensifying competition in the biodiesel, alternative energy industries, and metal and metal consuming industries;

 

   

the availability of suitable raw materials on terms acceptable to us;

 

   

changes in the general operating environment in China;

 

   

various business opportunities that we may pursue; and

 

   

general economic, market and business conditions in China.

This annual report also contains data related to the biodiesel fuel market in several countries. This market data includes projections that are based on a number of assumptions. The biodiesel fuel market may not grow at the rates projected by the market data, or at all. The failure of the market to grow at the projected rates may materially and adversely affect our business and the market price of our ADSs. In addition, the evolving nature of the biodiesel fuel market subjects any projections or estimates relating to the growth prospects or future condition of our market to significant uncertainties. If any one or more of the assumptions underlying the market data proves to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements. You should read these statements in conjunction with the risk factors disclosed in Item 3.D of this annual report, “Key Information—Risk Factors.” Those risks are not exhaustive.

The forward-looking statements contained in this annual report speak only as of the date of this annual report or, if obtained from third-party studies or reports, the date of the corresponding study or report and are expressly qualified in their entirety by the cautionary statements in this annual report. Since we operate in an emerging and evolving environment and new risk factors emerge from time to time, you should not rely upon forward-looking statements as predictions of future events. Except as otherwise required by the securities laws of the United States, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, to reflect events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events. All forward-looking statements contained in this annual report are qualified by reference to this cautionary statement.

 

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PART I.

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3. KEY INFORMATION

A. Selected Financial Data

The following selected consolidated statement of operations data and other selected consolidated financial data (other than ADS and U.S. dollar data) for the years ended December 31, 2008, 2009 and 2010 and the selected consolidated balance sheet data (other than U.S. dollar data) as of December 31, 2009 and 2010 are derived from our audited consolidated financial statements included elsewhere in this annual report. The following selected consolidated statement of operations data and other selected consolidated financial data (other than ADS and U.S. dollar data) for the years ended December 31, 2006 and 2007 and selected consolidated balance sheet data (other than U.S. dollar data) as of December 31, 2006, 2007 and 2008 are derived from our audited consolidated financial statements which are not included in this annual report. You should read the following information in conjunction with those financial statements and the accompanying notes and Item 5 of this annual report, “Operating and Financial Review and Prospects.” Our audited consolidated financial statements are prepared in accordance with U.S. GAAP, and have been audited by KPMG, an independent registered public accounting firm. Our historical results for any period are not necessarily indicative of results to be expected in any future period.

 

     Year ended December 31,  
     2006     2007     2008     2009     2010     2010  
     RMB     RMB     RMB     RMB     RMB     US$  
     (in thousands, except for percentage and per share data)  

Selected Consolidated Statement of Operations Data:

            

Revenues

     824,482        1,008,056        1,495,614        628,186        408,498        61,894   

Cost of revenues

     (446,742     (568,973     (962,606     (766,686     (481,857     (73,009
                                                

Gross profit (loss)

     377,740        439,083        533,008        (138,500     (73,359     (11,115

Operating expenses(1)

     (44,696     (55,955     (110,963     (129,092     (165,227     (25,035

Impairment loss on property, plant and equipment

     —          —          —          —          (992,620     (150,397

Other operating income

     —          —          —          —          103,780        15,724   
                                                

Income (loss) from operations

     333,044        383,128        422,045        (267,592     (1,127,426     (170,823

Other (expense) income

     4,152        (104,356     (71,342     1,606        3,415        518   
                                                

Earnings (loss) before income tax

     337,196        278,772        350,703        (265,986     (1,124,011     (170,305

Income tax (expense) benefit

     (4,392     (48,499     (81,693     (17,523     17,746        2,689   
                                                

Net income (loss)

     332,804        230,273        269,010        (283,509     (1,106,265     (167,616

Less: Net income attributable to non-controlling interest

     —          —          —          —          (2,750     (417
                                                

Net income (loss) attributable to the Company

     332,804        230,273        269,010        (283,509     (1,109,015     (168,033
                                                

Earnings (loss) per share

            

—Basic

     2.75        1.84        1.61        (1.70     (6.68     (1.01

—Diluted

     2.49        1.83        1.61        (1.70     (6.68     (1.01

 

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     Year ended December 31,  
     2006     2007     2008     2009     2010  

Other Selected Consolidated Financial Data:

          

Gross profit (loss) margin(2)

     45.8 %     43.6 %     35.6 %     (22.0 )%      (18.0 )%

Operating profit (loss) margin(2)

     40.4 %     38.0 %     28.2 %     (42.6 )%      (276.0 )%

Net income (loss) margin(2)

     40.4 %     22.8 %     18.0 %     (45.1 )%      (271.5 )%

Earnings (loss) per ADS

     27.50        18.40        16.10        (16.99 )     (66.79 )

Effect of tax holiday on earnings (loss) per share—basic (in RMB)(3)

     0.73        0.75        0.44        0.01        —     

Effect of tax holiday on earnings (loss) per share—diluted (in RMB)(3)

     0.65        0.75        0.44        0.01        —     

Dividends declared (in thousands of RMB)(4) (5)

     —          —          68,401        26,693        —     

Dividend declared per ordinary share (in RMB)(4) (5)

     —          —          0.41        0.16        —     

 

(1) Operating expenses consist of research and development expenses, selling, general and administrative expenses, other operating expenses, loss on disposal of property, plant and equipment and change in fair value of contingent consideration liability.
(2) Gross profit (loss) margin, operating profit (loss) margin and net income (loss) margin represent gross profit (loss), operating profit (loss) and net income (loss), respectively, divided by revenues.
(3) Our PRC subsidiaries enjoyed tax holidays provided by local and national PRC tax authorities. See Item 5, “Operating and Financial Review and Prospects.” If our PRC subsidiaries had not enjoyed these tax holidays, our effective income tax rate would have been higher.
(4) Dividends declared and dividend declared per ordinary share expressed in US$ during the year ended December 31, 2008 amounted to US$10,026 and US$0.06, respectively, if translated at US$1.00 = RMB6.8225, the noon buying rate for U.S. dollars in effect on December 31, 2008 in The City of New York for cable transfers of RMB as certified for customs purpose by the Federal Reserve Bank of New York.
(5) Dividends declared and dividend declared per ordinary share expressed in US$ during the year ended December 31, 2009 amounted to US$3,911 and US$0.02, respectively, if translated at US$1.00 = RMB6.8259, the noon buying rate for U.S. dollars in effect on December 31, 2009 in The City of New York for cable transfers of RMB as certified for customs purpose by the Federal Reserve Bank of New York.

 

     Year ended December 31,  
     2006      2007      2008      2009      2010  

Selected Operating Data:

              

Sales volume of biodiesel(1) (tons)

     158,994         182,969         231,377         143,818         42,391   

Average selling price of biodiesel(1) (in RMB/ton)

     4,393         4,621         5,748         4,040         4,505   

Sales volume of by-products(2) (tons)

     21,479         22,134         23,878         18,469         6,314   

Average selling price of by-products(2) (in RMB/ton)

     5,868         7,346         6,936         2,554         1,972   

Sales volume of recycled copper products(3) (tons)

     —           —           —           —           3,787   

Average selling price of recycled copper products(3) (in RMB/ton)

     —           —           —           —           53,697   

 

(1) Sales volume of biodiesel includes biodiesel sold as a refined oil product to the fuel market and biodiesel sold as fatty acid methyl ester, an intermediate product to the chemical industry. Average selling price of biodiesel represents total average selling price of biodiesel sold as a refined oil product to the fuel market and biodiesel sold as an intermediate product to the chemical industry.
(2) By-products are comprised of glycerine, stearic acid, erucic acid, erucic amide, plant asphalt and refined glycerine.
(3) On November 3, 2010, we acquired an initial 67% beneficial ownership interest in Mian Yang Jin Xin Copper Company Limited, or Jin Xin. The results of Jin Xin’s operations have been included in our consolidated financial statements since that date. Jin Xin manufactures copper rods, copper wires and copper granules from recycled copper in Sichuan. Jin Xin has one plant in Sichuan, with a daily production capacity of approximately 160 tons of copper products. On January 1, 2011, we acquired an additional 8% beneficial ownership interest in Jin Xin and increased our beneficial ownership interest in Jin Xin to 75%.

 

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    As of December 31,  
    2006     2007     2008     2009     2010     2010  
    RMB     RMB     RMB     RMB     RMB     US$  
    (in thousands, except number of shares)  

Selected Consolidated Balance Sheet Data:

           

Cash

    275,142        1,380,735        963,228        571,188        272,822        41,337   

Accounts receivable

    24,780        31,110        12,926        2,414        48,639        7,370   

Inventories

    38,784        31,580        59,246        33,418        176,023        26,670   

Property, plant and equipment

    498,085        807,371        1,451,533        1,641,096        663,946        100,598   

Total assets(1)

    879,118        2,309,794        2,604,036        2,379,129        1,338,650        202,826   

Secured short-term bank loans

    —          —          —          —          60,000        9,091   

Convertible notes

    41,043        —          —          —          —          —     

Net assets

    798,121        2,181,301        2,377,770        2,096,863        1,001,913        151,805   

Total shareholders’ equity

    798,121        2,181,301        2,377,770        2,096,863        1,001,913        151,805   

Total liabilities and shareholders’ equity

    879,118        2,309,794        2,604,036        2,379,129        1,338,650        202,826   

Number of ordinary shares

    123,820,000        166,831,943        166,831,943        166,831,943        190,831,943        190,831,943   

 

(1) During the year ended December 31, 2010, we determined that the fair value of property, plant and equipment related to PRC biodiesel subsidiaries was lower then their carrying value and we recognized an impairment loss of RMB951.0 million (US$144.1 million). In addition, we recognized an impairment loss of RMB41.7 million (US$6.3 million) on property, plant and equipment in connection with the relocation of production facilities of Sichuan Gushan Vegetable Fat Chemistry Co., Ltd., or Sichuan Gushan.

Exchange Rate Information

Our business is conducted in China and all of our revenue and the majority of our expenses are denominated in Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars at specified rates. Unless otherwise noted, all translations from Renminbi to U.S. dollar amounts were made at the noon buying rate in the City of New York for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York, as of December 31, 2010, which was RMB6.6000 to US$1.00. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all.

The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollars for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you. The exchange rate of Renminbi per U.S. dollar as set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.4801 to US$1.00 as of June 10, 2011.

 

     Exchange Rate (Renminbi per U.S. Dollar)(1)  
     Average(2)      High      Low      Period-end  
     (RMB per US$1.00)  

2006

     7.9579         8.0702         7.8041         7.8041   

2007

     7.6032         7.8127         7.2946         7.2946   

2008

     6.9477         7.2946         6.7800         6.8225   

2009

     6.8307         6.8470         6.8176         6.8259   

2010

     6.7696         6.8330         6.6000         6.6000   

December

     6.6497         6.6745         6.6000         6.6000   

 

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     Exchange Rate (Renminbi per U.S. Dollar)(1)  
     Average(2)      High      Low      Period-end  
     (RMB per US$1.00)  

2011

           

January

     6.5964         6.6364         6.5809         6.6017   

February

     6.5761         6.5965         6.5520         6.5713   

March

     6.5645         6.5743         6.5483         6.5483   

April

     6.5267         6.5477         6.4900         6.4900   

May

     6.4957         6.5073         6.4786         6.4796   

June (through June 10)

     6.4790         6.4824         6.4754         6.4801   

 

Source: Federal Reserve Bank of New York

 

(1) The source of the exchange rate is: (i) with respect to any period ending on or prior to December 31, 2008, the Federal Reserve Bank of New York, and (ii) with respect to any period ending on or after January 1, 2009, the H.10 statistical release of the Federal Reserve Board.
(2) Averages for a period are calculated by using the average of the exchange rates at the end of each month during the periods. Monthly averages are calculated by using the average of the daily rates during the relevant period.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

An investment in our ADSs involves significant risks. The risks and uncertainties described below are not the only ones we face. You should consider carefully all of the information in this annual report, including the risks and uncertainties described below and our consolidated financial statements and related notes, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

RISKS RELATING TO OUR BUSINESSES AND OUR INDUSTRIES

Our biodiesel operations have been subject to significant suspensions and interruptions which have resulted in a reduction of our sales volume and may continue to materially and adversely affect our results of operations.

Our biodiesel plants have been subject to significant suspensions or interruptions for a variety of reasons including the following:

 

   

government policies such as taxation regulations introduced by the PRC government which significantly raised the consumption tax on diesel products from January 1, 2009. Although it was later clarified that, subject to fulfillment of certain conditions, pure biodiesel made from animal fats or vegetable oils is exempted from such consumption tax, the consumption tax issue had a substantial impact on our operations, resulting in the suspension and deferral of commencement of operations at certain of our plants. It also had a material impact on our financial condition and results of operations as we recognized provisions for consumption tax in 2009 and in the first three quarters of 2010. The consumption tax issue also caused us to shift our sales channel to chemical plants, the market of which is smaller than biodiesel. This contributed in part to the decrease in our revenue and resulted in an impairment charge on our property, plant and equipment;

 

   

repair and maintenance or technological upgrades of our production processes;

 

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transport network interference;

 

   

relocation of production facilities;

 

   

accidents, natural disasters, epidemics and other unexpected or catastrophic events; and

 

   

local protests, activism and labor disruptions.

We have also made strategic decisions to extend the suspension of certain biodiesel plants for reasons such as increasingly high raw material input costs, in particular, since the first quarter of 2011 and a legal dispute.

Further, unscheduled downtime or operational hazards inherent in our industry, such as equipment failures, fires, explosions, release of toxic chemicals such as methanol, abnormal pressures, blowouts, pipeline ruptures, transportation accidents, power outages or shortages or other events outside of our control, may also result in the prolonged suspension of our operations. Some of these events may also cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in the imposition of civil or criminal penalties. Our insurance may not be adequate to fully cover the potential events described above and we may not be able to renew this insurance on commercially reasonable terms or at all.

We cannot assure you that we will not experience further suspensions or interruptions or experience damage to our facilities as a result of future natural disasters, governmental directives or policies, including other taxation regulations, expansion of production capacity, repair and maintenance, relocation of facilities or other consequences associated with such events, which could materially and adversely affect our business, results of operations and financial condition.

We may not be able to resume production at certain of our plants in time to meet customer demand for our products.

Our production operations at several of our biodiesel plants were suspended during 2010. We cannot assure you that the operating condition of our machinery and equipment will allow us to resume production at such plants in a timely manner or at all. To resume production operations, we need to undertake substantial planning and mechanical work to, among other things, inspect, reconfigure, test and fine tune our machinery and equipment and it is uncertain how long this process will take. We may also experience equipment breakdowns or other technical problems during resumption of production that will delay our production and increase our operating expenditures. When we resume production, we may not be able to resume our production operations at the necessary production levels and our production facility may be permanently impaired by our suspension of operations. We will also need to procure an adequate amount of raw materials at acceptable costs in order to resume production. The price and availability of raw materials are affected by a number of factors beyond our control. We cannot assure you that we will be able to procure an adequate amount of raw materials at acceptable costs or at all in order to resume production. See “—Our dependence on a limited number of third-party raw materials suppliers could adversely impact our production or increase our costs, which could harm our reputation or materially and adversely affect our business, results of operations and financial condition.” In addition, our supplier and customer base may have been materially and adversely affected by our suspension of operations. As a result of any of the foregoing, we cannot assure you that we will be able to resume production in time to meet customer demand for our products, which may result in a loss of customer orders and have a material adverse effect on our business, results of operations, financial condition and cash flows. As of the date of this annual report, Beijing Gushan Bio-sources Energy Co. Ltd., or Beijing Gushan, and Handan Gushan Bio-sources Energy Co., Ltd., or Handan Gushan, are in operation and Sichuan Gushan’s new plant has been conducting a trial run since early June 2011.

A decline in the price of diesel or other fuel sources or an increase in their supply could constrain the selling price of our biodiesel and materially and adversely affect our business, results of operations and financial condition.

Our biodiesel prices are influenced by market prices for diesel, the pricing of which is affected by global and domestic market prices for crude oil. As a result, any decline in the price of diesel may adversely affect our

 

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business, results of operations and financial condition. The PRC government also publishes “guidance prices” with respect to diesel. These guidance prices typically establish a ceiling for retail prices for diesel that are generally followed by industry participants. As biodiesel prices are affected by the price of diesel, the PRC government’s prevailing guidance prices typically limit the price range for our biodiesel.

In recent years, the demand for and price of biodiesel in China has also been influenced by the level of energy consumption and prices of crude oil and natural gas in relation to the level of growth in the PRC economy. Demand for biodiesel in China declined significantly in 2009 as a result of the economic slowdown due to the global financial crisis. For example, the price of biodiesel in China began to decline significantly from the fourth quarter of 2008 and such decline continued throughout the third quarter of 2009, resulting from significant decreases in global oil prices and from the rapid contraction of China’s industrial production amid the global financial crisis. During the same period, the average selling price of our biodiesel decreased from RMB6,344 per ton in the third quarter of 2008, to RMB3,960 per ton in the second quarter of 2009. Although the average selling price of biodiesel began to recover steadily to RMB4,835 (US$732.6) per ton in the fourth quarter of 2010, this represented a decrease of 23.8% in the average selling price of our biodiesel from the third quarter of 2008 to the fourth quarter of 2010. This decrease in average selling price contributed to our gross loss for 2009 and 2010. If supply of other energy sources continues to increase and exceed the demand for fuel products, demand for our biodiesel may cease to recover or may decline further and our business, results of operations and financial condition may continue to be adversely affected.

Our dependence on a limited number of third-party raw materials suppliers could adversely impact our production or increase our costs, which could harm our reputation or materially and adversely affect our business, results of operations and financial condition.

We purchase the raw materials for our biodiesel business, including vegetable oil offal, used cooking oil and methanol, from a limited number of third-party suppliers, including waste management companies and vegetable oil producers. Our five largest suppliers accounted for approximately 89.2% of our total cost of revenues in 2010. Our largest supplier for our biodiesel business was the Group’s third largest supplier and accounted for approximately 16.7% of our total cost of revenues in 2010 and the top five suppliers in biodiesel business collectively accounted for approximately 35.0% of our total cost of revenues in 2010. In addition, since our acquisition of Jin Xin on November 3, 2010, we purchased raw materials for our recycled copper business, mainly scrap copper, from two third-party suppliers. These two suppliers were also the Group’s two largest suppliers in 2010 and accounted for approximately 42.9% and 17.9%, respectively, of our total cost of revenues in 2010. We conduct our recycled copper business with suppliers on an order by order basis and do not make any long-term purchase contracts.

The failure of a supplier to supply raw materials satisfying our quality, quantity and cost requirements in a timely manner could impair our ability to produce our products or could increase our costs. If we fail to maintain our relationships with major raw materials suppliers or fail to develop new relationships with other raw materials suppliers, we may be unable to produce our products, or we may only be able to produce our products at a higher cost or after lengthy delays. The supply of copper may be affected by shortages caused by inventory built up when some market speculators influence the commodity market. Furthermore, if these suppliers identify alternative sales channels, such as to chemical plants or distributors, they may choose to sell to other buyers or raise their prices. As a result, we may be compelled to pay higher prices to secure our raw material supplies, which could adversely affect our business, results of operations and financial condition.

In addition, our efforts to diversify our sources of raw materials for castor bean oil for biodiesel production may not ensure adequate supplies of quality products at a competitive price or in a timely manner, or we may not be able to diversify our sources of raw materials. The harvest of castor beans may be affected by natural disasters such as flooding, drought, earthquake, typhoon, and so on. Any such events may reduce the harvest and in turn, reduce the supply of our raw materials, which could result in a reduction of our production volumes, increase our manufacturing costs, or both, either of which may adversely affect our business, results of operation and financial

 

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condition. For example, due to continuous problems with the climate and quality of the castor bean produced, we decided to terminate our supply contract in Indonesia. The long-term payment of RMB4.8 million in connection with such supply contract for castor bean was written off in the fourth quarter of 2010.

Our operations are materially affected by the cost and availability of raw materials.

The principal raw materials we use in the production of biodiesel include vegetable oil offal, used cooking oil and methanol. From 2005 to the fourth quarter of 2010, the prices we have paid for raw materials have steadily increased, and the market price for used cooking oil has also risen significantly in the recent past. For the years ended December 31, 2008, 2009 and 2010, the overall average unit costs of our raw materials, which primarily consist of used cooking oil and vegetable oil offal, amounted to RMB2,538, RMB2,635 and RMB3,573 (US$541.4) per ton, respectively. Recently, our raw material input costs have increased at a rate higher than the rate of increase in our average biodiesel selling prices. In particular, our raw material input costs have risen significantly since the first quarter of 2011. Given the increasingly high raw material input costs, we will continue, commence or resume production of biodiesel in due course upon management’s determination that the market environment is sufficiently favorable to continue, commence or resume operations, with the exception of Shanghai Gushan Bio-Energy Technologies Co., Ltd. or Shanghai Gushan, in which the resumption of biodiesel production is subject to the satisfactory resolution of a previously disclosed legal dispute with a construction contractor. As of the date of this annual report, Beijing Gushan and Handan Gushan are in operation and Sichuan Gushan’s new plant has started trial run since early June 2011.

Vegetable oil offal is a waste by-product of vegetable oil production, and the availability of vegetable oil offal depends on production levels of vegetable oil. Production levels of vegetable oil are affected by factors beyond our control, such as the quality of harvests of plant crops. Used cooking oil is the oil left over from food processing or preparation, mostly by restaurants and food producers. Therefore, any fluctuations in cooking oil consumption in the food industry in China will affect the supply of used cooking oil. If cooking oil consumption in China decreases, the supply of used cooking oil for our production would be adversely affected. Natural gas is the principal feedstock for our suppliers to produce methanol, and our operations depend on the availability, security of supply and price of methanol. If our suppliers are unable to obtain continued access to sufficient natural gas or if they experience significant interruptions in their supply of natural gas, our biodiesel production would be adversely affected. Any such events that reduce the supply of our raw materials could reduce our production volumes, increase our manufacturing costs, or both, either of which may adversely affect our business, results of operation and financial condition.

Our overall operating performance is also affected by the mix of raw materials we use as well as the product mix of our biodiesel and by-products, which command different profit margins. We source our vegetable oil offal and used cooking oil from local used cooking oil disposal companies and vegetable oil manufacturers. Because the long-distance transport of used cooking oil and vegetable oil offal is not economical, we have limited control over the mix of raw materials we can supply to each of our facilities. In addition, the composition of our raw materials is determined by the geographical regions in which we operate, which may affect our profit margins. For example, rapeseed is a raw material essential for producing erucic acid, a by-product of biodiesel production which generates a higher profit margin than biodiesel. Vegetable oil offal and used cooking oil containing rapeseed are only available in a few regions in China, such as Sichuan. Should we decide to expand our facilities into other regions of China, we may be unable to purchase vegetable oil offal or used cooking oil which contains rapeseed to enable us to produce erucic acid as a by-product in these new production facilities. Other than selecting the regions in which we locate our facilities, we have limited ability to change our product mix to concentrate on products with higher profit margins. In addition, given that by-products command a higher profit margin than biodiesel in some regions while the opposite may be true in other regions, our ability to maximize profits through control of our product mix is further constrained.

We may also be subject to increases in the cost of raw materials as a result of our entry into a castor bean oil supply contract in Sichuan. Pursuant to the contract, we have an exclusive right to purchase substantially all of

 

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the expected output of the supplier at the supplier’s cost plus a fixed percentage of commission, or a cost-plus basis, through 2012. Because the purchase price of castor bean oil is based on a cost-plus basis, it may be adjusted from time to time based on the supplier’s costs. Although the contract was structured to diversify the risk of increasing cost of feedstock, our costs may increase due to an increase in the Sichuan supplier’s costs of maintaining the plantation.

The raw materials used for our recycled copper operations are scrap copper, primarily sourced from suppliers located in China. The price of such raw materials has fluctuated significantly since 2008. For example, the spot price of copper in China ranged from approximately RMB19,000 per ton to RMB67,000 per ton during the period from 2008 to the first quarter of 2011. As we generally pay prevailing market prices for scrap copper at the time of purchase, an increase in scrap copper prices would increase our need for working capital and financing, which may not be available on favorable terms, or at all, and may also increase our customers’ working capital requirements, which could result in delays in payments by our customers and increases in our trade receivables and bills receivable. Decreases in copper prices may result in a decrease in the selling price of our inventory, which would negatively affect our gross profit margin.

In the event we are unable to obtain a sufficient quantity of raw materials at reasonable prices, or to pass on higher raw material costs to our customers, our business, financial condition and results of operations could be materially and adversely affected.

Our gross margins in our sales of biodiesel and recycled copper products are principally dependent on the spread between raw material or feedstock prices and product prices. If the unit cost of raw materials increase and the average selling price of our products does not similarly increase or if the average selling price of our products decreases and the unit cost of our raw materials does not similarly decrease, our margins will decrease and our results of operations will be harmed.

Our gross margins from sales of biodiesel are principally dependent on the spread between feedstock prices and biodiesel prices. If the unit cost of feedstock increases and the average selling price of biodiesel does not similarly increase or if the average selling price of biodiesel decreases and the unit cost of feedstock does not similarly decrease, our margins will decrease and our results of operations will be harmed. The spread between biodiesel prices and feedstock prices has narrowed significantly since September 2008. Prices for vegetable oil offal and used cooking oil, which have historically been our principal feedstock and comprised approximately 80% of total cost of revenues for our biodiesel business during the year ended December 31, 2010, do not necessarily have a direct price relationship to the price of biodiesel in a particular period. Prices for vegetable oil offal and used cooking oil are principally influenced by general inflation, market and regulatory factors. Biodiesel prices, however, are primarily influenced by the guidance prices set by the National Development and Reform Committee of China, or the NDRC, and supply and demand for petroleum-based diesel fuel, rather than biodiesel production costs. This lack of correlation between production costs and product prices means that we may be unable to pass increased feedstock costs on to our customers. Any decrease in the spread between biodiesel prices and feedstock prices, whether as a result of an increase in feedstock prices or a reduction in biodiesel prices, would adversely affect our financial performance and cash flow.

Similarly, our gross margins from sales of recycled copper products are principally dependent on the spread between raw material prices and recycled copper product prices. If the unit cost of raw materials increase and the average selling price of recycled copper products does not similarly increase or if the average selling price of recycled copper products decrease and the unit cost of raw materials do not similarly decrease, our margins will decrease and results of operations will be harmed. Currently, there is a close correlation between production costs and prices of recycled copper products, meaning that we are able to pass increased raw material costs on to our customers. However, any decrease in the spread between recycled copper product prices and raw material prices, whether as a result of an increase in raw material prices or a reduction in recycled copper product prices, would adversely affect our financial performance and cash flow.

 

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We may continue to incur substantial impairment losses on our long-lived assets if the operating environment continues to deteriorate.

Our long-lived assets, consisting of property, plant and equipment and land use rights are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of an asset to the estimated future undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

We recognized impairment losses of RMB992.6 million (US$150.4 million) on certain property, plant and equipment in 2010. The impairment loss consists of (i) an impairment loss of RMB951.0 million (US$144.1 million) for the facilities of Fujian Gushan Biodiesel Energy Co., Ltd. or Fujian Gushan, Handan Gushan, Beijing Gushan, Shanghai Gushan, Chongqing Gushan Bio-Source Energy Co., Ltd., or Chongqing Gushan, Hunan Gushan Bio-Sources Energy Co., Ltd., or Hunan Gushan, and Gushan (China) Biomass Energy Technology Co., Ltd., or Biomass. The impairment loss was driven by a combination of a series of adverse changes in the operating environment, in particular, the unresolved consumption tax issue and the increase in costs of raw materials and (ii) an impairment loss of RMB41.7 million (US$6.3 million) in relation to the relocation of Sichuan Gushan’s production lines from San Tai County to our new plant in Qin Dong Bei Industrial Park.

Reversal of previously recognized impairment losses is prohibited under U.S. GAAP. Depreciation is to be recorded based on the adjusted carrying amount of the production facilities after the impairment losses. For the purpose of estimating the fair value, we utilized the projected cash flows of the property, plant and equipment discounted at its weighted average cost of capital.

Currently, we are facing a difficult operating environment caused by a general increase in the average unit cost of our raw materials, which may continue to impact our gross margins, and such factors may further reduce the undiscounted cash flows to be generated from the long-lived assets. If the operating environment continues to deteriorate, the estimated future undiscounted cash flows of our long-lived assets may fall short of their current carrying value again, resulting in a further impairment loss, recognized in our statements of operations. Although any such loss will have no impact on our daily operations, it may continue to adversely affect our financial condition and results of operations.

We may not be able to effectively manage our current expansion, the failure of which could materially and adversely affect our business, results of operations and financial condition.

We have been constructing a plant in Sichuan with an initial annual production capacity of 100,000 tons, which has been conducting a trial run since early June 2011. Such expansion plans could be affected by construction delays, cost overruns, failures or delays in obtaining government approvals of necessary permits and our inability to secure the necessary production equipment.

After completion of the new plant in Sichuan, we do not expect to further expand our biodiesel production capacity in the near future. Should we decide to expand further, any such plans would require us to secure raw materials at competitive prices and to host a sufficiently large local customer base to support the expanded production. In addition, we may not have the necessary management or financial resources to oversee the successful and timely construction of new production facilities or expansion of existing facilities.

Furthermore, to effectively manage any future expansion we would need to improve our operational and financial systems and procedures and system of internal control. Our past growth has strained our resources and made it difficult to maintain and update our internal procedures and controls as necessary to meet the expansion of our overall business. We would need to expand, train and manage our employee base, or successfully establish new subsidiaries for the new or expanded facilities. We would also need to continue to maintain and expand our relationships with our customers, suppliers and other third parties.

 

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We cannot assure you that we will be able to effectively manage any expansion or achieve any expansion at all in the future. If we are unable to do so, we may not be able to take advantage of market opportunities, execute our business strategies or respond to competitive pressures, any of which could materially and adversely affect our business, results of operations and financial condition.

The biodiesel industry faces a number of challenges, and there is no established market for biodiesel in China where biodiesel is considered a principal source of energy for any purpose.

Biodiesel has only recently been produced for commercial applications in China, and the market for biodiesel products is currently confined to specific regions and is relatively small at the national level. There is no established market in China where biodiesel is considered a principal source of energy for vehicles operating on diesel, or an intermediate product for the manufacture of chemicals, or for any other purpose. We cannot assure you that biodiesel will be accepted or will reach a broader consumer base in China. Our future prospects and operational results will be adversely affected if biodiesel and the biodiesel industry in China fail to develop.

The global biodiesel industry is also at an early stage of development and acceptance as compared to other more established industries, and has experienced significant growth only in recent years. Demand for biodiesel may not grow as rapidly as expected or at all. Biodiesel and the global biodiesel industry also face a number of obstacles and drawbacks, including:

 

   

potentially increased nitrogen oxide, or NOx, emissions as compared with most formulations of diesel;

 

   

gelling at lower temperatures than diesel, which can require the use of low percentage biodiesel blends in colder climates or the use of heated fuel tanks;

 

   

potential water contamination that can complicate handling and long-term storage;

 

   

reluctance on the part of some auto manufacturers and industry groups to endorse biodiesel and their recommending against the use of biodiesel or high percentage biodiesel blends;

 

   

potentially reduced fuel economy due to the lower energy content of biodiesel as compared with diesel; and

 

   

potentially impaired growth due to a lack of infrastructure such as dedicated rail tanker cars and truck fleets, sufficient storage facilities, and refining and blending facilities.

The success of any future expansion plans depends on growth in domestic demand for biodiesel, and we may face overcapacity if the biodiesel market in China does not develop as expected. If overcapacity occurs, the expenditures we incur to expand our facilities and increase our capacity may not result in increased revenues, which could cause our results of operations to be materially and adversely affected.

We derive a significant portion of our revenues from a small number of customers and a loss of any of our major customers may cause significant declines in our revenues.

We derive a significant portion of our biodiesel revenues from a small number of customers, and we may be unable to maintain and expand our current customer relationships. For 2008, 2009 and 2010, our five largest biodiesel customers represented approximately 20.6%, 22.4% and 44.5% of our total biodiesel revenues, respectively, while our largest biodiesel customer represented approximately 9.1%, 7.4% and 18.6% of our total biodiesel revenues, respectively. For 2010, two of our top five customers were from our biodiesel business and accounted for approximately 14.0% of our total revenues. We also derive a significant portion of our recycled copper product revenues from a small number of customers, and we may be unable to maintain and expand our current customer relationships. For 2010, the largest customer of our recycled copper business was also our Group’s largest customer and represented approximately 10% of our total revenues. Three of our Group’s top five customers were customers of our recycled copper business and accounted for approximately 19.7% of our total revenues.

 

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We expect we will continue to depend on a relatively small number of customers for a significant portion of our sales volume and revenues. If we lose any of our major customers for any reason, including, for example, if our reputation declines, a customer materially reduces its orders from us, our relationship with one or more of our major customers deteriorates, or a major customer becomes insolvent or otherwise unable to pay for our products, our business and results of operations may be materially and adversely affected.

We face significant competition, and if we do not compete successfully against existing and new competitors as well as competing technologies and other products, we may lose our market share and our results of operations may be materially and adversely affected.

With respect to our biodiesel business, existing and future domestic competitors, who may have a greater presence in other regions through government support or enjoy greater popularity among local consumers, may be able to secure a significant market share in regions where we currently do not have plants in operation. We have only seven biodiesel production plants in a limited number of regions in China, including Mianyang in Sichuan province, Fuzhou in Fujian province, Handan in Hebei province, Liuyang in Hunan province and Beijing, Shanghai and Chongqing. See Item 4.D, “Information on the Company—Property, Plant and Equipment—Production Facilities” for further information. In addition, our potential biodiesel competitors might be able to secure raw materials at a lower cost than we can and could therefore threaten our competitive position, which could significantly impact our results of operations and future prospects. Our domestic biodiesel competitors include China Biodiesel International Holding Co., Ltd., China Clean Energy Inc., East River Energy Resources and Science Technology (Zhejiang) Ltd., or East River Energy Resources, China Petroleum and Chemical Corporation, or SINOPEC, China National Offshore Oil Corporation, or CNOOC, and PetroChina Co. Ltd., or PetroChina, some of which have greater resources, brand recognition and access to more extensive distribution channels than we do. Moreover, some of our biodiesel competitors have the ability to manage their risk through diversification, whereas we lack diversification in both the geographic scope and the nature of our business. As a result, we could potentially be impacted more by factors affecting the biodiesel industry or the regions in which we operate than we would if our business were more diversified.

We also face potential competition from foreign producers of biodiesel, which may have greater financial and research and development resources. Biodiesel is a relatively new product that was initially introduced outside China, and the technology for producing biodiesel may be more advanced in countries other than China. If foreign competitors, or domestic competitors relying on alliances with or support from foreign producers, enter the PRC biodiesel market, they may develop biodiesel that is more economically viable, which would adversely affect our ability to compete and our results of operations.

In addition, new technologies may be developed or implemented for alternative energy sources and products that use such energy sources. Advances in the development of fuels other than biodiesel or diesel, or the development of products that use energy sources other than diesel, such as gasoline hybrid vehicles and plug-in electric vehicles, could significantly reduce demand for biodiesel and thus affect our sales. Biodiesel also faces competition from fuel additives that help diesel burn cleaner and therefore reduce the comparative environmental benefits of biodiesel in relation to diesel. Other clean energy sources such as ethanol, liquefied petroleum gas, hydrogen and electricity from clean sources may be more cost-effective to produce, store, distribute or use, more environmentally friendly, or otherwise more successfully developed for commercial production in China than our products. These other energy sources may also receive greater government support than our products in the form of subsidies, incentives or minimum use requirements. As a result, demand for our products may decline and our business model may no longer be viable and our results of operations and financial condition may be materially and adversely affected.

Any increase in competition arising from an increase in the number or size of competitors or from competing technologies or other clean energy sources may result in price reductions, reduced gross profit margins, loss of our market share and departure of key management, any of which could adversely affect our financial condition and results of operations.

 

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With respect to our recycled copper business, we compete primarily with local companies and new entrants to the market, some of which may have a lower cost structure than ours due to lower capital expenditures or lower labor costs resulting from being located in other regions of China. As the barriers to entry in the industry are relatively low, the recycled copper industry in China is highly fragmented and competitive, with a large number of providers throughout the country. We also compete with large companies and may face competition from other sources as well, such as foreign companies and metal manufacturers seeking to vertically integrate their operations. Some of our recycled copper competitors may have greater financial and other resources than we do. Our recycled copper products also compete with imported recycled copper and further appreciation of the Renminbi, which may have the effect of lowering the cost of imported recycled scrap copper and may intensify such competition. We cannot assure you that we will be able to compete successfully in our existing markets for recycled copper products. Any increase in competition may adversely affect our business, financial condition and results of operations.

The prices of our by-products may decrease significantly, which may adversely affect our operating results.

The prices for the by-products of biodiesel production may decrease significantly due to increased production of biodiesel in China, a slowdown in the PRC economy, or for other reasons beyond our control. Our average selling price for biodiesel by-products was RMB1,972 (US$299) per ton in 2010, which represented a 22.8% decrease from our average selling price of RMB2,554 per ton in 2009. By-products accounted for 11.1%, 7.5% and 3.0% of our total revenue for the years ended December 31, 2008, 2009 and 2010, respectively. Accordingly, decreases in the market prices of by-products could materially and adversely affect our business, results of operations and financial condition.

We may not be able to successfully integrate newly acquired recycled copper businesses or achieve expected profitability from our acquisitions.

Acquisitions have been, and are expected to continue to be, an element of our growth strategy for our recycled copper business. We acquired a 67% equity interest in Jin Xin in November 2010 and subsequently increased our equity interest to 75% in January 2011 and we expect to explore additional acquisitions in the future. If we cannot successfully integrate this or future acquisitions, joint ventures and other partnerships on a timely basis, we may be unable to generate sufficient revenue to offset acquisition costs, we may incur costs in excess of what we anticipate and our expectations of future results of operations and synergies may not be achieved. In addition, our results of operations may be adversely affected if we are unable to improve the efficiency of Jin Xin’s operations. Acquisitions involve substantial risks, including:

 

   

unforeseen difficulties in integrating operations, accounting systems and personnel;

 

   

diversion of financial and management resources from existing operations;

 

   

the need to attract and retain management and key employees;

 

   

unforeseen difficulties related to entering geographic regions where we do not have prior experience;

 

   

risks relating to obtaining sufficient equity or debt financing;

 

   

potential undisclosed liabilities; and

 

   

the loss of customers or suppliers.

In addition, if we finance acquisitions by issuing equity or equity-related securities, the equity interests of Gushan’s shareholders would be diluted, which, in turn, could adversely affect the market price of Gushan’s ADSs. Moreover, we may finance an acquisition with debt, resulting in higher leverage and finance costs.

 

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A material disruption of our operations could adversely affect our businesses

Our biodiesel and recycled copper operations are subject to uncertainties and contingencies beyond our control that could result in material disruptions in our operations and adversely affect our business. These include industrial accidents, fires, floods, droughts, storms, earthquakes, natural disasters and other catastrophes, equipment failures or other operational problems, strikes or other labor difficulties and disruptions of public infrastructure. Any breakdown or malfunction of any production equipment could cause a material disruption of our operations which could lead to a reduction in, or halt in our production of biodiesel and recycled copper products. Any reduction or halt in production could prevent us from meeting customer orders, adversely affect our business reputation, increase our costs of production or require us to make unplanned capital expenditures, all which could materially and adversely affect our businesses, financial condition and results of operations.

Our recycled copper business is subject to seasonality.

Demand for our recycled copper products is subject to seasonal fluctuations. Due to the Chinese New Year holiday in the first half of the year, demand for our recycled copper products is generally higher in the second half of the year. As a result, fluctuations in demand for recycled copper in the second half of the year may have a disproportionate impact on our results of operations. In addition, our working capital requirements are generally higher in the second half of the year.

Our recycled copper business and prospects depend heavily on the performance of the metal and metal consuming industries in China.

Our recycled copper business and prospects depend heavily on the performance of the metal industry in China, particularly the copper industry, and the industries that consume copper in China. China has experienced rapid growth in recent years, which has contributed to the strong demand for copper. This, in turn, has resulted in strong demand for recycled scrap copper. A significant slowdown in the Chinese economy, or a downturn in the construction or manufacturing sectors in China, likely would adversely affect demand for recycled copper in China. Demand for recycled copper products may also be affected by various other factors, such as changes in industry preferences, the cost and availability of substitute materials and raw material prices.

As a result, we cannot assure you that there will be continued or growing demand for recycled copper products in China. If demand for recycled copper products in China does not continue to grow or grows more slowly than expected, recycled copper product prices may decline and our business, financial condition and results of operations could be materially and adversely affected.

Our recycled copper business is subject to risks related to transportation systems.

Our recycled copper business is highly dependent upon the transportation systems we use to acquire raw materials and deliver our products. We receive raw materials from suppliers and deliver recycled copper products to our customers primarily by truck, using third-party providers. Because we generally keep only 15 to 30 days of inventory on hand, our business is substantially dependent on reliable and efficient transportation systems.

Transportation services are subject to disruption from a variety of causes, including shortages of supplies, equipment or operating problems, labor disputes or strikes, storms and adverse weather, energy shortages, natural disasters and other causes. Disruptions in the transportation systems we use for these or any other reasons could adversely affect our ability to receive raw materials and deliver products to our customers on a timely basis. A prolonged disruption in these transportation services, or a significant increase in transportation costs, may adversely affect our business, financial condition and results of operations.

Electricity shortages could adversely affect our business, financial condition and results of operations and increases in the price of electricity and natural gas could increase our costs and lower our profitability.

All of our manufacturing assets and operations for our biodiesel and recycled copper businesses are located in China. Our operations are vulnerable to power shortages that generally affect enterprises located in China.

 

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Certain manufacturers in China, especially in eastern and southern China, have in recent years experienced electricity shortages. If there is insufficient electricity supply to satisfy our requirements and accommodate our planned growth, we may need to limit or delay our production or expansion plans. For example, our recycled copper business is dependent on electricity and natural gas to operate equipment and convert scrap copper into recycled copper products. Accordingly, the successful operation of our facilities requires a reliable supply of electricity and natural gas. If the cities where we have operations are affected by power outages or must ration power, our production volumes would decrease and our results of operations may be adversely affected.

We cannot assure you that power shortages will not affect us in the future. In addition, we do not have any insurance coverage for business interruptions, including loss of profits from such interruptions. Any losses that may occur as a result of these kinds of events could adversely affect our business, financial condition and results of operations.

In addition, increases in the price of electricity or natural gas would increase our operating costs. The energy industry in China has historically experienced shortages and price volatility as a result of a variety of factors, including surging demand as a result of rapid growth in China and disruptions in the supply of coal used to produce electricity. Any significant shortages of electricity and/or natural gas or prolonged blackouts would disrupt our operations, and as a result, negatively impact our operating results. In addition, significant increases in the price of electricity and/or natural gas would adversely affect our profitability if we were unable to pass on those additional costs to our customers.

We may not be able to adequately protect our intellectual property rights or may be subject to infringement claims.

We rely on a combination of patents, trademarks, domain names and contractual rights to protect our intellectual property. We cannot assure you that the measures we take to protect our intellectual property rights will be sufficient to prevent any misappropriation of our intellectual property, or that our competitors will not independently develop alternative technologies that are equivalent or superior to technologies based on our intellectual property. We have three registered patents, two in China, each with a validity period of 20 years from August 7, 2002 and from March 9, 2005, respectively, and one in the United States with a validity period of 20 years and 5 months from April 25, 2008. We cannot assure you that these patent registrations will not be revoked or challenged during their validity periods. The legal regime governing intellectual property in China is still evolving and the level of protection of intellectual property rights in China may not be as effective as those in other jurisdictions. In the event that the steps we have taken and the protection afforded by law do not adequately safeguard our proprietary technology, we could suffer losses due to the sales of competing products that exploit our intellectual property, and our profitability would be adversely affected. Furthermore, we may incur additional overhead costs in any intellectual property claims we initiate, which will impact our operating results.

Many international biodiesel producers and other domestic biodiesel producers in China may have also patented certain technologies in the production of their biodiesel products. To the best of our knowledge, our patented process does not infringe any third party’s intellectual property rights. However, intellectual property rights are complex and there exists the risk that our process may infringe, or be alleged to infringe, another party’s intellectual property rights. The defense and prosecution of intellectual property suits, patent opposition proceedings and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties, to pay ongoing royalties, or to redesign our products or manufacturing processes or subject us to injunctions prohibiting the manufacture and sale of our products or the use of our technologies.

 

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If we fail to keep up with new technology, our ability to offer cost-effective, technologically advanced and environmentally friendly products may be materially and adversely affected and our competitiveness may erode.

Our success depends on our ability to offer cost-effective and environmentally friendly products. As the technology for manufacturing biodiesel is at an early stage of development, failure to keep up with technological improvements or to implement such improvements in commercial applications would impede our efforts to reduce unit production costs and correspondingly hinder our efforts to strengthen our competitiveness. Moreover, if alternative technologies that are more cost-effective and environmentally friendly become available to the market, the biodiesel industry in general and our business in particular may not be able to compete against such new alternative energy sources. Further, the PRC government may introduce new standards regulating biodiesel quality with which we may be unable to comply, or we may have to incur additional costs to invest in technology or equipment to meet a new PRC or industry-wide standard. If we fail to achieve any new standard, or if the cost of achieving such standard is prohibitively expensive, we may have to raise prices and our biodiesel may become less attractive to customers or we may have to suspend all or part of our operations, which could materially and adversely affect our business, results of operations and financial condition.

We have not received NDRC approval for certain of our foreign investment-related projects, which could materially and adversely affect our further expansion and our ability to benefit from certain preferential policies that might otherwise be available to us.

Our subsidiaries incorporated in the PRC are foreign invested enterprises that we established either through acquisition or incorporation. Certain of our subsidiaries have not obtained approval from the NDRC, for certain foreign investment-related projects. PRC law requires the Ministry of Commerce, or its local counterparts, to issue final government approval as a pre-condition to foreign investment in China. Before this final approval may be granted, however, approval from the NDRC, or its local counterparts, is required for projects except for trade or services related projects that do not relate to fixed asset investment. In practice, the Ministry of Commerce, or its local counterparts, often grant final approval for foreign invested projects before such projects have first obtained NDRC approval. Our further expansion and ability to benefit from certain preferential policies that might otherwise be available to us may be adversely affected because the competent authorities for land, planning, quality supervision, safety supervision, customs, taxation, foreign exchange and the administration of industry and commerce could refuse to grant approval or consent to our future projects due to the lack of NDRC approval.

Failure to comply with environmental regulations could harm our business.

We are subject to various PRC national and local environmental regulations related to our operations, including regulations governing the use, storage, discharge and disposal of hazardous substances and waste emission levels. If we fail to comply with the applicable environmental regulations, we could be subject to significant monetary damages and fines or suspensions of our operations, and our business, reputation and results of operations would be adversely affected. Further, any amendments to these laws and regulations may impose substantial pollution control measures that may require us to make significant expenditures to modify our production process or change the design of our products to limit actual or potential impact to the environment. Moreover, new laws, new interpretations of existing laws, increased governmental enforcement of environmental laws or other developments could require us to make significant additional expenditures, which may adversely affect our business, results of operations and financial condition.

In November 2006, we installed a covered storage tank at our Fujian plant at the recommendation of the local environmental bureau. We currently use uncovered storage tanks at our Sichuan and Hebei facilities. If we are required to undertake further compliance measures at any of our plants, our results of operations may be materially and adversely affected. As of the date of this annual report, Shanghai Gushan, which commenced operation in June 2008, has obtained a water discharge permit as required by the management authority of the

 

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industrial area in Fengxian, from the Fengxian branch of the Shanghai Water Authority. Beijing Gushan, which commenced operation in January 2008, has not obtained waste discharge permit from the relevant local environmental authorities.

We cannot assure you that waste discharge permits will be obtained or that our Beijing plant will not be materially and adversely affected as a result of its failure to obtain such permits. In addition, any perception of our noncompliance with environmental regulations could harm our business. For example, in August 2007, we experienced protests at our Fujian plant alleging environmental issues. As a result, our operations at the Fujian plant were disrupted for several hours. These and other risks relating to environmental compliance may materially and adversely affect our business, results of operations and financial condition.

We do not possess valid title to certain buildings that we occupy and commenced construction of certain buildings prior to obtaining the requisite construction approvals.

For some of the buildings and land we occupy, we have not yet obtained sufficient land use or title certificates that allow us to occupy, freely use or transfer the land or properties. As of the date of this annual report, Fujian Gushan, Beijing Gushan, Shanghai Gushan, Sichuan Gushan and Jin Xin have not obtained the building ownership certificates for buildings with a total gross floor area of approximately 319 square meters, 9,941 square meters, 7,956 square meters, 9,630 square meters and 12,850 square meters, respectively. As of December 31, 2010, the carrying value of these buildings amounted to RMB44.6 million (US$6.8 million). We currently use these properties as production facilities and ancillary facilities. We are in the process of carrying out completion inspections of these buildings and applying for the relevant building ownership certificates. Beijing Gushan and Jin Xin are also applying for land use right certificates with respect to land occupying a total gross floor area of approximately 54,965 square meters and 15,257 square meters, respectively. As of December 31, 2010, the carrying value of these land use rights amounted to RMB24.0 million (US$3.6 million). We cannot assure you that such building ownership or land use right certificates will be obtained. As a result of the absence of land use right certificates or vested legal title in these properties, we may incur additional costs to relocate our operations and our business operations and our financial condition may be adversely affected.

In addition, Fujian Gushan, Beijing Gushan, Shanghai Gushan, Chongqing Gushan, Sichuan Gushan, Hunan Gushan and Jin Xin commenced construction of certain workshops or ancillary facilities prior to obtaining the construction approvals required by PRC construction law. Each of Fujian Gushan, Beijing Gushan, Shanghai Gushan, Chongqing Gushan, Sichuan Gushan, Hunan Gushan and Jin Xin may be subject to a maximum administrative penalty of RMB30,000 (US$4,545). As of the date of this annual report, Fujian Gushan, Beijing Gushan, Sichuan Gushan and Shanghai Gushan have not obtained all necessary approvals for construction of certain workshops or ancillary facilities of a total gross floor area of approximately 319 square meters, 9,941 square meters 4,460 square meters and 2,335 square meters, respectively, and the relevant government authority may require the buildings located on these sites to be demolished. As of December 31, 2010, the carrying value of these buildings amounted to RMB14.5 million (US$2.2 million). As of the date of this annual report, Jin Xin has not obtained all necessary approvals for construction of certain workshops or ancillary facilities of a total gross floor area of approximately 12,850 square meters, and the relevant government authority may require the buildings located on these sites to be demolished. As of December 31, 2010, the carrying value of these buildings amounted to RMB19.8 million (US$3.0 million). If the relevant government authority imposes penalties on us and requires us to cease construction of or demolish these properties, we may incur additional costs and expenses for the relocation of our facilities.

The modification or elimination of government initiatives promoting the adoption of clean energy sources in China could cause demand for our products and our revenues to decline.

A number of PRC government initiatives promote the adoption of clean energy sources, such as biodiesel. For example, pursuant to the Twelfth Five-Year Plan and the Medium and Long-Term Development Plan, China targets to increase its consumption of energy from renewable sources to 15% of total energy consumption in

 

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China by 2020. The plan also includes the promotion of renewable energy sources. Under the plans, China aims to increase its annual consumption of biofuel, with the consumption of biodiesel targeted at two million tons per year by 2020. According to the Law of Renewable Energy Resources, local governments are required to prepare a renewable energy development plan and provide financial support to renewable energy projects in rural areas. Further, the government may grant businesses engaged in biodiesel production certain benefits and incentives, while petroleum marketing enterprises are required to include biodiesel products that comply with the state standard with respect to fuel sales. These government initiatives could be modified or eliminated altogether. Such a change in policy could adversely affect the growth of the biodiesel market and cause our revenues to decline. Changes to or elimination of initiatives designed to increase general acceptance of clean energy sources could result in decreased demand for our products and have a material adverse effect on our business, results of operations and financial condition.

In addition, the PRC government has enacted regulations that are intended to affect corporate behavior pertaining to the environment. Many of these regulations may be favorable to companies, such as us, that are engaged in environmentally friendly or “green” industries. According to the Medium and Long-Term Development Plan, the share of renewables used in primary energy consumption is to be increased to roughly 10% by 2010 and nearly 15% by 2020, up from 7.5% in 2005. However, we cannot assure you that demand for our products will increase or that we will otherwise benefit from such regulations. For example, the PRC Ministry of Finance has issued the Temporary Regulation on the Management of Special Funds for the Development of Renewable Resources. Pursuant to this regulation, special funds will be provided to companies for the development of renewable resources, including petroleum substitutes. These funds may be used to promote advancement in the development of energy sources that compete with biodiesel, which may in turn reduce demand for biodiesel.

If environmental regulations are relaxed in the future, or if the enforcement of environmental regulations is not sufficiently rigorous, we may not be able to compete effectively against other manufacturers of energy products, including traditional and other clean energy source products. Our business prospects and results of operations may be adversely affected as a result of any of the foregoing factors.

Our insurance coverage may not be sufficient to cover our liability risks.

Consistent with customary practice in China, we do not carry any business interruption insurance, third- party liability insurance for personal injury or coverage for environmental damage arising from accidents at our production facilities. In addition, we have very limited product liability insurance coverage for our biodiesel business. The maximum payout for each claim is capped at RMB100,000, and the cumulative maximum payout under our product liability insurance policies ranges from RMB500,000 to RMB1,000,000. As of the date of this annual report, our 75%-owned subsidiary, Jin Xin, does not carry any insurance on its property, plant and machinery. We are in the process of finalizing such insurance with an insurance company in China. Should an uninsured liability or a liability claim in excess of our insured limits occur, our business operations and financial condition may be adversely affected. Further, if such incidents are publicized, our reputation maybe adversely affected, which could result in reduced and/or cancelled sales, thereby adversely affecting our revenues.

Our recycled copper business may be subject to liability in connection with industrial accidents at our production facilities.

Our recycled copper operations involve the operation of heavy machinery that could result in industrial accidents which cause injuries or death. We cannot assure you that industrial accidents, whether due to malfunctions of machinery or other reasons, will not occur in the future at our production facilities. In such an event, we may be liable for loss of life and property, medical expenses, medical leave payments and fines and penalties for violation of applicable PRC laws and regulations. In addition, we may experience interruptions in our operations and may be required to change the manner in which we operate as a result of governmental investigations or the implementation of safety measures due to accidents. Any of the foregoing could adversely affect our business, financial condition and results of operations.

 

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Our future performance depends on the continued service of our senior management and our ability to attract, train and retain skilled personnel.

Our future success depends on the continued service of our key management and technical staff, in particular, our founder, chairman and principal executive officer, Mr. Jianqiu Yu, our chief technology officer for our biodiesel business, Mr. Deyu Chen, and the managing director of Jin Xin, Mr. Hanjiu Liu. Mr. Yu, our founder, plays a key role in the formation of our business strategy and has extensive knowledge of the local markets in which we operate our biodiesel business. In addition, Mr. Yu is instrumental in formulating our strategies for entering into new markets. Mr. Chen was instrumental in the development of our proprietary biodiesel manufacturing process and continues to play a key role in our technological development. Mr. Liu was instrumental in the development of our proprietary recycled copper manufacturing process and is responsible for the overall operation of Jin Xin, including in key areas such as production, procurement and sales and distribution. If one or more of our key executives were unable or unwilling to continue in their present positions, we may not be able to replace them easily, our future growth may be constrained and our business may be disrupted and our financial condition and results of operation may be materially and adversely affected. While we have non-competition agreements with most members of our senior management, including Mr. Chen, Mr. Liu and Mr. Yu, we may be unable to continue to retain their services and there can be no assurance that they will not compete against us.

Our success also depends upon the continued service of our skilled personnel and on our ability to continue to attract, retain and motivate such personnel. There is intense competition to recruit technically competent personnel with expertise in the biodiesel and recycled copper industry and we have periodically experienced difficulties in recruiting suitable personnel. We may also need to offer better compensation and other benefits in order to attract and retain these personnel in the future, and we cannot assure you that we will have the resources to achieve our staffing needs. Due to the skills involved in operating some of our equipment, skilled production workers are not easily replaceable, and considerable training is required for new hires. These difficulties could limit our output capacity or reduce our operating efficiency and product quality, which could reduce our profitability and limit our ability to grow.

Our recycled copper business requires a high level of working capital to sustain our operations and overall growth.

Because the purchase of raw materials requires substantial capital, we require a high level of working capital to sustain our recycled copper operations and maintain our overall growth. Historically, Jin Xin has financed its working capital through cash from operations derived from customer payments, short term bank loans and loans from shareholders and capital contributions from shareholders. Accordingly, our liquidity and financial condition could be materially and adversely affected if we do not receive payments from our customers on a timely basis to satisfy payments to our suppliers and other working capital requirements, or if we are unable to obtain financing on satisfactory terms.

We cannot assure you that our recycled copper business will be able to achieve positive operating cash flow or obtain adequate financing to meet our future working capital requirements. The inability to achieve positive operating cash flow or obtain additional short-term bank loans and additional financing on a timely basis or on acceptable terms would adversely affect our ability to satisfy our working capital requirements, including payments to suppliers in accordance with the terms of our agreements with them. In addition, we cannot assure you that our recycled copper business will be able to obtain additional working capital for our expansion plans, or that additional working capital needs of our new production facilities will not adversely impact the current or future level of working capital for our existing production facilities.

We may be unable to obtain adequate financing to fund our capital requirements.

We expect to reach 490,000 tons of annual designed biodiesel production capacity by the end of the second quarter of 2011 after the completion of the new plant in Sichuan. Beyond that, we do not expect to further expand

 

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biodiesel production capacity in the near future, as the recovery of diesel demand, and hence biodiesel selling prices, continue to be slow. These conditions, see “—Risks Relating to Our Business and our Industries,” are expected to continue to adversely affect our profitability and cash flow generation in the short term. We expect that over the next several years, a substantial portion of our cash flow and cash balance will be used to finance the upgrading and/or modification of our existing production facilities, or investments in businesses in the energy and/or environmental sector and research and development. We may need to incur additional financing in order to fund our capital expenditures and potential acquisition. We cannot assure you that we will be successful in obtaining such financing at a reasonable cost or at all. Our inability to finance our planned capital expenditures and potential acquisition could adversely affect our business, financial condition, results of operations or liquidity position.

Rising interest rates would increase our borrowing costs.

We currently rely in part on short-term bank borrowings to finance our recycled copper business’s working capital and operations, much of which bears interest at variable rates. As of December 31, 2010, we had bank borrowings, all in Jin Xin, due within one year of approximately RMB60.0 million (US$9.1 million), with interest rates ranging from approximately 5.10% to 6.43% per annum. If interest rates on bank borrowings increase, our cost of borrowing will increase and our profitability may be adversely affected. The People’s Bank of China, or the PBOC, has adjusted the benchmark one-year lending rate and the deposit reserve ratio for PRC commercial banks a number of times in 2010. Such tightening measures caused interest rates to increase and limited the amount that commercial banks in China were able to lend. A significant increase in prevailing interest rates could substantially increase our finance costs, which could adversely affect our business, financial condition and results of operations.

Our recycled copper business requires significant capital investments.

Our recycled copper business requires a high level of working capital to sustain our growth, maintain our equipment, comply with environmental laws and regulations and remain competitive. We will also be required to make substantial capital investments in connection with our planned new production facilities in Jin Xin. Since the acquisition on November 2010, Jin Xin’s total capital expenditures paid were approximately RMB23.5 million (US$3.6 million), primarily for expanding its production capacity. In 2011, we expect to make capital expenditures to expand the production capacity of any newly acquired copper businesses. We intend to finance these capital expenditures through our internal resources and bank loans.

We have relied in part on external financing to fund our capital investments. The availability of external financing depends on many factors beyond our control, including but not limited to market conditions and policies of the PRC government. The current tightening of credit markets in the PRC may also limit our ability to obtain external financing. Our current financing may not be adequate to sustain our operations or to fund future expansion plans and we may not be able to obtain additional financing in the future to continue to fund these programs. If we do not have sufficient internally generated cash or acceptable external financing to make necessary capital expenditures in the future, we may be unable to develop or enhance our recycled copper production facilities, take advantage of business opportunities and respond to competitive pressures. Any failure to obtain adequate financing for our current operations or our expansion plans may materially and adversely affect our business, financial condition and results of operations.

Increase in the market price of Gushan’s ADSs would increase the fair value of contingent consideration liability for the acquisition of Jin Xin and affect our results of operations.

We acquired an initial 67% beneficial ownership interest in Jin Xin through a series of transactions in exchange for up to 24 million of our newly issued ordinary shares of our Company, or the Consideration Shares. The Consideration Shares are subject to an earn-out arrangement whereby six million ordinary shares were delivered to Gold Hero Holdings Limited, or Gold Hero, at the closing of the transactions, while the remaining

 

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18 million ordinary shares, or the Contingent Consideration Shares were placed into escrow to be released in stages upon the determination of Jin Xin’s net income under U.S. GAAP for the year ended December 31, 2010 and the three-year period ending December 31, 2012. Under the earn-out arrangement, the maximum of six million Contingent Consideration Shares have been released to Gold Hero with respect to the year ended December 31, 2010 as of April 8, 2011, as Jin Xin achieved a net income of over RMB30.0 million. The remaining Contingent Consideration Shares are to be released to Gold Hero if Jin Xin achieves a cumulative net income of RMB190.0 million or more during the three-year period ended December 31, 2012.

The Contingent Consideration Shares are classified as a liability and stated at their fair value at the acquisition date and each reporting date. The subsequent change in the fair value of the Contingent Consideration Shares at each reporting date is recognized in our statement of operations. Key assumptions behind the calculation of the fair value of contingent consideration include, among others, the market price of Gushan’s ADSs at each reporting date. An increase in the market price of Gushan’s ADSs will increase the fair value of contingent consideration and thus negatively affect our future financial results.

RISKS RELATING TO BUSINESS OPERATIONS IN CHINA

PRC tax policies may continue to affect our business, results of operations and financial condition.

The PRC government introduced three regulations, Guofa [2008] No, 37, Caishui [2008] No. 167 and Caishui [2008] No. 168, in relation to consumption tax rates to be levied on diesel products which took effect on January 1, 2009. Measures introduced under these regulations include, among others, increases in consumption tax on various refined oil products, including diesel. Pursuant to these regulations, consumption tax on diesel products levied on diesel producers increased from RMB0.10 per liter to RMB0.80 per liter.

Prior to January 1, 2009, biodiesel products, which are produced from animal and vegetable fats and oils, were specifically exempted from consumption tax. The regulations redefined diesel products that are subject to consumption tax. Under the regulations, biodiesel that is processed from diesel or predominately mixed with diesel would be subject to consumption tax. As a result of these taxation regulations, we made a provision of RMB103.8 million for consumption tax for our sales of biodiesel products in 2009 in respect of 129.7 million liters of biodiesel products sold as a refined oil product to comply with the consumption tax regulations at that time. In order to minimize operating cash flows that would result from the assessment and payment of consumption tax from the local State Administration of Taxation, or SAT, we decided to extend suspension of operations at our Fujian plant pending resolution from the PRC SAT on this consumption tax issue. Primarily as a result of this suspension and our decision to shift our sales channel away from the refined oil market to the chemical industry in response to the continued uncertainty over the consumption tax issue, our sales volume of biodiesel products decreased from 231,377 tons for 2008 to 143,818 tons for 2009 and to 42,391 tons for 2010.

In December 2010, the Ministry of Finance and the PRC SAT issued Caishui 118, clarifying that, subject to fulfillment of certain conditions, pure biodiesel made from animal fats or vegetable oils is exempted from consumption tax. Caishui 118 took effect immediately and applied retroactively to January 1, 2009, such that any consumption tax paid on any such biodiesel since January 1, 2009, would be refunded. As a result of this clarification, we reversed the provision for consumption tax of RMB103.8 million made in 2009. Prior to this clarification, the consumption tax issue had a substantial impact on our operations, resulting in the suspension of operations at certain of our plants and deferral of the commencement of production at our Chongqing and Hunan production facilities. It also had a material impact on our financial condition and results of operations as we recorded provisions for consumption tax in 2009 and in the first three quarters of 2010. The consumption tax issue also caused us to shift our sales channel to chemical plants, the market of which is smaller than biodiesel. This contributed in part to the decrease in our revenue and resulted in an impairment charge on our property, plant and equipment. While the consumption tax regulation was ultimately resolved in our favor, we cannot assure you that future governmental policies, including other taxation regulations, will not continue to have a material impact on our business, financial condition and results of operations.

 

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If foreign ownership of the biodiesel production business in China is restricted, we would have to rely on contractual arrangements to derive economic benefits from, and to control, our new PRC operating entities in the future, which may not be as effective in providing control over these entities as direct ownership.

On October 31, 2007, the NDRC and the Ministry of Commerce of China jointly promulgated a newly revised Catalog for Guiding Foreign Investment in Industries, or the Catalog, which came into effect on December 1, 2007. Pursuant to the Catalog, biodiesel production is classified as a sub-category of the agricultural food processing industry, which is a restricted industry, and, as a result, any such biodiesel production business in China must be majority-owned by PRC citizens and/or entities.

Our PRC legal counsel, Chen & Co. Law Firm, has advised us that based on their understanding of the Catalog, only biodiesel production using agricultural food products as raw materials falls within the “restricted industry” category pursuant to the Catalog. In the opinion of Chen & Co. Law Firm, our biodiesel production process, which utilizes used cooking oil and vegetable oil offal as raw materials, does not fall within the restricted industry category under the Catalog. Further, even if biodiesel production utilizing used cooking oil and vegetable oil offal is classified as a restricted industry, Chen & Co. Law Firm is of the opinion that only new biodiesel production businesses established after December 1, 2007, or existing biodiesel production businesses that require new approvals from the PRC Ministry of Commerce or its local branch in order to, for example, increase their registered capital or conduct an equity transfer, would be classified as falling within a restricted industry.

There are substantial uncertainties in the interpretation and application of existing and new PRC laws, regulations or policies, including the Catalog. In the event our existing biodiesel production business is deemed a restricted business in China, we would have to reorganize our corporate structure and rely on contractual arrangements with our operating entities in China and their owners of record to derive economic benefits from and exercise control over these entities. These contractual arrangements may not be as effective in providing control over our operating entities as direct ownership. If our operating entities were to fail to perform their obligations under any agreements with us, we would have to resort to legal remedies which could be time consuming and costly and we cannot assure you that such remedies would be available. In addition, we cannot assure you that any of the future direct record owners of our operating entities in China would always act in our best interests.

A global financial and economic crisis, and its impact on the Chinese economy, may adversely affect our business, results of operations and financial condition.

The global financial and economic crisis that began in 2008 adversely affected the U.S. economy and many other parts of the world, including the PRC. As a result of this crisis, financial markets experienced significant disruptions, leading to extreme volatility and dislocation of the global capital markets. Many of the world’s major economies entered into recession and have not fully recovered. The PRC economy also slowed down significantly in the second half of 2008 and during 2009. Due in part to the global financial crisis, beginning in September 2008, among other measures, the PRC government began to loosen macroeconomic measures and monetary policies by reducing interest rates and decreasing the statutory reserve rates for banks. In addition, in November 2008, the PRC government announced an economic stimulus package in the amount of RMB4 trillion (US$586 billion). In 2010, China’s economic growth has approached its pre-crisis level a year after the adoption of a stimulus package. However, the country’s strategy has raised concern that loose monetary policy could inflate the consumer price index, or CPI, form a real estate bubble, build up redundant production capacity and saddle the economy with bad debts. As a result, the PBOC has recently raised the reserve ratio to tighten liquidity in the financial system.

As we operate substantially in the PRC where we primarily sell our products, a prolonged recession or a slowing of the PRC economy, or a decrease in business activity in our end markets could reduce demand for our products, which could materially and adversely affect our financial condition and results of operations.

 

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Changes in China’s political and economic policies could have a material adverse effect on our business operations.

The PRC economy has been transitioning from a centrally planned economy to a more market-oriented economy. For approximately three decades, the PRC government has implemented economic reform measures to utilize market forces in the development of the PRC economy. Many of the reforms are unprecedented or experimental and are expected to be modified from time to time. Other political, economic and social factors may also lead to further readjustment or introduction of other reform measures. This process of reform may have a material impact on our operations in China or may adversely affect our results of operations as our current revenue is substantially derived from our operations in China. Our financial condition and results of operations may be adversely affected by changes in China’s political, economic and social conditions and by changes in laws, regulations or the interpretation or implementation thereof.

While the Chinese economy has grown significantly in the past 30 years, the growth has been uneven geographically among various sectors of the economy, and during different periods. We cannot assure you that the Chinese economy will continue to grow, or that if there is growth, such growth will be steady and uniform, or that if there is a slowdown, such slowdown will not have a negative effect on our business. For example, as the Chinese economy experienced high rate of increase in residential property prices in recent years, to combat high property prices and prevent the economy from overheating, the PRC government adopted a number of measures, including raising statutory reserve rates for banks and controlling bank lending to certain industries or economic sectors. We cannot assure you that the various macroeconomic measures and monetary policies adopted by the PRC government to guide economic growth and the allocation of resources will be effective in improving the growth rate of the Chinese economy. In addition, such measures, even if they benefit the overall Chinese economy in the long-term, may materially and adversely affect us if they reduce the demand for biodiesel.

Our business, financial condition and results of operations could be adversely affected by PRC labor laws and regulations.

On June 29, 2007, the National People’s Congress promulgated the Labor Contract Law of the PRC, or the Labor Contract Law, effective January 1, 2008. On September 18, 2008, the State Council passed the relevant implementation regulations. The Labor Contract Law is aimed to provide employees greater protections with respect to establishing and terminating employment relationships. For example, the Labor Contract Law requires employers to enter into written contracts with their employees, and if an employer fails to enter into a written contract with an employee within one month after commencement of employment, the employer is required to pay the employee double its salary every month for up to 11 months. In addition, the Labor Contract Law calls for implementation of open-ended contracts rather than fixed-term contracts under certain circumstances. In particular, an employer cannot enter into a one-year or short-term contract with an employee upon the third consecutive renewal of the employment contract unless otherwise requested by the employee. As a result, the Labor Contract Law limits our discretion in the hiring and termination processes and could in turn affect our labor costs and our profitability.

Interpretation of PRC laws and regulations involves uncertainty that could materially impact our operations.

Our business and operations in China are governed by the legal system of China. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since the late 1970s, the PRC government has promulgated laws and regulations dealing with such economic matters as foreign investment, corporate organization and governance, commerce, taxation and trade. However, as these laws and regulations are relatively new and continue to evolve, interpretation and enforcement of these laws and regulations involve significant uncertainties and different degrees of inconsistency.

For example, the PRC’s Ministry of Commerce released the Regulations for Oil Product Market and Regulations for Crude Oil Market, which were implemented in January 2007. The PRC Ministry of Commerce

 

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does not currently interpret these regulations as applicable to biodiesel producers. However, we cannot assure you that the PRC Ministry of Commerce will not change its interpretation. If we are ever subject to these regulations and are unable to obtain any required permits, we may be subject to monetary fines and our production of biodiesel may be temporarily or permanently interrupted. Furthermore, due to the limited volume of published cases and the non-binding nature of prior court decisions, the outcome of dispute resolution may not be as consistent or predictable as in other more developed jurisdictions, which may limit legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

Our PRC subsidiaries are subject to restrictions on dividend payments that could materially impact our ability to receive dividends.

We are a holding company, and we rely principally on dividends and other distributions paid by our intermediate holding companies, Carling Technology Limited, or Carling Technology, Brightest Resources Limited, or Brightest Resources, Joywin Technology Limited, or Joywin Technology, Profit Faith Technology Limited, or Profit Faith Technology, Engen Investments Limited, or Engen Investments, Gushan Holdings Limited, or Gushan Holdings, Kim Yau Limited (previously known as Gushan Bio-Energy Limited), or Kim Yau, True Excel Holdings Limited, or True Excel, and our PRC subsidiaries for our cash requirements, including the funds necessary to service any debt we may incur or financing we may need for operations other than through our PRC subsidiaries. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to our intermediate holding companies and us. Each of Chongqing Gushan, Hunan Gushan, Shanghai Gushan, Beijing Gushan, Fujian Gushan, Handan Gushan, Sichuan Gushan, Biomass, and Jin Xin, as a foreign-invested enterprise in China, is required under PRC laws and regulations to provide for statutory general reserves. Each is also required to allocate at least 10% of their after tax profits as reported in the PRC statutory financial statements to the statutory general reserves and has the right to discontinue allocations to these funds once the cumulative amount of such reserves has reached 50% of their registered capital. These statutory reserves are not available for distribution to the shareholders, except in a liquidation, and may not be transferred in the form of loans, advances, or cash dividends. As of December 31, 2010, the amount of these restricted portions was RMB71.9 million (US$10.9 million) in total for our PRC subsidiaries. Limitations on the ability of our PRC subsidiaries or affiliated PRC entities to transfer funds to our intermediate holding companies and us in the form of dividends, loans or advances could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, and otherwise fund and conduct our business.

PRC laws and foreign exchange controls may affect our ability to receive dividends and other payments from our PRC subsidiaries.

Our operating PRC subsidiaries are subject to the PRC rules and regulations on currency conversion. The ability of our operating PRC subsidiaries to pay dividends or make other distributions to us may be restricted by these PRC foreign exchange control restrictions. We cannot assure you that the relevant regulations will be amended to our advantage such that the ability of our operating PRC subsidiaries to distribute dividends to us will not be adversely affected.

Changes in foreign exchange regulations and fluctuation in the value of the Renminbi may adversely affect our business and results of operations.

We receive all of our revenue in Renminbi, which is not freely convertible into other currencies, except under certain circumstances. Current foreign exchange regulations have significantly reduced the PRC government’s foreign exchange control on current account transactions, including trade and service related to foreign exchange transactions and payment of dividends. The PRC government may, however, at its discretion, restrict access in the future to foreign currencies for current account transactions under certain circumstances.

 

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Any such change to the foreign exchange regulations may adversely affect our ability to pay dividends or satisfy other foreign exchange requirements.

The value of the Renminbi against other foreign currencies is subject to changes in the PRC’s policies and international economic and political developments. Under the current managed floating exchange rate system, the conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the PBOC, which are quoted daily based on the previous day’s inter-bank foreign exchange market rates. Since 1994, the official exchange rates for the conversion of Renminbi into U.S. dollars have been relatively stable. In July 2005, the PRC government discontinued pegging the Renminbi to the U.S. dollar. However, the Renminbi exchange rate versus the U.S. dollar is restricted to a rise or fall of no more than 0.5% per day and the PBOC regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate. Nevertheless, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long-term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market. Fluctuations in the exchange rate will also affect the relative value of any dividend that will be exchanged into U.S. dollars and earnings from and the value of any U.S. dollar-denominated investments or deposits we make, if any.

Any change in the preferential tax rates or tax holidays we enjoy in China, or the status of our subsidiaries as foreign-invested enterprises, may reduce our net profits.

Prior to January 1, 2008, a foreign-invested enterprise in China, or FIE, was typically subject to corporate income tax, or CIT, at the rate of 33%, which comprises 30% national income tax and 3% local income tax, on taxable income. The PRC government authorities provided various incentives to FIEs. For example, as a result of such preferential rates and tax holidays, each of Handan Gushan and Fujian Gushan enjoyed full exemption from CIT in the first two years followed by a 50% exemption from CIT in the next three years starting with their respective first profitable year after being an FIE, which began in 2005 for Handan Gushan and 2006 for Fujian Gushan. Sichuan Gushan enjoyed full exemption from CIT in 2005 and exemption from national income tax in 2006, followed by a 50% exemption from national income tax/unified CIT from 2007 to 2009. See Item 5, “Operating and Financial Review and Prospects.” On March 16, 2007, the National People’s Congress of China enacted a new corporate income tax law, or the New CIT Law, under which foreign-invested enterprises, such as our PRC subsidiaries and domestic companies, would be subject to CIT at a uniform rate of 25%. Preferential tax treatments will continue to be granted to entities that conduct business in encouraged sectors, whether FIEs or domestic companies. The New CIT Law became effective on January 1, 2008. Under the New CIT law and the Notice on the Implementation of Transitional Preferential Policies on Corporate Income Tax, issued by the State Council on December 26, 2007, effective from January 1, 2008, the tax rate of enterprises that were established and were entitled to preferential tax rates or tax holidays before March 16, 2007 are to (i) in the case of preferential tax rates, gradually increase from the preferential tax rate to a 25% rate over a period of five years beginning January 1, 2008, or (ii) in the case of tax holidays, continue until the expiration of such term. Therefore, our subsidiaries in China will continue to be entitled to the tax holidays currently enjoyed by them until the expiration of the tax holiday term. We cannot assure you that any of our PRC subsidiaries will continue to be entitled to any preferential tax rates or tax holidays after the transition period expires.

The Rules on Acquisition of Domestic Enterprises by Foreign Investors, or the New M&A Rules, were promulgated on August 8, 2006 jointly by the Ministry of Commerce, the State-owned Assets Supervision and Administration Commission of the State Council of the PRC, or the SASAC, the PRC SAT, the State Administration for Industry and Commerce, the China Securities Regulatory Commission and the State Administration of Foreign Exchange of China, or SAFE, and came into effect on September 8, 2006. The New M&A Rules were further amended on June 22, 2009.

Under the New M&A Rules, FIEs established by way of acquisition of related domestic companies by offshore companies which are established or controlled by PRC domestic companies, enterprises or persons will not be entitled to be treated as FIEs except when, if the offshore companies offer to buy the company through a

 

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capital increase of the domestic companies, or increased capital to the enterprises established by the offshore companies after merger, the sum of capital increase is equal to more than 25% of the FIE’s registered capital. According to Chen & Co. Law Firm, our PRC legal advisor, PRC laws and regulations with specific effective dates generally have no retroactive effect. However, we cannot assure you that the New M&A Rules will not apply to our subsidiaries in the PRC. If the New M&A Rules are applicable to our subsidiaries in the PRC, our PRC subsidiaries may not be able to enjoy preferential treatment as FIEs and our financial condition and results of operations could be adversely affected.

The New CIT Law could affect tax exemptions on dividends received by us and our shareholders and increase our CIT rate.

The New CIT Law provides that, if an enterprise incorporated outside the PRC has its “de facto management organization” located within the PRC, such enterprise may be recognized as a PRC tax resident enterprise and thus may be subject to CIT at the rate of 25% on its worldwide income. The Implementation Rules of the Corporate Income Tax Law prescribe that a “de facto management organization” means an organization that exercises substantive and overall management and control over the enterprise’s business operations, personnel, finance, property and other functions. Although the Implementation Rules provide a definition of “de facto management organization,” such definition has not been tested and there remains uncertainty as to the circumstances under which a non-PRC enterprise’s de facto management organization is considered to be located in the PRC. We may be deemed a PRC tax resident enterprise and therefore subject to an CIT rate of 25% on our worldwide income because a majority of the members of our management are located in China.

Moreover, under the New CIT Law, if we are categorized as a PRC tax resident enterprise, foreign ADS holders may be subject to a 10% withholding tax on dividends payable by us and gains realized on the sale or other disposition of ADSs or ordinary shares.

The New CIT Law also provides that qualified dividends received by a PRC tax resident from another PRC tax resident are exempt from CIT. However, given the short history of this law, it remains unclear as to the detailed qualification requirements for such exemption and whether the dividends which the Company receives indirectly from our PRC subsidiaries will be exempt from CIT if it is recognized as a PRC tax resident enterprise.

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

SAFE issued a public notice in October 2005, or the SAFE notice, requiring PRC residents, including both legal persons and natural persons, to register with the competent local SAFE branch before establishing or controlling any company outside China, referred to as an “offshore special purpose company,” for the purpose of acquiring any assets of or equity interest in PRC companies and raising funds from overseas. In addition, any PRC resident that is the shareholder of an offshore special purpose company is required to amend its SAFE registration with the local SAFE branch with respect to that offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China. If any PRC shareholder of an offshore special purpose company fails to make the required SAFE registration and amendment, the PRC subsidiaries of that offshore special purpose company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the offshore special purpose company. Moreover, failure to comply with the SAFE registration and amendment requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

Although our executive officers Jianqiu Yu and Gonghao Chen have registered with the local SAFE branch as required under the SAFE notice, we cannot provide any assurances that all of our beneficial owners who are

 

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PRC residents will register as required. The failure of these beneficial owners to register as required or to amend their SAFE registrations in a timely manner pursuant to the SAFE notice or the failure of future beneficial owners of our Company who are PRC residents to comply with the registration procedures set forth in the SAFE notice may subject such beneficial owners to fines and legal sanctions and may also result in restrictions on our PRC subsidiaries’ ability to distribute profits to us or otherwise materially and adversely affect our business.

The approval of the Chinese Securities Regulatory Commission might have been required in connection with our initial public offering under a recently adopted PRC regulation, and, if approval was required, we could be subject to sanctions, fines and other penalties.

The New M&A Rules, among other things, include provisions that purport to require that an offshore special purpose vehicle formed for purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the Chinese Securities Regulatory Commission, or CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange.

On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC, which would take several months to complete.

The application of the New M&A Rules remains unclear with no consensus currently existing among leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement. The CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under our initial offering prospectus are subject to this new procedure.

Our PRC counsel, Chen & Co. Law Firm, has advised us, based on their understanding of the current PRC laws and regulations as well as the procedures announced on September 21, 2006, that:

 

   

Because we completed our onshore restructuring before September 8, 2006, the effective date of the new regulation, and Gushan Environmental Energy Limited was formed for the sole purpose of facilitating private equity investment, this regulation does not require an application to be submitted to the CSRC for its approval of the issuance and sale of the ADSs and the ordinary shares, or the listing and trading of our ADSs on the NYSE; and

 

   

The issuance and sale of the ADSs and the ordinary shares and the listing and trading of the ADSs on the NYSE did not conflict with or violate this new PRC regulation.

If the CSRC or other PRC regulatory body subsequently determines that the CSRC’s approval was required for our initial public offering, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. In that case, these regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. Also, if the CSRC subsequently requires that we obtain its approval, we may be unable to obtain a waiver of the CSRC approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding this CSRC approval requirement could have a material adverse effect on the trading price of our ADSs.

SAFE rules and regulations may limit our ability to transfer the net proceeds from any of our future securities offerings to our subsidiaries in the PRC, which may adversely affect our business expansion and we may not be able to convert our U.S. dollar or Hong Kong dollar denominated cash balances deposited in Hong Kong into Renminbi to invest in or acquire any other PRC companies.

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.

 

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The notice requires that the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and, unless otherwise stipulated, may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies. The use of such Renminbi capital may not be changed without SAFE’s approval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. Violations of Circular 142 will result in severe penalties, such as heavy fines. As a result, Circular 142 may significantly limit our ability to transfer the net proceeds from any of our future securities offerings to our subsidiaries in the PRC, which may adversely affect our business expansion and we may not be able to convert our U.S. dollar or Hong Kong dollar denominated cash balances deposited in Hong Kong into Renminbi to invest in or acquire any other PRC companies.

The outbreak of any severe transmissible disease in China, if uncontrolled, could adversely affect our results of operations.

The outbreak of any severe communicable disease in China, such as Severe Acute Respiratory Syndrome, avian flu or swine flu, if uncontrolled, could adversely affect the overall business sentiment and environment in China, which in turn may have an adverse impact on domestic consumption and, possibly, the overall gross domestic product, or GDP, growth in China. As our revenue is currently derived from our China operations, any contraction or slow down in domestic consumption and slowdown in the GDP growth of China will adversely affect our financial condition, results of operations and future growth. In addition, if any of our employees is infected or affected by any severe communicable diseases outbreak, it could adversely affect or disrupt our production at the relevant plants and adversely affect our results of operations, as we may be required to close our facilities to prevent the spread of the disease. The spread of any severe communicable disease in China may also affect the operations of our customers and suppliers, which may have an adverse effect on our business, financial condition and results of operations.

All employee participants in our share option scheme who are PRC citizens may be required to register with SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt additional share incentive plans for our directors and employees under PRC law.

To implement the Administrative Rule on Foreign Exchange Matters of Individuals and its related Implementing Rule, on March 28, 2007, the Department of General Administration Affairs of SAFE issued the Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Incentive Plan and Stock Option Plan of An Overseas Listed Company, or Circular No. 78. For any share option plans which are covered by Circular No. 78 and are adopted by an overseas listed company, Circular No. 78 requires the employee participants who are PRC citizens to register with SAFE’s local branch within ten days of the beginning of each quarter. Registration should have been made within three months if the employee participated in such plan prior to the effective date of Circular No. 78. In addition, Circular No. 78 also requires the employee participants who are PRC citizens to follow a series of requirements, including applications for foreign exchange purchase quotas, opening special bank accounts and filings with SAFE’s local branch before they exercise their stock option.

Our share option scheme is subject to Circular No. 78. The failure to comply with such provisions may subject us and the participants of our share option scheme who are PRC citizens to fines and legal sanctions and may prevent us from further granting options under our share option scheme to our employees. Such events could adversely affect our business operations.

 

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RISKS RELATED TO OUR ORDINARY SHARES AND ADSs

Our principal shareholders exert significant influence over us and their interests may not coincide with yours.

Our principal shareholders, acting individually or together, have significant influence over our business and could control all matters requiring shareholder approval, including the election of most directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of our Company and make some transactions more difficult or impossible without the support of these shareholders. The interests of these shareholders may not always coincide with our interests as a company or the interest of other shareholders. Accordingly, these shareholders could cause us to enter into transactions or agreements with which you may not approve or make decisions with which you may disagree.

Anti-takeover provisions in our charter documents may adversely affect the rights of holders of our ADSs and common shares.

Our amended and restated articles of association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving 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 us in a tender offer or similar transaction.

We have included the following provisions in our amended and restated articles of association:

 

   

At each annual general meeting, one-third of our directors (or, if their number is not a multiple of three, the number nearest to but not less than one-third) must retire from office by rotation, and every director is subject to retirement at least once every three years. This provision would delay the replacement of a majority of our directors and would make changes to the board of directors more difficult than if such provision were not in place.

 

   

Our board of directors has the authority to establish from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series, including the designation of the series, the number of shares of the series, the dividend rights, conversion rights, voting rights, and the rights and terms of redemption and liquidation preferences.

 

   

Our board of directors may issue series of preference shares without action by our shareholders to the extent authorized but unissued. Accordingly, the issuance of preference shares may adversely affect the rights of the holders of the ordinary shares. In addition, the issuance of preference shares may be used as an anti-takeover device without further action on the part of the shareholders. Issuance of preference shares may dilute the voting power of holders of ordinary shares.

 

   

Subject to applicable regulatory requirements, our board of directors may issue additional ordinary shares without action by our shareholders to the extent of available authorized but unissued shares.

Our interests may conflict with those of the non-controlling shareholders of Jin Xin.

Jin Xin, through which we conduct our recycled copper business, is not wholly owned by us. We have a 75% beneficial ownership interest in Jin Xin and there are two non-controlling shareholders that own the remaining 25% as of the date of this annual report. These non-controlling shareholders have significant influence over Jin Xin’s management and operations through, among other things, representatives on the board of directors or in the management team as well as shareholders’ voting rights.

 

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To the extent that there are any conflicts of interest between these non-controlling shareholders and us, we cannot assure you that we will be able to resolve them in a manner that will be in our best interests. These non-controlling shareholders may:

 

   

have economic or business interests or goals that are inconsistent with ours;

 

   

take actions contrary to our instructions or requests or contrary to our policies and objectives;

 

   

be unable or unwilling to fulfill their obligations under the relevant joint venture arrangements or agreements;

 

   

have financial difficulties;

 

   

be acquired or undergo a change in control; or

 

   

have disputes with us.

A serious dispute with these non-controlling shareholders or the early termination of our cooperation arrangements or agreements with them could adversely affect our business, financial condition and results of operations.

The market price of our ADSs has been and is likely to continue to be highly volatile.

The market price for our ADSs has been, and is likely to continue to be, highly volatile in response to factors such as variations in our operating results; failure of our quarterly financial and operating results to meet market expectations or failure to meet our previously announced guidance; changes in financial estimates by securities research analysts; sales or perceived sales of additional shares or ADSs; technological improvements in the biodiesel manufacturing process by us or our competitors; reduction or elimination of PRC government grants and economic incentives for the renewable energy industry; any change in applicable PRC law adversely affecting the renewable energy industry as a whole or the biodiesel industry in particular, including recent assessments of consumption tax on sales of our biodiesel products; news regarding any gain or loss of customers by us; news regarding recruitment or loss of key personnel by us or our competitors; adverse claims and allegations about our Company, our business, our financial reporting, our executives or directors, or other matters relating to us, see Item 4.B, “Information on the Company—Business Overview—Legal and Administrative Proceedings”; announcements of competitive developments, acquisitions or strategic alliances in the biodiesel or copper industry; general market conditions or other developments affecting the renewable energy industry; agricultural or other conditions in the PRC that may impact our supply of raw materials; and 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. These market fluctuations may also materially and adversely affect the market price of our ADSs.

We may not be able to pay any dividends on our ordinary shares and ADSs.

Under Cayman Islands law, we may only pay dividends out of our profits or our share premium account subject to our ability to service our debts as they become due in the ordinary course of business. Our ability to pay dividends therefore depends on our ability to generate sufficient profits. We cannot give any assurance that we will declare dividends of any amounts, at any rate or at all in the future. Future dividends, if any, will be at the discretion of our board of directors, subject to the approval of our shareholders, and will depend upon our results of operations, our cash flows, our financial condition, the payment of our subsidiaries of cash dividends to us, our capital needs, future prospects and other factors that our directors may deem appropriate. You should refer to Item 8.A, “Financial Information—Consolidated Statements and Other Financial Information—Dividend Policy” for additional information regarding our current dividend policy and the risk factor entitled “—Risks Relating to Business Operations in China—PRC laws and foreign exchange controls may affect our ability to

 

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receive dividends and other payments from our PRC subsidiaries” above for additional legal restrictions on the ability of our PRC subsidiaries to pay dividends to us.

Future financing may cause a dilution in your shareholding or place restrictions on our operations.

We may be required to raise additional funding to meet our working capital or capital expenditure requirements in the future. If we raise such funding through issuance of new equity or equity-linked securities it may cause a dilution in the percentage ownership of our then existing shareholders. Alternatively, if we meet such funding requirements by way of additional debt financing, we may have restrictions placed on us through such debt financing arrangements which may:

 

   

limit our ability to pay dividends or require us to seek consents for the payment of dividends;

 

   

increase our vulnerability to general adverse economic and industry conditions;

 

   

limit our ability to pursue our business strategies;

 

   

require us to dedicate a substantial portion of our cash flows from operations to service our debt, thereby reducing the availability of our cash flow to fund capital expenditure, working capital requirements and other general corporate needs; and

 

   

limit our flexibility in planning for, or reacting to, changes in our business and our industry.

Future sales or issuances, or perceived intentions of future sales or issuances, of substantial amounts of our ordinary shares or ADSs could adversely affect the price of our ADSs.

Sales of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Such sales, or perceived potential sales, by our existing shareholders might make it more difficult for us to issue new equity or equity-related securities in the future at a time and place we deem appropriate. As of the date of this annual report, we had 190,831,943 ordinary shares outstanding, including 101,391,628 ordinary shares outstanding under the name of the depositary on behalf of the holders of 10,139,162 ADSs and 12,000,000 ordinary shares held in escrow in relation to the acquisition of Jin Xin. Our ADSs are freely transferable without restriction or additional registration under the U.S. Securities Act of 1933, or the Securities Act.

In addition, we may issue additional ADSs or ordinary shares for future acquisitions or other purposes. If we issue additional ADSs or ordinary shares, your ownership interests in our Company would be diluted and this in turn could have a material adverse effect on the price of our ADSs.

You may not be able to exercise your right to vote.

As an ADS holder, you may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying ordinary shares in accordance with these instructions. Otherwise, you will not be able to exercise your right to vote unless you withdraw the ordinary shares underlying your ADSs. Pursuant to our amended and restated articles of association, we may convene a shareholders’ meeting upon 10 clear days’ notice. When a shareholder’s meeting is convened, you may not receive sufficient advance notice to withdraw the ordinary shares underlying your ADSs to allow you to vote with respect to any specific matter. If we give timely notice, the depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to instruct the depositary to vote the ordinary shares underlying your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and there may be nothing you can do if the ordinary shares underlying your ADSs are not voted as you requested.

 

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You may not receive distributions on ordinary shares or any value for them if it is unlawful or impractical to make them available to you.

Subject to the terms and conditions of the deposit agreement, 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 after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs, in which case it may determine not to make such a distribution. Neither we nor the depositary has any obligation to register ADSs, ordinary shares, rights or other securities subject to such distribution under U.S. securities laws. Neither we nor the depositary have any 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 the distribution we make on our ordinary shares or any value for them if it is unlawful or impractical for us to make them available to you. These restrictions may have a material adverse effect on the value of your ADSs.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time and from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

You may not be able to participate in rights offerings or elect to receive stock dividends and may experience dilution of your holdings, and the sale, deposit, cancellation and transfer of our ADSs issued after exercise of rights may be restricted.

If we offer holders of our ordinary shares any rights to subscribe for additional shares or any other rights, the depositary may make these rights available to you after consultation with us. 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. In addition, under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered by us under the provisions of the Securities Act. We can give no assurance that we can establish an exemption from the registration requirements under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, you may be unable to participate in such rights offerings and may experience dilution of your holdings as a result. The depositary may allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them. In addition, U.S. securities laws may restrict the sale, deposit, cancellation and transfer of ADSs issued after the exercise of rights.

You may face difficulties in protecting your interests because we are incorporated under Cayman Islands law.

We are incorporated in the Cayman Islands and our corporate affairs are governed by our amended and restated memorandum and articles of association and by the Companies Law, Cap.22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands, which we will refer to as the Cayman Companies Law below, and common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law may not be as clearly established as they are under statutes or judicial precedents in existence in the United States. In particular, the Cayman Islands has a less developed body of securities law as compared to the United States and provides significantly less protection to investors. Therefore,

 

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our public shareholders may have more difficulties in protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before federal courts of the United States.

There is uncertainty as to whether the courts of the Cayman Islands would (i) recognize or enforce judgments of U.S. courts obtained against us or our directors and officers predicated upon the civil liability provisions of the federal securities laws of the United States or the securities laws of any state or territory within the United States or (ii) entertain original actions brought in the courts of the Cayman Islands, against us or our directors and officers predicated upon the federal securities laws of the United States or the securities laws of any state or territory within the United States.

The Cayman Islands would recognize as a valid judgment, a final and conclusive judgment in personam obtained in the federal or state courts in the United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that: (a) such courts had proper jurisdiction over the parties subject to such judgment; (b) such courts did not contravene the rules of natural justice of the Cayman Islands; (c) such judgment was not obtained by fraud; (d) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (f) there is due compliance with the correct procedures under the laws of the Cayman Islands.

You may experience difficulties in effecting service of legal process and enforcing judgments against us and our management.

Substantially all of our assets and our subsidiaries are located in China. In addition, most of our directors and officers reside within China and Hong Kong. As a result, it may not be possible to effect service of process within the United States or elsewhere outside of China upon most of our directors and officers, including with respect to matters arising under the U.S. federal securities laws or applicable state securities laws. Moreover, our PRC legal advisor, Chen & Co. Law Firm, has advised us that China is not a party to any treaties providing for reciprocal enforcement of judgments of courts with the United States, the United Kingdom, Japan or certain other jurisdictions. As a result, recognition and enforcement in China of judgments of a court in the United States or any other jurisdictions mentioned above in relation to any matter may be difficult or impossible.

As a result of being a public company, we are subject to financial reporting and other requirements for which our accounting, internal audit and other management systems and resources may not be adequately prepared.

We are subject to reporting and other obligations under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, including the requirements of Section 404 of the Sarbanes-Oxley Act, or Section 404. These requirements of Section 404 first applied to our annual report on Form 20-F for the fiscal year ended on December 31, 2008. Section 404 requires annual management assessment of the effectiveness of our internal controls over financial reporting and an attestation report by our independent registered public accounting firm on the effectiveness of our internal controls over financial reporting. Although our management determined that our internal controls over financial reporting were effective at December 31, 2010, see Item 15, “Controls and Procedures” in the future, our management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial reporting are effective, our independent registered public accounting firm may disagree and issue an adverse opinion on the effectiveness of our internal controls over financial reporting. Any of these possible outcomes could result in the loss of investor confidence in the reliability of our financial statements.

 

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In April 2008, we recruited an internal audit director to head our internal audit department and expanded our financial and accounting staff, the team of which is still currently serving us. If we fail to timely achieve and maintain the adequacy of our internal controls in the future, we may not be able to conclude that we have effective internal controls over financial reporting. Moreover, effective internal controls over financial reporting are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our ADSs. Furthermore, we continue to incur considerable costs and use significant management time and other resources in an effort to comply with our reporting and other obligations, including Section 404.

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

We do not expect to be a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for our current taxable year ending December 31, 2011 or in the foreseeable future. However, the application of the PFIC rules is subject to ambiguity in several respects, and PFIC status is tested each taxable year and will depend on the composition of our assets and income and the value of our assets, which may change from time to time. Because we currently hold, and expect to continue to hold, a substantial amount of cash or cash equivalents and other passive assets, and, because the value of our assets is likely to be determined in large part by reference to the market prices of our ordinary shares or ADSs, which has been fluctuating and is likely to continue to fluctuate, we may be a PFIC for any taxable year. If we are treated as a PFIC for any taxable year during which a U.S. Holder, as defined under Item 10.E, “Additional Information—Taxation—United States Federal Income Taxation,” held our ADSs or ordinary shares, certain adverse U.S. federal income tax consequences would apply to such U.S. Holder.

For more information on the tax consequences to you if we were treated as a PFIC, see Item 10.E, “Additional Information—Taxation—U.S. Holders—Passive foreign investment company.”

 

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

Our predecessor company, Sichuan Gushan, was established in China on June 14, 2001. In April 2005, the shareholders of Sichuan Gushan contributed their equity interests in Sichuan Gushan to Carling Technology, a company incorporated on January 5, 2005 in the British Virgin Islands. Since then, Carling Technology has become the ultimate holding company of four additional subsidiaries in China, three of which were established by us and one of which was acquired by us. In anticipation of our initial public offering, we incorporated Gushan Environmental Energy Limited in the Cayman Islands on May 16, 2006, as our listing vehicle and our holding company. Through a series of transactions, Gushan Environmental Energy Limited became a holding company of Carling Technology in September 2007. In December 2007, we completed the initial public offering of our ADSs and listed our ADSs on the NYSE.

We currently conduct our operations primarily through the following subsidiaries in China:

 

   

Sichuan Gushan, a wholly foreign-owned enterprise established in China on June 14, 2001;

 

   

Fujian Gushan, a wholly foreign-owned enterprise established in China on May 13, 2005;

 

   

Handan Gushan, formerly known as Feixiang Gushan Vegetable Fat Chemistry Co., Ltd., a sino-foreign joint venture established in China on May 15, 2003, which we acquired on June 1, 2005;

 

   

Beijing Gushan, a wholly foreign-owned enterprise established in China on August 17, 2006;

 

   

Shanghai Gushan, a wholly foreign-owned enterprise established in China on December 18, 2006;

 

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Chongqing Gushan, a wholly foreign-owned enterprise established in China on January, 24, 2008;

 

   

Hunan Gushan, a wholly foreign-owned enterprise established in China on January 14, 2008; and

 

   

Jin Xin, a registered company established in China on February 3, 2009, in which we acquired an initial 67% beneficial ownership interest on November 3, 2010 and subsequently acquired an additional 8% interest on January 1, 2011, increasing our beneficial ownership to 75%.

See Item 4.C, “Information on the Company—Organizational Structure” for further information.

For a description of our principal capital expenditures since January 1, 2008 and principal capital expenditures currently in progress, including the amount invested and method of financing, see Item 5.B, “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Acquisition and Capital Expenditures.”

Our principal executive offices are located at No. 37, Golden Pond Road, Golden Mountain Industrial District, Fuzhou City, Fujian Province, People’s Republic of China. Our telephone number at this address is (86 591) 8385–9133 and our fax number is (86 591) 8385–9105. Our registered office in the Cayman Islands is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands. Our telephone number at this address is (345) 945-3901. Our Hong Kong office is located at Room 908, China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, Central, Hong Kong. Our telephone number at this address is (852) 2587-7212 and our fax number is (852) 2587-7199.

Investor inquiries should be directed to us at the address and telephone number of our Hong Kong office set forth above or to our investor relations agent, Hill & Knowlton, Inc., located at 909 Third Avenue, New York, NY 10022. Our website is www.chinagushan.com. The information contained on our website does not form part of this annual report. Our agent for service of process in the United States is CT Corporation System located at 111 Eighth Avenue, New York, New York, 10011.

B. Business Overview

Overview

We are a leader in the PRC biodiesel industry, in terms of annual production capacity, and one of the leading biodiesel producers in Asia, in terms of nominal capacity. We believe we were one of the first commercial biodiesel producers in China when we commenced operations in 2001. Our aggregate annual biodiesel production capacity increased from 290,000 tons in 2008 to 450,000 tons as of December 31, 2009, and decreased to 390,000 tons as of December 31, 2010 as a result of the relocation of our Sichuan plant, respectively. Following the relocation of production lines in Sichan Gushan’s new plant by the end of the second quarter of 2011, our annual production capacity will increase to 490,000 tons. We sold 231,377, 143,818 and 42,391 tons of biodiesel for the years ended December 31, 2008, 2009 and 2010, respectively.

We generated revenues of RMB1,495.6 million, RMB628.2 million and RMB408.5 million (US$61.9 million) for the years ended December 31, 2008, 2009 and 2010, respectively. For the year ended December 31, 2008, we had net income attributable to our Company of RMB269.0 million. For the years ended December 31, 2009 and 2010, we had net loss attributable to our Company of RMB283.5 million and RMB1,109.0 million (US$168.0 million), respectively.

We produce biodiesel and by-products of biodiesel production, including glycerine, plant asphalt, erucic acid and erucic amide. Biodiesel is a renewable, clean-burning and biodegradable fuel and a raw material used to

 

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produce chemical products, primarily produced from a variety of feedstocks, such as vegetable oil, animal fat and recycled cooking oil. Biodiesel can be used to fuel a wide range of diesel engines, typically after blending with diesel, including diesel engines found in trucks, mass transit vehicles, marine vessels and generators and is also used as fatty acid methyl ester in the chemical industry. The by-products of our biodiesel production have numerous commercial applications in the food, pharmaceutical and manufacturing industries.

We also operate a recycled copper business through Jin Xin, a 75% owned subsidiary, that manufactures copper rods, copper wires and copper granules from recycled copper in Sichuan. Jin Xin has one plant in Sichuan, with a daily production capacity of approximately 160 tons of recycled copper products.

We pursue technological innovations and improvements to our manufacturing methods and processes. We have obtained three patents in China, one for a biodiesel manufacturing method we invented, one for the a method of producing fatty acid methyl ester and the other for a method of producing certain by-products, and we have four pending patent applications in China relating to methods of producing different types of by-products of biodiesel production. We have also obtained a patent for a biodiesel manufacturing method from the United States Patent and Trademark Office. On September 4, 2008, we also filed two applications with the United States Patent and Trademark Office relating to methods of producing different types of by-products from biodiesel production. We believe our emphasis on technological innovations and production efficiency has contributed significantly to our competitive position as a leader in the PRC biodiesel industry. On September 2010, we also filed two applications with the State Intellectual Property Office of the PRC relating to methods of producing different type of copper products.

We sell our products in China to direct users, including marine vessel operators and chemical companies, in addition to petroleum wholesalers and individual retail gas stations. Our solid reputation in the biodiesel industry in China, together with our established track record for consistently providing products in large quantities, have enabled us to expand our customer base by retaining existing customers and acquiring new customers.

We primarily use vegetable oil offal and used cooking oil to produce biodiesel. We acquire the raw materials supply for each of our production facilities primarily from local suppliers. Our ability to acquire significant quantities of raw materials and make prompt payments has enabled us to establish strong relationships with our suppliers. These relationships and the ability of our facilities to use a range of different types and grades of raw materials in turn have allowed us to leverage our purchasing power and secure raw materials on relatively favorable pricing and delivery terms.

We are also preparing to diversify our sources of raw materials and have signed long-term contract for castor bean oil with a supplier in Sichuan. We have an exclusive right to purchase a minimum of 57,000 tons of castor bean oil, from the supplier in Sichuan through 2012, which represents substantially all of the expected output the supplier will produce. During the fourth quarter of 2010, due to continuous problems with the climate and quality of the castor bean, we decided to terminate the supply contract in Indonesia. We will seek to continue purchasing alternative raw materials under similar long-term supply arrangements in order to help secure our supply of raw materials at more stable prices.

We currently have seven production facilities for biodiesel business, located in Fujian, Sichuan, Hebei, Beijing, Shanghai, Chongqing and Hunan in China. We have one production facility for our recycled copper business located in Sichuan in China. Our aggregate annual biodiesel production capacity has increased substantially from 10,000 tons in 2001 to 390,000 tons as of the date of this annual report. Recently, our raw material input costs have increased at a rate higher than the rate of increase in our average biodiesel selling prices. In particular, our raw material input costs have risen significantly since the first quarter of 2011. Given the increasingly high raw material input costs, we will continue, commence or resume production of biodiesel in due course upon management’s determination that the market environment is sufficiently favorable to continue, commence or resume operations, with the exception of Shanghai Gushan, in which the resumption of production is subject to the satisfactory resolution of a previously disclosed legal dispute with a construction contractor. As

 

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of the date of this annual report, Beijing Gushan and Handan Gushan are in operation. Sichuan Gushan’s new plant has been conducting a trial run since early June 2011. The following map sets forth the locations of our existing and planned production facilities:

LOGO

To enhance our investments in environmental businesses, in November 2010, we acquired an initial 67% beneficial ownership interest in Jin Xin to expand our business into the recycled copper business. In January 2011, we acquired an additional 8% beneficiary ownership interest, increasing our beneficial ownership in Jin Xin to 75%. Jin Xin is engaged in the manufacturing of copper rods, copper wires and copper granules from recycled copper in Sichuan. We currently have one production facility located in Mianyang in Sichuan province with a daily production capacity of approximately 160 tons of recycled copper products.

Our Products

Our biodiesel production process generates biodiesel and the by-products of biodiesel production, such as glycerine, a distillation residue of biodiesel production known as plant asphalt, erucic acid and erucic amide, which have numerous commercial applications. Our products include:

 

   

Biodiesel. A renewable, clean-burning and biodegradable alternative to diesel and a raw material in the chemical industry, which can be used to power a wide range of diesel vehicles, including trucks, mass transit vehicles and marine vessels and can be used as fatty acid methyl ester to produce chemical products;

 

   

Glycerine and refined glycerine. A colorless, odorless, nontoxic liquid with numerous uses, including use in foods and beverages, for example, as a preservative, sweetener or softening agent, in pharmaceuticals, for example, as a lubricant, alcohol substitute or expectorant, as a paint dissolving solvent, and in personal care products, for example, in soap, shampoo and lotion. Refined glycerine has a higher level of purity than glycerine;

 

   

Plant asphalt. As fuel for boilers, casting plaster and a stain remover;

 

   

Erucic acid. A fatty acid that can be extracted from rapeseed and used in the production of lubricants and polyesters, for example, in skin and health care products, plastic photographic film manufacturing processes and as a transmission fluid additive;

 

   

Erucic amide. An anti-felt, anti-static agent for fabrics and a plastics lubricant;

 

   

Stearic acid. A fatty acid used in making plastics, soaps, cosmetics and candles; and

 

   

Fatty acid methyl ester. An intermediate product sold to the chemical industry.

 

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The properties of the raw materials we use at our particular plants determine our product mix at our respective production facilities. Although our by-products do not enjoy comparable demand to biodiesel, in general, they generate greater profit margins than our biodiesel.

Many of our customers mix the biodiesel they purchase from us with their own diesel.

In November 2010, we acquired an initial 67% beneficially ownership interest in Jin Xin to expand our business into recycled copper business including the manufacturing of copper rods, copper wires and copper granules from recycled copper in Sichuan. We subsequently increased our equity interest in Jin Xin to 75% in January 2011. Our recycled copper products are used by manufacturers in China for the production of power cables.

The following table sets forth information regarding our biodiesel, biodiesel by-products, and recycled copper products sales volumes for the periods indicated:

 

     Year ended December 31,  
     2008      2009      2010  
     Sales volume
(in tons)
     % of total
sales  volume
     Sales volume
(in tons)
     % of total
sales  volume
     Sales volume
(in tons)
     % of total
sales  volume
 

Biodiesel

     231,377         90.6         143,818         88.6         42,391         87.0   

Biodiesel by-products

     23,878         9.4         18,469         11.4         6,314         13.0   
                                                     

Total

     255,255         100.0         162,287         100.0         48,705         100.0   
                                                     

Recycled copper products

     —              —              3,787         100.0   
                                                     

The PRC government introduced three regulations in relation to consumption tax rates to be levied on diesel products which took effect on January 1, 2009. Measures introduced under these regulations include, among others, increases in consumption tax on various refined oil products, including diesel. Pursuant to these regulations, consumption tax on diesel products levied on diesel producers would increase from RMB0.10 per liter to RMB0.80 per liter. Prior to January 1, 2009, biodiesel products that are produced from animal and vegetable fats and oils were specifically exempted from consumption tax. The regulations redefined diesel products that are subject to consumption tax. Under the regulations, biodiesel that is processed from diesel or predominately mixed with diesel would be subject to consumption tax. As a result of these taxation regulations, we made a provision of RMB103.8 million for consumption tax for our sales of biodiesel products in 2009 in respect of 129.7 million liters of biodiesel products sold as a refined oil product in accordance with the consumption tax regulations at that time. We also decided to extend suspension of operations at our Fujian plant after the suspension due to road maintenance from April to June 2009 pending resolution from the PRC SAT on this consumption tax issue, in order to minimize operating cash flows that would result from the assessment and payment of consumption tax from the local SAT.

In December 2010, the Ministry of Finance and the PRC SAT issued Caishui 118. According to Caishui 118, subject to fulfillment of certain conditions, pure biodiesel made from animal fats or vegetable oils is exempted from consumption tax in China, Caishui 118 is effective immediately and applies retroactively to January 1, 2009, such that any consumption tax paid on any such biodiesel since January 1, 2009, will be refunded. We expect that biodiesel produced at all of our production facilities will satisfy the conditions set forth by Caishui 118 and so qualify for the exemption.

We did not pay consumption tax for our sales of biodiesel products in 2009 but made a provision of RMB103.8 million, which was reversed in 2010 and recorded as other operating income in 2010.

Furthermore, to seek to mitigate the potential adverse impact from the consumption tax issue prior to its resolution in December 2010, we attempted to expand alternative sales channels, including biodiesel sales as

 

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fatty acid methyl ester to the chemical industry, which was not subject to consumption tax, while reducing our sales of biodiesel to the refined oil market. This strategy contributed in part to the absolute decrease in the sales volume of biodiesel and resulted in the proportion of biodiesel sold to the chemical market increasing from 8.6% of the total volume of biodiesel sold in 2008, to 23.3% in 2009 and to 67.2% in 2010. Although the consumption tax issue was resolved in December 2010, our sales volume of biodiesel for the first quarter of 2011 did not increase immediately as compared to the sales volume in previous quarters because of the ramp up time necessary to resume production of biodiesel and because of the Chinese New Year holiday in February 2011.

Raw Material Supply

We use vegetable oil offal, which is the waste or by-product generated in connection with the manufacturing of vegetable oil, and used cooking oil, which are widely available in China, as the primary raw materials for our biodiesel manufacturing process. Recycling of vegetable oil offal and used cooking oil also carries additional environmental benefits as disposal without proper processing can be hazardous. These inedible oils were sourced from provinces in the southern and western part of China. Our proprietary production technology enables us to produce biodiesel using lower-grade, lower-cost vegetable oil offal and used cooking oil, as compared to relatively higher-grade, higher-cost feedstock. For example, we are able to process raw materials with lower oil and free fatty acid content and which may contain a mixture of different types of oil, and we do not have any requirements on the ratio of oil and free fatty acid content, thus allowing us greater flexibility in the raw materials that we purchase. From the fourth quarter of 2008, we also began using a small amount of inedible oils, such as castor bean oil and jatropha oil, as feedstock at our Sichuan production facility.

To help secure adequate raw materials supplies and minimize purchasing costs, we use one to two main feedstock suppliers and several secondary suppliers for each production facility. We conduct business with suppliers on an order by order basis. We determine raw material prices based on arm’s-length negotiations with our suppliers shortly prior to delivery with reference to market prices.

Raw materials for our recycled copper business primarily include scrap copper from household appliances and manufacturing industries. Our major recycled copper raw material suppliers are private enterprises engaged in the collection of unprocessed scrap copper in China. We conduct our recycled copper business with suppliers on an order by order basis at prevailing market prices at the time of purchase, and do not enter into any long-term purchase contracts.

The following table sets forth a summary, for the periods indicated, of the aggregate amounts of vegetable oil offal, used cooking oil, jatropha oil, castor bean oil and recycled copper raw materials used in our operations:

 

     Year ended December 31,  
     2008      2009      2010  
     (in tons)      (in tons)      (in tons)  

Vegetable oil offal and used cooking oil

     302,421         182,512         53,034   

Jatropha oil

     3,005         —           —     

Castor bean oil

     —           6,023         5,123   
                          

Total

     305,426         188,535         58,157   
                          

Recycled copper raw materials

     —           —           4,517  
                          

As we expand the geographic scope of our operating facilities across China, we expect the usage ratio of used cooking oil to increase because used cooking oil is more readily available in these expansion areas. Unlike vegetable oil offal, used cooking oil produces comparatively lower quantities of our by-products. By utilizing a greater percentage of used cooking oil as a portion of our raw materials, we expect the percentage of revenues contributed by by-products to decrease.

We secure supplies of vegetable oil offal from vegetable oil producers near our production facilities through local privately owned collecting agencies. The raw material suppliers for used cooking oil are also local collecting

 

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agencies that collect used cooking oil from restaurants and other sources. Our suppliers typically deliver raw materials directly to us. Under our typical terms with our suppliers, we settle payments within 30 days. To ensure adequate supplies and to better support the working capital needs of the raw materials collecting agencies, we have sought to settle our payables with our raw material collecting agencies over a shorter period of time, typically three to seven days, or in the form of prepayment.

In order to help diversify and secure our source of feedstock at a stable price, we signed two contracts in respect of supplies of castor bean oil with a supplier in Sichuan and castor beans with another supplier in Indonesia in 2009. Castor bean oil itself is an intermediate product in the chemical industry as well as a raw material used to produce biodiesel. During the fourth quarter of 2010, due to continuous problems with the climate and quality of the castor bean, we decided to terminate the supply contract in Indonesia. The payment of RMB4.8 million (US$0.7 million) in connection with such supply contract for castor bean was written off in the fourth quarter of 2010.

Pursuant to the contract with the supplier in Sichuan, we have an exclusive right to purchase a minimum of 57,000 tons of castor bean oil, which represents substantially all of the expected output the supplier will produce, on a cost-plus basis through 2012. The purchase price of castor bean oil from Sichuan may be adjusted based on the supplier’s costs from time to time.

Recently, our raw material input costs have increased at a rate higher than the rate of increase in our average biodiesel selling prices. In particular, our raw material input costs have risen significantly since the first quarter of 2011. Given the increasingly high raw material input costs, we will continue, commence or resume production of biodiesel in due course upon management’s determination that the market environment is sufficiently favorable to continue, commence or resume operations, with the exception of Shanghai Gushan, in which the resumption of production is subject to the satisfactory resolution of a previously disclosed legal dispute with a construction contractor. As of the date of this annual report, Beijing Gushan and Handan Gushan are in operation. Sichuan Gushan’s new plant has been conducting a trial run since early June 2011. We will continue our efforts to control our raw material input costs. We have been negotiating with the local government of Mianyang to be appointed as the exclusive collector and processor of used cooking oil in the regions under its jurisdiction. Also, we continue to explore the possibility of developing an internal feedstock production capability within China.

Our recycled copper raw materials suppliers in Sichuan generally grant us credit periods of approximately seven days. For suppliers outside Sichuan, we usually pay in cash on delivery terms.

For 2008, 2009 and 2010, our five largest suppliers represented 45.1%, 35.7% and 89.2% of our total cost of revenues, respectively, while our largest supplier represented 10.2%, 9.6% and 42.9% of our total cost of revenues, respectively. For the years ended December 31, 2008, 2009 and 2010, we had one supplier, no supplier and three suppliers which represented more than 10% of our cost of revenues, respectively. Since our initial acquisition of Jin Xin in November 2010, we purchased raw materials for our recycled copper business mainly from two third-party suppliers which accounted for 60.7% of our total cost of revenues in 2010. As we expand our production facilities to other regions in China, we expect that our purchases from our largest suppliers as a percentage of our total purchases will decrease in 2011.

 

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Manufacturing

Production process

Our biodiesel production method utilizes production technologies for which we have obtained patents. The following chart illustrates our biodiesel manufacturing process:

LOGO

We begin the production process by purifying raw materials, which are typically already acidified when purchased by us. We filter the acidified oil, after which it is stored and allowed to settle before entering our production process. We then continuously dehydrate the raw materials by vacuum and reduce the water content in the raw materials to less than 0.2%. The dehydrated raw materials are then blended with methanol.

Transesterification (the process by which vegetable oil is combined with methanol to produce biodiesel and glycerine) of the raw materials then takes place in a reactor tower under heat and pressure. Water is removed from the reaction at the bottom of the methanol recovery tower. Methanol is then recycled at the top of the tower back to the reactor for further reaction. The resulting material is then dehydrated in a precipitator for continuous distillation at lower pressure in a distillation tower to produce biodiesel.

We collect the by-product glycerine during the transesterification process. We produce plant asphalt and erucic acid during the distillation process. To produce erucic amide, we hydrolyze erucic acid to produce erucic, which is then combined with amine and catalysts to produce erucic amide following purification.

We believe our manufacturing process is innovative and cost-effective. Our production process does not require the use of catalysts. Our process utilizes low cost raw materials, namely vegetable oil offal and used cooking oil, and adopts continuous vacuum dehydration, which reduces the water content level of raw materials to less than 0.2%. In addition, our specially designed compact structure can quickly remove the water produced during the reaction and our medium-pressure continuous esterification tower can be scaled for industrial mass production.

The following chart illustrates our production process in our recycled copper business:

LOGO

Scrap copper is purchased from suppliers, and is separated manually into product categories. Secondary copper is processed through melting, drawing into copper rod and wires. Scrap copper wires and cables are processed using a wire stripper to strip off their plastic coating. Scrap copper is sheared and cut in the shredder into copper granules.

Quality Control

We apply rigorous quality control standards and have implemented safety procedures at all of our production facilities. In April 2004, our Sichuan plant obtained ISO9001:2000 international quality management standard certification and we have strictly abided by the requirements for maintaining this certification.

 

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Currently, there is no mandatory national standard in China for biodiesel quality. On May 1, 2007, the General Administration of Quality Supervision, Inspection and Quarantine of China and the committee of the Standardization Administration of China implemented recommended standards for biodiesel blend stock (BD100) for diesel engine fuels. We set our own biodiesel production standard based on EN14214, the European Biodiesel Standard, and the National Light Diesel Standard. According to a report of SGS Group, an independent inspection and testing company, as of August 2006, biodiesel produced by us satisfied the EN 14214 production standard, which is generally perceived as one of the most stringent standards in the world.

Our management team has implemented policies to proactively safeguard against accidents. In addition, we conduct regular inspections and maintenance of our biodiesel production facilities.

Customers

Our biodiesel customers are based in China and can be classified into three major groups: direct users, petroleum wholesalers and individual retail gas stations. Direct users include marine vessel operators, chemical companies and factories. Petroleum wholesalers purchase biodiesel from us for subsequent distribution to individual gas stations. Petroleum wholesalers include local subsidiaries of state-owned enterprises or privately owned companies. Beginning in March 2008, we also commenced sales of some of our biodiesel products to chemical companies at higher average selling prices than to our other customers. These customers use our biodiesel to produce a variety of products, including elasticizers, surfactants, alkyd resin, leather greasing agents and anticoagulants.

Our recycled copper customers are primarily power cable manufacturers in Sichuan and new raw material manufacturers in Anhui province in China. Demand for our products is subject to seasonal fluctuations. Due to the Chinese New Year holiday in the first half of the year, demand for our recycled copper products is generally higher in the second half of the year. As a result, fluctuations in demand for recycled copper products in the second half of the year may have a disproportionate impact on our results of operations.

The following table sets forth the percentage of our revenues by our principal groups of customers for the periods indicated:

 

     2008     2009     2010  

Customer

      

Direct users (Biodiesel)

     44.9 %     36.7 %     30.4 %

Petroleum wholesalers (Biodiesel)

     23.4 %     32.4 %     12.9 %

Individual retail gas stations (Biodiesel)

     31.7 %     30.9 %     6.5 %

Recycled copper products customers

     —          —          50.2

We adopt similar credit policies and sales, marketing and distribution strategies across three groups of biodiesel customers. We usually sign sales contracts for a term of approximately one year with our customers for biodiesel and approximately one year or less with our customers for by-products. The total sales volume, the pricing, product specifications, the delivery schedule and the method of delivery are agreed and set out in the sales contracts. Depending on the market conditions, we sell our biodiesel either at no discount or at a discount to the local retail market prices for diesel products. In most cases, customers will arrange their own delivery from our facilities to their own locations. We set the payment methods depending on our business relationship, customers’ credit records and the current market conditions. We occasionally provide our customers with 30-day credit terms.

Our by-products customers are based in China and include direct customers and chemical trading companies. Direct customers include manufacturers in various industries, for example, the foundry industry, pharmaceutical industry and food industry. We price our by-products by reference to prevailing market prices for such products. Our management and sales executives monitor the prices of these products and consider various

 

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factors, including prices being offered by our competitors, purchase order volumes and seasonal factors when they set our product prices.

We grant credit periods of approximately 10 days to our major recycled copper customers for account receivables and sell to other customers in cash on delivery terms.

For 2008, 2009 and 2010, our five largest customers contributed 20.6%, 22.4% and 33.7% of our total revenues, respectively, while our largest customer contributed 9.1%, 7.4% and 10.0% of our total revenues, respectively. In 2008 and 2009, none of our customers accounted for more than 10.0% of our revenues. In 2010, one of our customers accounted for more than 10.0% of our revenues.

Sales and Marketing

We conduct all of our sales through direct sales by our own sales personnel of our operating subsidiaries. We sell our biodiesel mainly to customers located in close proximity to our production facilities in operation. Our by-products are mainly sold to chemical plants and other companies. We sell recycled copper products mainly to customers located in Anhui, Sichuan and Zhejiang.

Our sales team places strong emphasis on building long-term relationships with our customers by actively seeking customer feedback. Our sales personnel regularly contact our customers and visit them to obtain feedback and gather market information.

Most of our biodiesel customers pick up our products directly from our production facilities. Our products are typically transferred by pipeline to trucks at our facilities. We generally deliver our recycled copper products to customers.

Intellectual Property

Our biodiesel manufacturing processes are based on technology substantially developed in-house by our research and development and engineering personnel. We rely on a combination of patents, trademarks, domain names and confidentiality agreements to protect our intellectual property. We require all members of our senior management and our key research and development personnel to sign agreements with us which stipulate, among other things, confidentiality obligations and restrictions on the assignment of intellectual property.

One of our biodiesel production processes is protected by an invention patent (patent no. ZL02133591.5) granted by the State Intellectual Property Office of the PRC and effective as of August 7, 2002. The term of this patent is 20 years from August 7, 2002. This patent is held by Sichuan Gushan, which has licensed the patent to our other subsidiaries.

On January 23, 2008 we obtained an invention patent (patent no. ZL200510020486.6) for a method of producing certain by-products, granted by the State Intellectual Property Office of the PRC. This patent has a term of 20 years starting from March 9, 2005. This patent is held by Sichuan Gushan.

On February 23, 2010, we obtained an invention patent (patent no. US 7,667,060 B2) for one of our biodiesel production methods, granted by the United States Patent and Trademark Office. This patent is effective from April 25, 2008 to September 13, 2028 and is held by Sichuan Gushan.

On June 9, 2010 we obtained an invention patent (patent no. ZL200610022443.6) for a method of producing fatty acid methyl ester, granted by the State Intellectual Property Office of the PRC. This patent has a term of 20 years starting from December 8, 2006. This patent is held by Sichuan Gushan.

On September 4, 2008, we also filed two applications with the United States Patent and Trademark Office relating to methods of producing different types of by-products from biodiesel production. In September 2010,

 

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we also filed two applications with the State Intellectual Property Office of the PRC relating to methods of producing different types of copper products. We also have four pending patent applications that have been filed in China involving technologies for producing new fuel additives, and erucic acid and fatty acid.

We are currently using the registered trademark “GS LOGO ” for our biodiesel. The mark is owned by Sichuan Gushan, which has licensed the trademark to our other subsidiaries. We also have registered trademarks for “ LOGO ”, “Gushan” and “Gushan LOGO ” in Hong Kong. We are not aware of any material infringement of our intellectual property rights.

Competition

We believe the principal competitive factors for biodiesel producers in China are as follows:

 

   

Pricing. A producer’s ability to control and flexibility over the pricing of products and the ability to use economies of scale to secure competitive pricing advantages;

 

   

Technology. A producer’s ability to produce biodiesel and by-products efficiently and to utilize low-cost raw materials; and

 

   

Barriers to entry. A producer’s technical knowledge, local market knowledge and established relationships with suppliers and customers to support the development of commercially viable production facilities.

The biodiesel industry is still at an early stage in China and we have thus far experienced limited competition from domestic biodiesel producers. Our competitors include China Biodiesel International Holding Co., Ltd., East River Energy Resources, SINOPEC, CNOOC, and PetroChina and domestic manufacturers that are currently in the development stage of biodiesel production.

China represents a potentially lucrative market for international competitors, many of whom may seek to enter the PRC market. We believe that there are no foreign competitors with a material presence in the biodiesel industry in China. However, in the past it has been reported that certain Malaysian producers have expressed interest in establishing biodiesel production facilities in China and that they will likely use imported Malaysian palm oil as a feedstock. Although the current price of palm oil appears prohibitively too high for overseas manufacturers to commercially validly operate in the PRC market, we expect that some overseas manufacturers will enter China once the price of palm oil or other alternative feedstock becomes more affordable. The biodiesel industry in China may become more competitive due to competition from overseas manufacturers in the future. We believe that our annual production capacity, early entry into the commercial biodiesel market in China, strong customer relationships and reputation for high quality products has differentiated us from our competitors. Nevertheless, existing and future domestic competitors, who may have a greater presence in other regions through government support or enjoy greater popularity among local customers, may be able to secure a significant market share in regions where we currently do not have active operations. Further, our international competitors may have comparatively greater financial and research and development resources. Any increase in the number or size of competitors may affect our competitive position in the biodiesel market and our overall performance and profitability.

The recycled copper industry in China is fragmented and the competition is intensive, and we compete with numerous other companies for both raw materials and sales of recycled copper products. Competition for raw materials is based on price and proximity to the source of raw materials. Competition for sales is primarily based on price, quality of products, sales, capacity and proximity to customers. We compete primarily with local metal recycling companies, and those who import recycled scrap copper from overseas.

Facilities

We both own and lease properties for our operations. We own or expect to obtain land use rights to a total of approximately 357,307 square meters of land for all of our existing plants and plant under construction. We

 

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occupy our owned properties for purposes of production, research and development and employee living quarters. Our principal executive and administrative offices are located on premises comprising approximately 3,600 square meters in an office building in Fuzhou, China. This leasehold interest will expire on September 30, 2011, subject to renewal.

Insurance

We maintain various insurance policies to safeguard against risks and unexpected events. We provide social security insurance including pension insurance, unemployment insurance, work related injury insurance and medical insurance for our employees. We also maintain insurance for our projects under construction, plants, machinery, equipment, inventories and motor vehicles. We maintain very limited product liability insurance for our biodiesel products. In 2010, Jin Xin maintained social security insurance, work related injury insurance and medical insurance for its employees, and insurance for motor vehicles. We are in the process of finalizing insurance on Jin Xin’s property, plant and machinery with an insurance company in China.

Environmental Matters

Given the nature of our biodiesel business, we generate waste water, exhaust fumes and noise during our production process. We have implemented a comprehensive set of environmental protection measures to treat emissions generated during our production process to minimize the impact of our production process on the environment. These measures include the following:

 

   

Waste water. Waste water processed by our facilities meets the PRC national standard for discharge. To conserve water resources, we also recycle and reuse waste water generated during our production process, which decreases our consumption of water and reduces the discharge of waste water into the environment;

 

   

Exhaust fumes. We generate exhaust fumes during our production process. Exhaust fumes generated during our production process are filtered to reduce dust, sulfur dioxide, trisodium phosphate (TSP), NOx and organic elements. In each case, exhaust fumes are treated to comply with PRC national air quality standards; and

 

   

Noise. We generate noise through the operation of our heating, ventilation and pumping systems. We typically reduce the noise generated by these activities to a range of 60 decibels to 80 decibels by employing various noise reduction measures that comply with applicable law.

In addition, according to PRC environmental laws and regulations, Jin Xin is required to adopt effective measures to prevent and control pollution to the environment during the course of its operations. We monitor compliance with applicable environmental regulations relating to noise and solid waste discharge and have established an environmental control system pursuant to the applicable regulations.

All of our products meet the relevant requirements under PRC laws and we have not been subject to any material fines or legal action involving non-compliance with any relevant environmental regulation, nor are we aware of any threatened or pending action, including by any environmental regulatory authority. See Item 3.D, “Key Information—Risk Factors—Risks Relating to Our Business and Industry—Failure to comply with environmental regulations could harm our business.”

Legal and Administrative Proceedings

We may be subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time. In August 2009, a contractor for our production facility filed a lawsuit against us in the People’s Court of Fengxian District, Shanghai, alleging that we failed to pay the contract sum due for the contractor’s construction work on our Shanghai plant. We defended this lawsuit on the basis that the quality of the construction did not meet the standard agreed upon between us and the contractor and that we were entitled to

 

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withhold the remaining balance. On January 18, 2010, the court issued a judgment in favor of the contractor and held us liable for approximately RMB5.9 million. We appealed this decision to the Shanghai No. 1 Intermediate People’s Court but our demurrer was overruled on April 2, 2011, and, we were found liable to the contractor for approximately RMB6.8 million, of which we have recorded RMB5.3 million in “Accounts payable for property, plant and equipment” and “Accrued expenses and other payables” in our balance sheet as of December 31, 2009, and RMB1.5 million in other expenses for compensation in our statement of operations for the year ended December 31, 2010.

Subsequent to January 18, 2010, the court of first instance, the People’s Court of Fengxian District, Shanghai, ordered a restriction in a land use right certificate of Shanghai Gushan for the period from January 22, 2010 to January 22, 2012 in relation to the lawsuit bought by the contractor in August 2009. According to applicable PRC laws, during this period, Shanghai Gushan is restricted to file any mortgage or transfer ownership in the seized property. Following payment of the amount in accordance with the court’s judgment, we expect that such restriction will be removed from the land use right certificate of Shanghai Gushan.

In June 2008, our audit committee was notified by KPMG, our independent registered public accounting firm, that KPMG had received anonymous e-mails from a purported shareholder alleging, among others, that our unaudited financial statements for the fourth quarter ended December 31, 2007 and first quarter ended March 31, 2008 understated our cost of raw materials. In September 2008, there were reports in a printed media in the PRC, alleging that we have engaged in dishonest practices in the areas of operations, financial reporting and environmental protection. The audit committee undertook what it believes to be appropriate measures to address these allegations, including requesting our internal audit department to investigate such allegations. As a result of these investigations and other internal inquiries, our audit committee did not find any basis for these allegations. However, we cannot assure you that further allegations will not be made, either privately or publicly. Any such allegations or claims require our board of directors and management to expend significant resources to investigate and take other appropriate actions, and addressing such allegations could divert the attention of our board of directors and management. Any further allegations or claims of such nature, if publicly made, may cause us to suffer from negative publicity, which may have a material and adverse impact on the trading price of our ADSs. In addition, any litigation resulting from these allegations or claims may divert the attention of our management and result in significant costs, thereby resulting in a negative impact on our financial condition and results of operations.

Other than the allegations described above, we are not aware of any legal proceeding, investigation or claim, or other legal exposure that has a more than remote possibility of having a material adverse effect on our business, financial condition or results of operations or cash flows.

PRC GOVERNMENT REGULATIONS

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

On November 30, 2004, the NDRC and the Ministry of Commerce of the PRC jointly promulgated the Catalog, which came into effect on January 1, 2005. The Catalog lists those industries and economic activities in which foreign investment in China is encouraged, restricted or prohibited. Pursuant to the Catalog, the comprehensive utilization and disposal of exhaust gas, discharge liquid, and waste residue, and the technology for recycling and comprehensive utilization of resources, fall within the encouraged category. Our PRC counsel, Chen & Co. Law Firm, is of the opinion that our business falls within the encouraged category under the Catalog.

On October 31, 2007, the NDRC and the Ministry of Commerce jointly promulgated a further revised catalog, which came into effect on December 1, 2007 and supersedes the Catalog promulgated on November 30, 2004. Pursuant to the new catalog promulgated on October 31, 2007, although the comprehensive utilization and disposal of exhaust gas, discharge liquid, waste residue, and the technology for recycling and comprehensive

 

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utilization of resources still fall within the encouraged category, biodiesel production is classified as a sub-category of the agricultural food processing industry as a restricted industry. A foreign-invested enterprise engaged in such biodiesel production therefore must be majority owned by PRC citizens or entities because foreign investment in such biodiesel production is restricted.

Our PRC legal counsel, Chen & Co. Law Firm, has advised us that based on their understanding of the new catalog, only biodiesel production using agricultural food products as raw materials falls within the “restricted industry” category pursuant to the new catalog. In the opinion of Chen & Co. Law Firm, our biodiesel production process, which utilizes used cooking oil and vegetable oil offal as raw materials, does not fall within the restricted industry category under the new catalog.

There are substantial uncertainties in the interpretation and application of existing and new PRC laws, regulations or policies, including the new catalog. See Item 3.D, “Key Information—Risk Factors—If foreign ownership of the biodiesel production business in China is restricted, we would have to rely on contractual arrangements to derive economic benefits from, and to control, our new PRC operating entities in the future, which may not be as effective in providing control over these entities as direct ownership.”

Our operations have been significantly affected by government policies such as taxation regulations. The PRC government introduced three regulations in relation to consumption tax rates to be levied on diesel products, effective as of January 1, 2009, which raised the consumption tax on diesel products levied on diesel producers from RMB0.10 per liter to RMB0.80 per liter. In order to minimize operating cash outflows that would result from the assessment of consumption tax, we extended the suspension of operations at Fujian Gushan, following the completion of road maintenance by the Fuzhou municipal government in early June 2009. We have also deferred the commencement of production at our Chongqing and Hunan production facilities, which were completed in May and July 2009, respectively. See Item 3.D, “Key Information—Risk Factors—Our operation have been subject to significant suspensions and interruptions which have resulted in a reduction of our sales volume and may continue to materially and adversely affect our results of operations,” and “Key Information Risk Factors—Risks Relating to Business Operations in China—PRC tax policies may continue to affect our business, results of operations and financial condition.” In December 2010, the Ministry of Finance and the PRC SAT issued Caishui 118. According to Caishui 118, subject to fulfillment of certain conditions, pure biodiesel made from animal fats or vegetable oils is exempted from consumption tax in China, subject to fulfillment of certain conditions. Caishui 118 is effective immediately and applies retroactively to January 1, 2009. Accordingly, any consumption tax paid on any such biodiesel since January 1, 2009 will be refunded. We expect that biodiesel produced at all of our production facilities will satisfy the conditions set forth by Caishui 118 and qualify for the exemption.

Government Incentives and Regulations

In light of the rapid growth of the PRC economy and rising consumption of energy, the PRC government increasingly encourages the development and use of renewable energy resources. According to the Medium and Long Term Development Plan of the PRC, the share of renewable energy used in primary energy consumption is to be increased to roughly 10% by 2010 and nearly 15% by 2020, up from 7.5% in 2005. The PRC government expects that the renewable energy sector in China will experience rapid expansion in the next few years.

The Law of Renewable Energy Resources of China

The use of renewable energy sources has gained widespread support from the PRC government. The “Eleventh Five-Year Plan” of the PRC encourages the development of petroleum substitutes, including bioliquid fuel. The “Twelfth Five-Year Plan” of the PRC encourages the implementation of energy saving and/or petroleum substitute projects.

The newly amended Energy-Saving Law of China which came into effect on April 1, 2008 also encourages the development and utilization of petroleum substitutes.

 

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Pursuant to the Law of Renewable Energy Resources, which came into effect on January 1, 2006 and as amended on December 26, 2009, the PRC government encourages the manufacturing and application of bioliquid fuel, and mandates petroleum-selling enterprises to include bioliquid fuel that meets the PRC national standards into their fuel-selling system. If any petroleum-selling enterprise fails to do so, such petroleum-selling enterprise will be liable for the economic loss suffered by the manufacturers of bioliquid fuel. Financial institutions may provide government-subsidized interest loans to renewable energy projects which fall within the National Guidance Catalog for Renewable Energy Resources Industry Development and meet relevant credit requirements.

The PRC Law of Renewable Energy Resources also provides that the PRC government shall set up a special fund for the development of renewable energy resources, or the Special Fund. The PRC Ministry of Finance issued the Temporary Regulation on the Management of the Special Fund for the Development of Renewable Energy Resources on June 16, 2006, which came into effect on May 30, 2006. Pursuant to this regulation, the Special Fund shall mainly provide assistance to the development and use of renewable energy resources, including petroleum substitutes.

The Implementation Opinion on Financial and Taxation Supportive Policy for the Development of Bioenergy and the Biochemical Industry was issued jointly by the PRC Ministry of Finance, NDRC, Ministry of Agriculture, the PRC SAT, and State Forestry Administration on September 30, 2006. The Implementation Opinion proposed various supportive policies for enterprises engaging in the bioenergy and biochemical industries, including government subsidies and preferential tax treatment.

The Newly Established National Biodiesel Standard in China

On January 5, 2007, the General Administration of Quality Supervision, Inspection and Quarantine and the State Standardization Supervision Committee jointly promulgated the National Standard of Biodiesel Blend Stock (BD100) for Diesel Engine Fuels, or the National Biodiesel Standard (B100), which took effect as of May 1, 2007. To our knowledge, the National Biodiesel Standard is currently deemed to be a recommended standard by the General Administration of Quality Supervision, Inspection and Quarantine and the State Standardization Supervision Committee, which biodiesel manufacturers are encouraged to comply with pursuant to relevant laws and regulations.

Stringent Standards for the Disposal of Used Cooking Oil

Under the Rules on the Management of Waste Grease for Food Producers promulgated on April 15, 2002 (abrogated on August 20, 2010), food producers must sell used cooking oil to waste grease processing entities or waste collection entities rather than discharging used cooking oil into the environment or reusing it for human consumption. Any entity or individual that purchases waste grease for the purpose of using waste grease to process and sell food is subject to penalties by the regulatory authorities. Further penalties will be imposed for any harm suffered by consumers resulting from consumption of food prepared with used cooking oil.

Under the Opinion on Strengthening the Management of the Use of Waste Cooking Oil and Kitchen Waste, promulgated by general office of the State Council on July 13, 2010, extracted kitchen waste oil may not be used for cooking or sold to food production entities.

The misuse of used cooking oil, such as in connection with the production of food for sale and consumption, also violates the PRC Food Safety Law, which came into effect on June 1, 2009. The PRC Food Safety Law imposes penalties on violations relating to food hygiene, including the suspension of food production by the violating entities.

On March 2, 2010, the General Office of the State Council of the PRC promulgated Guobanfa [2010] No. 17 on “Rectification Arrangement of Food Safety for the Year of 2010” and on March 19, 2010, the State

 

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Food and Drug Administration promulgated Guoshiyaojianshi [2010] No. 106 on “Rectification Implementation of Food Safety in Restaurants,” both regulations aim to, among other things, reinforce the prohibition of processing food by using waste grease and used cooking oil.

Environmental Protection

We are subject to various PRC national and local environmental laws and regulations related to our operations, including regulations governing the use, storage, discharge and disposal of hazardous substances in the ordinary course of our manufacturing processes. The major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Treatment of Water Pollution and its implementation rules, the PRC Law on the Prevention and Treatment of Air Pollution, the PRC Law on the Prevention and Treatment of Solid Waste Pollution, and the PRC Law on the Prevention and Treatment of Noise Pollution.

According to the PRC Environmental Protection Law, the State Environmental Protection Administration sets national pollutant emission standards and provincial governments may set stricter local standards which are required to be registered at the State Administration for Environmental Protection. Enterprises are required to comply with the stricter of the two standards.

The relevant PRC laws and regulations generally impose discharge fees based on the level of emission of pollutants. These laws and regulations also impose fines for violations of laws, regulations or decrees and provide for possible closure by the central or local government of any enterprise which fails to comply with orders requiring it to rectify the activities causing environmental damage.

Tax Incentives

On December 9, 2008, the PRC SAT and Ministry of Finance jointly issued Policies for Products Generated from Comprehensive Utilization of Resources (Cai Shui [2008] No. 156), a circular on Value-added Tax, or VAT, which stipulated that a VAT refund upon levy would be applicable to enterprises that produce biodiesel by making use of waste animal oil or plant oil to the extent of not less than 70% as their raw materials. This VAT incentive policy is effective from July 1, 2008. To obtain the VAT refund, an enterprise must first apply for and obtain the relevant “Comprehensive Utilization of Resources Verification Certificate”, or Certificate, and then apply for the VAT refund.

According to article 33 of the New CIT Law issued on March 16, 2007 and article 99 of the Implementation Rules on Corporate Income Tax Law issued on December 6, 2007 and the relevant circulars on “Comprehensive Utilization of Resources CIT Incentive” (Cai Shui [2008] No. 47 and Cai Shui [2008] No. 117), when calculating its taxable income, an enterprise that makes use of waste biomass oil or waste lubricant as 100% of its raw materials is entitled to a 10% reduction in revenue. To qualify for this reduction, an enterprise must first apply for and obtain the Certificate and then apply for the tax reduction.

As of the date of this annual report, each of Beijing Gushan, Shanghai Gushan, Fujian Gushan and Handan Gushan has obtained such Certificate and Sichuan Gushan has made application for, but not yet obtained this Certificate.

Jin Xin is a social welfare enterprise to which the state and local tax bureau of Mianyang granted preferential tax benefits. According to the Chuanminfa [2007] No. 342 and Guoshuifa [2007] No. 67, Jin Xin is eligible for a VAT refund and concessions subject to the annual review by the state and local tax bureau of Mianyang.

 

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Regulation of Foreign Currency Exchange and Dividend Distribution

Foreign Currency Exchange

The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended. Under these rules, the Renminbi is freely convertible for trade and service-related foreign exchange transactions, but not for direct investments, loans or investments in securities outside China without the prior approval of SAFE.

Pursuant to the Foreign Currency Administration Rules, foreign-invested enterprises in China may purchase foreign exchange without approval of SAFE for trade and service-related foreign exchange transactions by providing commercial documents evidencing these transactions. They may also retain foreign exchange, subject to a cap approved by SAFE, to satisfy foreign exchange liabilities or to pay dividends. However, the relevant PRC government authorities may limit or eliminate the ability of foreign-invested enterprises to purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for direct investments, loans and investments in securities outside China are still subject to limitations and require approval from SAFE.

Dividend Distribution

The principal PRC regulations governing the distribution of dividends by foreign-invested enterprises include:

 

   

The Sino-foreign Equity Joint Venture Law (1979), as amended;

 

   

The Regulations of Implementation of the Sino-foreign Equity Joint Venture Law (1983), as amended;

 

   

The Foreign Investment Enterprise Law (1986), as amended;

 

   

The Regulations of Implementation of the Foreign Investment Enterprise Law (1990), as amended;

 

   

The Company Law (2005);

 

   

The New CIT Law (2007); and

 

   

The Implementation Rules on Corporate Income Tax Law (2007).

Under these regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to set aside at least 10% of their accumulated profits each year, if any, to fund certain statutory reserve funds unless such reserve funds have reached 50% of their respective registered capital. Sino-foreign equity joint ventures are required to set aside certain reserve funds, with the percentage of their accumulated annual profits to be set aside determined by their board of directors. These reserves are not distributable as cash dividends.

Withholding Tax in China

On March 16, 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the New CIT Law, which took effect on January 1, 2008. Under the New CIT Law, from January 1, 2008, foreign invested enterprises, such as our subsidiaries, and domestic companies are subject to CIT at a uniform rate of 25%, with certain exceptions.

In addition, according to the New CIT Law and its relevant regulations, PRC-resident enterprises are levied withholding tax at 10% on dividends to their non-PRC-resident corporate investors for earnings accumulated beginning on January 1, 2008. Undistributed earnings generated prior to January 1, 2008 are exempted from such withholding tax. Under the previous income tax laws and rules, no withholding tax was required. Since our PRC subsidiaries are invested by non-PRC-resident corporate investors, our Group is subject to withholding tax for

 

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earnings accumulated beginning on January 1, 2008. Under the Arrangement between the Mainland of China and Hong Kong Special Administration Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, or Mainland China/HKSAR DTA, a qualified Hong Kong tax resident which is the “beneficial owner” and holds 25% or more of the equity interest of a PRC-resident enterprise is entitled to a reduced withholding rate of 5%. All of our Group’s foreign-invested enterprises are directly held by Hong Kong tax residents. Accordingly, a rate of 5% was applied to the calculation of withholding tax for the year ended December 31, 2008.

On October 27, 2009, the PRC SAT issued Guoshuihan [2009] No. 601 on “How to understand and recognize the “Beneficial Owner” in Double Taxation Agreements”, or Circular 601. Circular 601 clarifies the general rules and the onus of proof in determining whether a tax relief applicant qualifies as a “beneficial owner.” Pursuant to Circular 601, a “beneficial owner” under a tax treaty is determined not purely by its place of legal registration but also by other factors which are dependent on the specific facts and circumstances and significant judgment may be involved. In view of the above and after seeking professional advice on the matter, a withholding tax rate of 10% is applied on our undistributed earnings as of December 31, 2009, resulting in a dividend withholding tax expense of RMB7.7 million for the year ended December 31, 2009 and a deferred tax liability of RMB29.6 million as of December 31, 2009. In 2010, we reduced the provision for dividend withholding tax by RMB23.6 million (US$3.6 million) in respect of our biodiesel business as a result of the net loss incurred by various PRC subsidiaries, and recognized a provision of RMB1.1 million (US$0.2 million) for Jin Xin’s profit since our initial acquisition in November 2010.

Under the New CIT Law, an enterprise established outside the PRC with its “de facto management organization” within the PRC is considered a resident enterprise and will be subject to the CIT at the rate of 25% on its worldwide income. A “de facto management organization” is defined as an organizational body that effectively exercises overall management and control over production and business operations, personnel, finance and accounting, and properties of the enterprise. It remains unclear how the PRC tax authorities will interpret this definition. Notwithstanding the foregoing provision, the New CIT Law also provides that, if a resident enterprise directly invests in another resident enterprise, the dividends received by the investing resident enterprise from the invested enterprise are exempted from income tax, subject to certain conditions. However, given the short history of this law, it remains unclear as to the details of the qualifications required for such exemption and whether the dividends which our Company receives from our PRC subsidiaries will be exempt from CIT if it is recognized as a PRC resident enterprise.

Moreover, under the New CIT Law, foreign ADS holders may be subject to a 10% withholding tax upon dividends payable by us and gains realized on the sale or other disposition of ADSs or ordinary shares if we are categorized as a PRC tax resident enterprise.

Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions

In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1, 2005, and was further supplemented by an implementing notice issued on November 24, 2005. Notice 75 suspends the implementation of two prior regulations promulgated in January and April of 2005 by SAFE. Notice 75 states that PRC residents, whether a natural or legal person, must register with the relevant local SAFE branch prior to their establishment or control of an offshore entity established for the purpose of overseas equity financing involving onshore assets or equity interests held by them. The term “Chinese residents” as used in Notice 75 refers to those entities with legal person status or other economic organizations established within the territory of China. The term “Chinese natural person residents” as used in Notice 75 includes all Chinese citizens and all other natural persons, such as foreigners, that habitually reside in China for economic benefit. The SAFE implementing notice of November 24, 2005 further clarifies that the term “Chinese natural person residents” as used under Notice 75 refers to those Chinese natural person residents defined under the relevant PRC tax laws and those natural persons who hold any

 

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interests in domestic entities which are classified as “domestic-funding” interests. Chinese residents are required to complete amended registrations with the local SAFE branch upon (a) injection of equity interests or assets of an onshore enterprise to the offshore entity, or (b) subsequent overseas equity financing by such offshore entity. Chinese residents are also required to complete amended registrations or file with the local SAFE branch within 30 days of any material change in the shareholding or capital of the offshore entity, such as changes in share capital, share transfers and long-term equity or debt investments, and providing security. Chinese residents who have already incorporated or gained control of offshore entities that have made onshore investment in China before Notice 75 was promulgated must register their shareholding in the offshore entities with the local SAFE branch on or before March 31, 2006. Under Notice 75, Chinese residents are further required to repatriate back into China all of their dividends, profits or capital gains obtained from their shareholdings in the offshore entity within 180 days upon their receipt of such dividends, profits or capital gains.

The registration and filing procedures under Notice 75 are prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investments or shareholder loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity sale proceeds, or the return of funds upon a capital reduction.

Please refer to Item 3.D, “Key Information—Risk Factors—Risks Relating to Business Operations in China —The approval of the China Securities Regulatory Commission might have been required in connection with our initial public offering under a recently adopted PRC regulation, and, if approval was required, we could be subject to sanction, fines and other penalties.”

C. Organizational Structure

Sichuan Gushan was established in China on June 14, 2001. In April 2005, the shareholders of Sichuan Gushan contributed their equity interests in Sichuan Gushan to Carling Technology, a company incorporated on January 5, 2005 in the British Virgin Islands, or BVI. Since 2005, Carling Technology became the ultimate holding company of four additional subsidiaries in China, three of which were established by us (Shanghai Gushan, Beijing Gushan and Fujian Gushan) and one of which we acquired (Handan Gushan). In anticipation of a public offering, we incorporated Gushan Environmental Energy Limited in the Cayman Islands as our listing vehicle and our holding company. On September 20, 2007, we underwent a reorganization pursuant to which the shareholders of Carling Technology subscribed to 123,820,000 of our ordinary shares in exchange for all of the outstanding shares of Carling Technology. Our proportionate ownership immediately after the reorganization and the proportionate ownership of Carling Technology before the reorganization remained the same, as Carling Technology was reorganized as our wholly owned subsidiary. We established Hunan Gushan and Chongqing Gushan, both wholly foreign-owned enterprises in China, on January 14, 2008 and January 24, 2008, respectively. On April 1, 2008, we acquired Eagle Sight Holdings Limited, or Eagle Sight, a newly established shell holding company incorporated in Hong Kong. On June 19, 2008, we changed the name of Eagle Sight to Gushan Holdings. On September 11, 2008, we acquired Gushan Bio-Energy, a newly established shell holding company incorporated in Hong Kong. We established Biomass, a wholly foreign-owned enterprise in China on November 3, 2008. On August 17, 2010, we acquired Engen Investments, a newly established shell holding company in the BVI. On August 27, 2010, we acquired True Excel, a newly established shell holding company in Hong Kong. On November 3, 2010, we acquired a 67% beneficial ownership interest in Jin Xin. On January 1, 2011, we acquired an additional 8% beneficial ownership interest in Jin Xin, increasing our beneficial ownership interest to 75%. Jin Xin is engaged in the manufacturing of copper rods, copper wires and copper granules from recycled copper in Sichuan.

 

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

LOGO

D. Property, Plant and Equipment

Production Facilities

The following table sets forth certain information regarding our biodiesel production facilities as of December 31, 2010:

 

    Sichuan   Sichuan   Hebei   Fujian   Beijing   Shanghai   Chongqing   Hunan

Location

  San Tai,
Mianyang,
Sichuan
  Qin Dong
Bei
Industrial
Park,
Mianyang
(relocation)(14)
  Feixiang,

Handan,

Hebei

  Mawei
Investment
Park, Fuzhou,
Fujian
  Daxing

District,

Beijing

  Fengxian
District,
Shanghai
  Changshou

Chemical

Park,

Chongqing

  Liuyang
Industrial
Park,
Liuyang,
Hunan

Began construction

  June 2001   August 2010   May 2003   June 2005   May 2007   October 2007   April 2008   April 2008

Began production

  December
2001(14)
  —     January 2004   February 2006   January 2008   June 2008   (12)   (12)

Capacity as of December 31, 2010(1)

  Biodiesel:
N/A
(before
relocation
60,000 tons)
  —     Biodiesel:

30,000 tons

  Biodiesel:
100,000 tons
  Biodiesel:

100,000 tons

  Biodiesel:
100,000 tons
  Biodiesel:

30,000 tons

  Biodiesel:
30,000 tons

2007 capacity utilization(2)

  94.0%
(biodiesel)(3)
  —     114.4%

(biodiesel)

  106.7%
(biodiesel)(4)
  —     —     —     —  

2008 capacity utilization(2)

  86.1%
(biodiesel) (5)(7)
  —     95.4%

(biodiesel)(7)

  99.0%
(biodiesel)(7)
  65.0%

(biodiesel) (6)

  78.6%
(biodiesel)
  —     —  

2009 capacity utilization(2)

  48.9%
(biodiesel)(8)
  —     52.2%

(biodiesel)

  27.9%
(biodiesel)(9)
  41.9%

(biodiesel)(10)

  40.9%
(biodiesel)(11)(15)
 
  0%

(biodiesel)(12)

  0%
(biodiesel)(12)

2010 capacity utilization

  14.0%
(biodiesel)(14)
  —     29.4%
(biodiesel)(16)
  0%
(biodiesel)(9)
  18.6%
(biodiesel)(16)
  6.6%
(biodiesel)(15)
  0%
(biodiesel)(12)
  0%
(biodiesel)(13)

Site Area

  28,665
square
meters(13)
  47,211
square

meters

  20,575

square

meters

  61,367 square
meters
  54,965

square

meters

  39,699
square
meters
  41,838

square

meters

  46,223
square
meters

 

(1) Capacity refers to the maximum annual amount of biodiesel that we can concurrently produce when we operate at full production as of December 31, 2010. The capacity of Shanghai Gushan was 50,000 tons from January to July 2009 and 100,000 tons from August to December 2009.
(2) Our production levels can be adjusted to exceed the design production capacity, which is estimated based upon 300 annual working days. As our production facilities typically operate 50 working weeks annually and 24 hours a day, our capacity utilization can exceed 100%. The utilization rate is calculated based on actual sales volume and weighted average annual capacity.
(3) In October 2007, we suspended production at our Sichuan plant for approximately two weeks in order to perform a capacity upgrade from 40,000 tons to 60,000 tons.
(4) In October 2007, we suspended production at our Fujian plant for approximately two weeks in order to carry out maintenance operations.

 

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(5) On May 12, 2008, the Sichuan province experienced a severe earthquake which caused a temporary interruption of power supply. The local government required us to suspend production at this facility for two weeks as a safety precaution. Our Sichuan facility resumed production on May 26, 2008.
(6) From August 1 to September 20, 2008, we suspended operations at our Beijing plant for about seven weeks due to the heightened enforcement of traffic control measures adopted by the Beijing municipal government in preparation for the hosting of the 2008 Beijing Olympic and Paralympic games.
(7) In November and December of 2008, we suspended production at our Fujian, Sichuan and Hebei plants for a few weeks to carry out repair and maintenance operations.
(8) Facilities with a production capacity of 10,000 tons at our Sichuan plant in San Tai County have been under repair since the second quarter of 2009. In August 2010, we suspended production at our Sichuan plant in San Tai County pending its relocation to Qin Dong Bei Industrial Park.
(9) From April 19, 2009, we suspended operations at our Fujian plant due to road maintenance that resulted in restricted access to the plant by our suppliers and customers. We subsequently extended the suspension of operations in order to minimize operating cash outflows that would result from the assessment of consumption tax from a local tax bureau. As of the date of this annual report, Fujian Gushan has not resumed production.
(10) In January 2009, we suspended production at our Beijing plant for approximately one month in order to perform a capacity upgrade from 50,000 tons to 100,000 tons.
(11) From mid June to mid August 2009, we suspended production at our Shanghai plant for approximately two months in order to perform a capacity upgrade from 50,000 tons to 100,000 tons.
(12) Following completion of construction of our Chongqing and Hunan plants in May and July 2009, we deferred the commencement of operations at those plants pending resolution of the consumption tax issue. Although the consumption tax issue was resolved in our favor in December 2010, as of the date of this annual report, we have not commenced production at our Chongqing and Hunan plants.
(13) Excludes 47,211 square meters of land to be used for the new plant near Sichuan Gushan’s existing plant.
(14) Sichuan Gushan suspended production in San Tai County beginning August 1, 2010 for the relocation to its new plant in Qin Dong Bei Industrial Park.
(15) Shanghai Gushan suspended production from April 2010 due to Expo 2010 and a lawsuit filed against us by a construction contractor. As of the date of this annual report, Shanghai Gushan has not resumed production.
(16) In 2010, to help mitigate the potential adverse impact from the consumption tax issue, we continued our efforts to expand our alternative sales channels, including biodiesel sales as fatty acid methyl ester to the chemical industry, which are not subject to consumption tax, while reducing our sales of biodiesel to the refined oil market. This strategy contributed in part to the year-to-year decrease in the sales volume of biodiesel because the size of our customer base in the chemical industry is smaller than that of the refined oil market.

In 2001, our Sichuan production facility began biodiesel production with an annual biodiesel production capacity of 10,000 tons, which we expanded in 2004 by building a new 30,000 ton biodiesel production line, increasing the annual biodiesel production capacity to 40,000 tons and production lines to produce erucic amide and stearic acid, a saturated fatty acid used to harden soaps. To further expand our operations and diversify our customer base, in 2004, we began to produce biodiesel at our Hebei production facility, which has an annual biodiesel production capacity of 30,000 tons. In 2006, we commenced biodiesel production in Fujian, with an annual biodiesel production capacity of 100,000 tons. In November 2007, we further expanded the production capacity of the Sichuan facility to 60,000 tons. In January 2008, we commenced biodiesel production in Beijing, with an initial annual biodiesel production capacity of 50,000 tons, and we commenced operation of the additional facilities in March 2009, adding another 50,000 tones of annual biodiesel production capacity. In June 2008, we commenced biodiesel production in Shanghai, with an initial annual biodiesel production capacity of 50,000 tons, and we commenced operation of the additional facilities in August 2009, adding another 50,000 tones of annual biodiesel production capacity. In May and July 2009, we completed the construction of Chongqing and Hunan plants respectively, each with initial annual biodiesel production capacity of 30,000 tons. In August 2010, we suspended production at our Sichuan plant in San Tai County pending its relocation to Qin Dong Bei Industrial Park.

We commenced relocation of our Sichuan plant in August 2010. The disposal and relocation of its property, plant and equipment was completed as of December 31, 2010 and we expect to complete construction of the new Sichuan plant in the second quarter of 2011 with an initial annual biodiesel production capacity of 100,000 tons.

In November 2010, we acquired a 67% beneficial ownership interest in Jin Xin. We subsequently increased our beneficial ownership interest in Jin Xin to 75% in January 2011. Jin Xin has one plant in Sichuan, with a daily production capacity of approximately 160 tons of recycled copper products from mid-December 2010 (from November to mid-December 2010: 60 tons).

 

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The following table sets forth certain information regarding our recycled copper production facilities as of December 31, 2010:

 

    

Sichuan

Location

   Song Ya Town, Farm District, Mianyang, Sichuan

Period operation commenced

   February 2009

Daily production capacity of recycled copper products as of December 31, 2010

   160 tons

Capacity utilization from November to December 2010

   89.1%

Site Area

   15,257 square meters

Equipment Suppliers

Our production facilities use equipment and machinery manufactured by domestic PRC equipment vendors. We seek to ensure the quality of our equipment and machinery and safeguard our technical know-how by utilizing a small number of equipment vendors. Our equipment vendors have been supplying equipment and machinery to us for several years and we are satisfied with the quality of their products.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with Item 3.A., “Key Information—Selected Financial Data,” our consolidated financial statements and related notes included elsewhere in this annual report. The discussion in this section contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.” 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 Item 3.D, “Key Information—Risk Factors” and elsewhere in this annual report.

A. Operating Results

Overview

Our revenues took a significant decline in 2009 and 2010 due to the global financial crisis, the slowdown in the PRC economy, and as a result of the suspension of operations at our Fujian, Sichuan and Shanghai facilities, principally as a result of the consumption tax issue described in Item 3.D, “Key Information—Risk Factors—Risks Relating to Our Business Operations in China—PRC tax policies may continue to affect our business, results of operations and financial condition.” In 2010, Shanghai Gushan continued to suspend its production as a result of Expo 2010 in Shanghai, China and the legal dispute with a construction contractor, and Sichuan Gushan suspended its production from August 2010 for relocation of its production facility. We generated revenues of RMB1,495.6 million, RMB628.2 million and RMB408.5 million (US$61.9 million) for the years ended December 31, 2008, 2009 and 2010, respectively. We acquired an initial 67% beneficial ownership interest in Jin Xin in November 2010 and Jin Xin’s revenue contributed RMB205.1 million (US$31.1 million) to our revenue in 2010. We achieved a net income of RMB269.0 million for the year ended December 31, 2008, and incurred a net loss attributable to our Company of RMB283.5 million and RMB1,109.0 million (US$168.0 million) for the

 

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year ended December 31, 2009 and 2010, respectively. We incurred a foreign exchange loss of RMB99.8 million in 2008, resulting from the depreciation of our foreign currency holdings in New Zealand dollars and Euros against U.S. dollars in the third and fourth quarters of 2008. In October 2008, we converted all of our cash deposits in New Zealand dollars and Euros to U.S. dollars. Due to the current highly volatile market conditions, we do not hold cash balances in currencies other than in Renminbi, Hong Kong dollars and U.S. dollars as of the date of this annual report and do not expect to do so in the foreseeable future. We made a provision for consumption tax of RMB103.8 million (US$15.7 million), based on consumption tax regulations at that time, in respect of 129.7 million liters of biodiesel sold to the fuel market for the year ended December 31, 2009. In 2010, we reversed the provision for consumption tax of RMB103.8 million (US$15.7 million) made in 2009 based on the issuance of Caishui 118 by the Ministry of Finance of the PRC and SAT. We recognized impairment losses on property, plant and equipment of RMB992.6 million (US$150.4 million) in the third quarter of 2010. In addition, we incurred a loss on disposal of property, plant and equipment of RMB3.3 million (US$0.5 million) as a result of the disposal and relocation of our Sichuan production facility, and we recognized a change in fair value of contingent consideration liability of RMB2.9 million (US$0.4 million) as a result of the increase in fair value of contingent consideration liability in connection with the acquisition of an initial 67% beneficial ownership interest in Jin Xin in November 2010.

The most significant factors that affect our financial condition and results of operations are:

 

   

economic, political and social conditions in China;

 

   

tax laws in China;

 

   

production capacity and utilization;

 

   

market prices for diesel and copper;

 

   

demand for, and market awareness of, biodiesel and demand for recycled copper products;

 

   

supply and costs of principal raw materials;

 

   

product mix and effect on gross margins; and

 

   

availability of financing for our recycled copper business.

Economic, political and social conditions in China

We conduct all of our production in China and we derive all of our revenues from sales to customers in China. As such, economic conditions in China and the geographic markets where we operate will affect virtually all aspects of our operations, including the demand for our products, the availability and prices of our raw materials and our other expenses. During the past three decades, the PRC government has implemented a series of economic reform measures to expand the influence of market forces in the development of the domestic economy. As a result of these reforms, China experienced significant economic growth, achieving a compound annual growth rate, or CAGR, of 14.0% in GDP from 1999 through 2008. Due in part to the global financial crisis, however, the PRC economy slowed down significantly in the second half of 2008. As a result, domestic demand for and consumption of energy and energy products, including biodiesel products, has been adversely affected. Furthermore, there was a slow rebound in refined diesel demand beginning in the fourth quarter of 2009. This trend continued in 2010 as China’s economy continued to recover. We believe that economic conditions in China and the geographic markets where we operate will continue to affect our business and results of operations. Our financial condition and results of operations may also be affected by changes in China’s political and social conditions and by changes in laws, regulations or the interpretation or implementation thereof.

Tax laws in China

In recent years, the PRC government has made a number of amendments to its existing tax laws and introduced a number of new regulations. Some of these amendments or new regulations had a sudden and

 

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material adverse effect on our business, results of operations and financial condition. These new regulations included, among others, increases in consumption tax on diesel producers from RMB0.10 per liter to RMB0.80 per liter and redefining diesel products that are subject to consumption tax. As a result of assessments of consumption tax by a local SAT in 2009, we suspended operations at Fujian Gushan pending resolution of the consumption tax issue and deferred the commencement of production at our Chongqing and Hunan production facilities. We received a similar assessment from a local SAT for consumption tax for Sichuan Gushan, which was deferred pending a decision from the PRC SAT on the applicability of the consumption tax to our sales of biodiesel.

While we did not pay consumption tax for our sales of biodiesel products in 2009, based on consumption tax regulations at that time, we made a provision of RMB103.8 million with respect to 129.7 liters of biodiesel products sold as a refined oil product in 2009. This provision was reversed in our 2010 financial statements based on the issuance of Caishui 118 by the Ministry of Finance of the PRC and SAT, which clarified that, subject to fulfillment of certain conditions, pure biodiesel made from waste animal fat or vegetable oil is exempt from consumption tax in China. We believe that biodiesel produced at all of our production facilities will satisfy the conditions set forth by Caishui 118 and quality for the exemption.

The foregoing factors contributed to our gross loss margin of 18.1% in 2010 and we expect existing and future tax laws in China to continue to have a material impact on our results of operations. While we are seeking to expand into alternative sales channels, including biodiesel sales as fatty acid methyl ester to the chemical industry, we may not be successful in such efforts.

Furthermore, on October 27, 2009, the PRC SAT issued Circular 601, which clarifies that a “beneficial owner” under a tax treaty is determined not purely by its place of legal registration but also by other factors dependent upon the specific facts and circumstances, and significant judgment and uncertainty may be involved with such determination. In view of the uncertainty in the definition of “beneficial owner” under the Mainland China/HKSAR DTA and after seeking professional advice on the matter, a withholding tax of 10% is applied on the undistributed earnings as of December 31, 2009, resulting in an income tax expense of RMB7.7 million for the year ended December 31, 2009 and a deferred tax liability of RMB29.6 million as of December 31, 2009, in view of the uncertainty in the definition of “beneficial owner” under the Mainland China/HKSAR DTA. See Item 4.B, “Business Overview—PRC Government Regulations—Regulation of Foreign Currency Exchange and Dividend Distribution—Withholding Tax in China.” In 2010, we recorded a reversal of the accrual for dividend withholding tax of RMB23.6 million (US$3.6 million) as a result of the net loss incurred by our various PRC subsidiaries, and a provision of RMB1.1 million (US$0.2 million) for Jin Xin’s profit since our acquisition of an initial 67% beneficial ownership interest in Jin Xin in November 2010.

Production capacity of biodiesel and utilization

Our designed annual production capacity increased from 70,000 tons in 2005 to 170,000 tons in 2006 to 190,000 tons in 2007 to 290,000 tons in 2008, to 450,000 ton in 2009 and to 390,000 tons in 2010. We sold 231,377, 143,818 and 42,391 tons of biodiesel in 2008, 2009 and 2010, respectively. In August 2010, we commenced relocation of our Sichuan plant, and have been conducting a trial run of our new plant, which has an initial annual biodiesel production capacity of 100,000 tons since early June 2011.

While our production capacity has increased in recent years, we have also experienced significant disruptions and suspensions of our operations that have affected our production output and the utilization of our production facilities. Such suspensions may continue or extend to additional facilities in the future. For example, we suspended production at Fujian Gushan from April to June 2009 due to road maintenance, which restricted access to the plant. From mid June 2009 to mid August 2009, we suspended production at Shanghai Gushan to install additional facilities. From mid September 2009 to the end of November 2009, we suspended production at Handan Gushan as a result of road maintenance by the Handan municipal government of Hebei province, which restricted access to the plant by our suppliers and customers. From mid April 2010 to October 2010, we suspended production at Shanghai Gushan due to heightened enforcement of control measures adopted by the

 

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Shanghai municipal government during the Expo 2010. We continued to suspend production at Shanghai Gushan due to a lawsuit filed against us by a production facility contractor in the People’s Court of Fengxian District, Shanghai alleging that we failed to pay the contract sum payable with respect to its construction of our Shanghai plant. We also suspended production in Sichuan Gushan for the relocation of its production facility since August 2010. See Item 3.D, “Key Information—Risk Factors—Risks Relating to Our Businesses and Our Industries—Our biodiesel operations have been subject to significant suspensions and interruptions which have resulted in a reduction of our sales volume and may continue to materially and adversely affect our results of operations.”

In addition, as a result of assessments of consumption tax by a local SAT in 2009, we extended the suspension of operations at Fujian Gushan following completion of road maintenance in June 2009 and deferred the commencement of production at our Chongqing and Hunan production facilities, which were completed in May and July 2009, respectively, pending resolution of the consumption tax issue. See “—Tax Laws in China.” Although the consumption tax issue was resolved in our favor in December 2010, as of the date of this annual report, we have not resumed production at Fujian Gushan and have not commenced production at our Chongqing and Hunan production facilities. Fujian Gushan’s production capacity represents approximately 25.6%, and our Chongqing and Hunan production facilities combined represent a further 15.4%, of our total production capacity as of the date of this annual report. As a result of the suspension of operations, Fujian Gushan’s utilization rate decreased to nil in 2010 from 27.9% in 2009 and from 99.0% in 2008, which materially and adversely affected our revenues for 2010. Suspension of production at our biodiesel plants would materially and adversely effect our production capacity and utilization.

If we are unable to utilize our production capacity effectively, as a result of interruptions, suspensions or deferrals of our operations, such as for technology upgrades or compliance with government directives, our revenues may decline, our operating margin may deteriorate as depreciation expense will increase along with the enlarged asset size and we may have to recognize additional impairment loss on our production facilities in future. After the relocation of our plant in Sichuan, we do not expect to further expand our biodiesel production capacity in the near future as we plan to focus on upgrading or modifying our existing production facilities to increase production efficiency.

Market prices for diesel and copper

We price our biodiesel based on the market price for diesel. Depending on the market conditions, we sell biodiesel at no discount or at a discount as compared to local retail diesel prices when the diesel market was slack. We believe biodiesel partially replaces or supplements diesel since biodiesel is often used on a blended basis with diesel. For these reasons, our products are affected by the market price and supply of diesel.

The market price for diesel is affected by the price for crude oil. As a result, changes in global prices of crude oil, any interruption in the supply of crude oil or any governmental regulation of the price of diesel may have a material effect on the selling price of our biodiesel products. Over the past three years, crude oil prices have fluctuated significantly. Nonetheless, the PRC diesel guidance prices described below historically have insulated the market price of diesel in China from short-term fluctuations in global crude oil prices.

The PRC government occasionally publishes guidance prices for diesel. Since 2009, these guidance prices set the maximum retail prices of diesel and are generally followed by industry participants. Because biodiesel prices are affected by the price of diesel, these guidance prices tend to limit the range in which we can set prices for our biodiesel products. Any material decrease in these guidance prices or delay in adjusting guidance prices despite any rapid increase in the crude oil price may have a material effect on the selling prices for our biodiesel products, which in turn may adversely affect our financial condition and results of operations.

Our results of operations are also affected by fluctuations in the market price of scrap copper. As we buy scrap copper and sell our recycled copper products at prevailing market prices, scrap copper prices affect both our raw material costs and our sale prices. We are also exposed to commodity price risk because we purchase our

 

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raw materials in advance of sales to customers. The price of copper has fluctuated significantly since 2008. For example, the spot price of copper in China ranged from approximately RMB19,000 per ton to RMB67,000 per ton during the period from 2008 to the first quarter of 2011. During periods of increasing prices, competitive conditions may limit our ability to pass on price increases to our customers. During periods of declining prices, we may be unable to fully recoup the costs of scrap copper that we purchase for producing our recycled copper products.

Demand for, and market awareness of, biodiesel and demand for recycled copper products

China’s biodiesel industry remains in an early stage, with biodiesel production currently representing only a small portion of China’s annual diesel production. Our three principal groups of biodiesel customers are direct users, petroleum wholesalers and individual retail gas stations. Direct users include marine vessel operators, chemical companies and factories, while petroleum wholesalers and retail gas stations generally distribute fuel that will be used in diesel-powered trucks and automobiles. Certain users, such as marine vessel operators, use biodiesel as a complete substitute for diesel, while others typically use a blend of 20% biodiesel and 80% diesel to fuel diesel trucks and automobiles. We believe demand for biodiesel will continue to grow as demand for diesel grows and as market awareness of biodiesel increases. In addition, PRC law and government policies encourage the development and utilization of renewable sources of energy. The consumption volume of biofuel in China is expected to further increase and the proportion of renewable energy consumption is expected to reach approximately 15% of China’s total energy consumption by 2020, from approximately 7.5% in 2005. We expect demand for our biodiesel products to increase continuously over time.

Moreover, of our recycled copper product sales in 2010 were to customers located in China. Accordingly, our results of operations are also dependent on demand for copper rods, copper wires and copper granules made from recycled copper within China. The scrap copper recycling industry tends to be cyclical in nature, reflecting general economic conditions. In periods of slow economic growth or recession, the construction and manufacturing industry may experience significant cutbacks in production, which results in decreased demand for metals such as copper. China’s rapid growth in recent years, however, has resulted in strong demand for copper and recycled scrap copper from copper consuming industries in China. As copper resources are currently in relatively short supply in China, we expect demand for recycled copper products in China to strengthen over time.

Supply and costs of principal raw materials

Our ability to manage our operating costs depends significantly on our ability to secure affordable supplies of raw materials.

With respect to our biodiesel business, we have historically been able to secure a sufficient supply of raw materials, which primarily consist of vegetable oil offal and used cooking oil. Our production facilities are able to process a range of different types and grades of raw materials, which allows us to use less costly grades of materials when available. However, the prices we have paid for raw materials have steadily increased. Between 2008 and 2010, for example, we experienced an increase in the average cost per ton of vegetable oil offal and of used cooking oil of 40.8%, from RMB2,538.3 to RMB3,573.2 (US$541.4). The overall average unit costs of our raw materials was RMB3,981.3 (US$603.2) per ton for the fourth quarter of 2010. Our raw material input costs have risen significantly since the first quarter of 2011. We believe that this increase in raw material cost is primarily due to general cost inflation in China, in particular, labor and transportation costs, and in part due to our suppliers’ perception that such raw materials constitute an increasingly valuable commodity as a result of the PRC government’s enactment of the Law of Renewable Energy Resources of China. Our operating costs may increase significantly if other businesses, including but not limited to other biodiesel manufacturers and oleochemical producers, compete for the raw materials we use. Our operating costs may also increase if the price of our raw materials increases due to changes in consumption patterns or as a result of price fluctuations in the commodities from which our raw materials are derived, which may be caused by weather conditions and other factors affecting agriculture and general market, economic and regulatory factors, including government policies with respect to agriculture and local supply and demand.

 

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The prices of the raw materials for our biodiesel business vary according to the type and the grade of raw materials we use. The prices of our primary raw materials also vary from one region to another, which affect our cost of revenues in each region. For example, as of December 31, 2010, the market price of vegetable oil offal and used cooking oil in Beijing was comparatively higher than in other regions where we operated our plants due to a limited availability of low grade vegetable oil offal in Beijing. For the year ended December 31, 2010, our Beijing plant paid an average of RMB3,753.9 (US$568.8) per ton for vegetable oil offal and used cooking oil compared with RMB3,491.0 (US$528.9) per ton for our Hebei plant. We anticipate that costs of raw materials for our biodiesel business will also be higher in the larger cities where we have established and currently plan to commence operations, such as Shanghai and Chongqing, respectively. The higher cost of raw materials we experience in some regions has a negative effect on our margins in these regions because we are unable to pass the costs of higher raw material costs in urban areas on to customers due to the constraints of the diesel guidance price. The diesel guidance price may follow the trend of global oil price; however, because any increase or decrease will be determined by the PRC government, the timing and magnitude of such increase or decrease may not correspond to increases or decreases in raw material costs. As a result, we anticipate that during certain periods of time, raw material costs for our biodiesel business will change without a corresponding change in the diesel guidance price, causing our margins to change during those periods.

In order to help diversify and secure sources of feedstock for biodiesel production at a stable price, we signed two contracts in respect of supplies of castor bean oil with a supplier in Sichuan and castor beans with another supplier in Indonesia in 2009. However, these contractual arrangements may not guarantee us feedstock which satisfies our quality requirements. For example, due to continuing problems with the climate and quality of the castor bean produced, we decided to terminate our supply contract in Indonesia and wrote off a long-term payment of RMB4.8 million (US$0.7 million) in connection with such supply contract in the fourth quarter of 2010.

The primary raw material used in our recycled copper operations is scrap copper, including scrap copper from household appliances and manufacturing industries. Our major recycled copper raw material suppliers are private enterprises engaged in the collection of unprocessed scrap copper in China. We do not enter into any long-term purchase contracts and conduct our recycled copper business with suppliers on an order by order basis at prevailing market prices at the time of purchase. Accordingly, our results of operations are subject to fluctuations in the price of scrap copper. During periods of low scrap copper prices, suppliers may elect to hold scrap to wait for higher prices or may slow their collection activities. In addition, a slowdown of industrial production in the areas where we source raw materials could reduce the supply of scrap copper. A shortage of raw materials could adversely affect our sales volume and increase our raw material costs, which could adversely affect our profitability if we were unable to pass along the higher costs to our customers.

The prices for scrap copper also vary between different regions within China. We currently purchase raw materials for our recycled copper business primarily from two third-party suppliers in Sichuan and our business and financial results could be impacted if we were to expand our supplier network to other regions of China in order to reduce our reliance on the local suppliers in Sichuan. Since 2008, the price of scrap copper has fluctuated significantly. For example, the spot price of copper in China ranged from approximately RMB19,000 per ton to RMB67,000 per ton during the period from 2008 to the first quarter of 2011. As we generally pay prevailing market prices for scrap copper at the time of purchase, an increase in scrap copper prices would increase our need for working capital and financing, which may not be available on favorable terms, or at all, and may also increase our customers’ working capital requirements, which could result in delays in payments by our customers and increases in our trade receivables and bills receivable. Decreases in copper prices may result in a decrease in the selling price of our inventory, which would negatively affect our gross profit margin.

Product mix and effect on gross margins

Our product mix affects our gross margin. In the past, we have realized a higher gross margin on sales of erucic acid and erucic amide, a major component of our biodiesel by-product sales, than on sales of our biodiesel and our other by-products. Thus, when we sell a greater volume of erucic acid and erucic amide relative to sales

 

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of biodiesel, our aggregate gross margin has been positively affected. Further, while our biodiesel prices are largely based on the market price for diesel, we have greater pricing power for sales of erucic acid and erucic amide, which are not linked to diesel prices.

The quantity and type of biodiesel by-products we produce are largely determined by the raw materials we use, and the raw materials we use are largely determined by the local raw materials that are available at each plant. For example, the raw materials we use in Sichuan contain rapeseed, which is needed to produce erucic acid and erucic amide. However, the raw materials we use in Beijing, Shanghai, Fujian and Handan do not contain rapeseed, and we therefore do not produce erucic acid and erucic amide at these other locations. In the future, we anticipate that the proportional contribution of erucic acid and erucic amide to our revenues will decline, as we anticipate that raw materials containing rapeseed may not be available in sufficient quantities in areas where we plan to expand production. Thus, we expect our gross margins will decrease as we expand into locations where raw materials containing rapeseed are not available.

Availability of financing for our recycled copper business

 

As a result of a combination of (i) increased recycled copper product sales, (ii) the relatively high prevailing market prices for copper and scrap copper and (iii) increases in the cost of raw materials in recent years, we require a high level of working capital to sustain our recycled copper operations. Historically, Jin Xin has financed its working capital through cash from operations derived from customer payments, short term bank loans and loans from shareholders and capital contributions from shareholders. We expect our working capital requirements to continue to grow as we expand our recycled copper operations. As a result, our recycled copper business will continue to be dependent on the availability of financing on acceptable terms for our working capital requirements.

Principal Components in Statements of Operations

Revenues

Our revenues are derived from sales of our biodiesel, biodiesel by-products produced during the biodiesel production process, and recycled copper products, net of value-added taxes. Biodiesel revenues represented 88.9%, 92.5%, and 46.8% of our revenues for 2008, 2009 and 2010, respectively, while biodiesel by-products represented 11.1%, 7.5% and 3.0% for 2008, 2009 and 2010, respectively, and recycled copper products represented nil, nil and 50.2% for 2008, 2009 and 2010, respectively.

The most significant factors that affect our revenues are sales volume and average selling prices. We generally collect cash payment at the time of delivery and on occasions extend credit for 30 days or less to certain of our established customers. Our accounts receivable as of December 31, 2010 totaled RMB48.6 million (US$7.4 million), with less than RMB3.3 million (US$0.5 million) more than 90 days overdue. For 2008, 2009 and 2010, our five largest customers represented 20.6%, 22.4% and 33.7% of our total revenues, respectively. For 2010, our five largest biodiesel customers represented 44.5% of our total biodiesel revenues. Of our top five customers, two customers were from our biodiesel business and accounted for 14.0% of our total revenues and three were customers of our recycled copper business and accounted for 19.7% of our total revenues. Our largest customer in 2008 and 2009, Xiapu Sansha Baoyinlai Seining Co., Ltd, accounted for 9.1% and 7.4% of our total revenues for 2008 and 2009, respectively. In 2010, our largest customer, Ning Bo Jin Tian Copper (Group) Limited, accounted for 10.0% of our total revenues in 2010.

Cost of revenues

Our cost of revenues primarily consists of direct material costs, depreciation cost and, to a lesser extent, other overhead costs. Direct material costs are the cost of the raw materials that we use in the manufacturing of

 

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our products. We use vegetable oil offal and used cooking oil as the primary raw materials for our biodiesel manufacturing process. Our proprietary production technology enables us to produce biodiesel using lower-grade, lower-cost vegetable oil offal and used cooking oil, as compared to the relatively higher-grade, higher-cost feedstock. We buy scrap copper at prevailing market prices. As such, our raw material cost for our recycled copper business is affected by fluctuations in the market price of scrap copper. Direct material cost is the largest component of our cost of revenues, accounting for approximately 90.5%, 72.6% and 87.1% of our total cost of revenues for 2008, 2009 and 2010, respectively. In 2009, we also included a provision for assessments of consumption tax in our cost of revenues. This provision was reversed in our 2010 financial statements based on the issuance of Caishui 118 by the Ministry of Finance of the PRC and SAT, which clarified that, subject to fulfillment of certain conditions, pure biodiesel made from waste animal fat or vegetable oil is exempt from consumption tax in China. With our acquisition of Jin Xin, we expect our cost of revenues to increase in 2011 in line with the revenue contribution from the recycled copper business.

Gross profit

Our gross profit from sales of biodiesel is determined primarily by the cost of raw materials and the cost of diesel. As discussed above and in the section titled “—Overview—Supply and costs of principal raw materials,” our cost of raw materials has increased consistently since 2006 up to the fourth quarter of 2010 and has also risen significantly since the end of the first quarter of 2011. At the same time, the price of diesel in China has increased since 2006 and up to the third quarter of 2008. Since the fourth quarter of 2008, however, the price of diesel began to decline. This trend was consistent with the general trend of oil prices worldwide, which has had a negative impact on the price of biodiesel since the third quarter of 2008. From 2009, the PRC government has allowed the price of diesel to adjust in accordance to the global oil price through an adjustment in the diesel guidance price.

Our gross profit from sales of recycled copper products is determined primarily by the cost of raw materials and recycled copper products price. Currently, there is a close correlation between production costs and prices of recycled copper products.

Operating expenses

Our operating expenses consist of selling, general and administrative expenses, research and development expenses and other operating expenses. In 2010, we also recorded operating expenses relating to impairment loss of property, plant and equipment, loss on disposal of property, plant and equipment, and changes in fair value of contingent consideration liability in connection with the Contingent Consideration Shares issued for the Jin Xin acquisition.

Selling, general and administrative expenses

Our selling, general and administrative expenses include salaries and transportation expenses for our sales personnel, administrative staff costs and other benefits, depreciation of office equipment, professional service fees and other miscellaneous expenses related to our administrative corporate activities.

Our sales activities are conducted through direct selling by our internal sales staff. Since substantially all of our biodiesel products are collected by our customers at or near our biodiesel production facilities, our selling expenses have been relatively small as a percentage of our revenues. We usually deliver our copper products to our customers by truck, using third-party providers. As most of our copper product customers are located near our production facilities, our selling expenses with respect to our copper business have been small relative to our revenues.

Our selling, general and administrative expenses also include share-based compensation expenses attributable to options that we have granted to our directors and executives. Our selling, general and

 

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administrative expenses will increase with any growth of our business. We expect our selling, general and administrative expenses will also increase in anticipation of our intention to continue, commence or recommence production of biodiesel at all our plants to the extent they are able to operate on a positive cash flow basis and the resolution of a previously disclosed legal dispute with a construction contractor, and as a result of the acquisition of Jin Xin. In connection with share options that we granted to certain directors, executives and employees, we expect to incur an expense in an aggregate amount of RMB10.5 million during 2011, which relates to the share options granted in January 2009, March 2010 and January 2011. We recognized share-based compensation expenses in the amount of approximately RMB36.9 million in 2008, RMB28.8 million in 2009 and RMB21.8 million (US$3.3 million) in 2010. See “—Critical Accounting Policies—Valuation of share-based compensation” for additional information regarding the assumptions and methodologies we use in determining share-based compensation expense.

On September 21, 2007, in connection with our reorganization, we entered into a new employment agreement with Mr. Wilson Wai Sun Kwong which replaced a former employment agreement, pursuant to which we replaced the previously granted options with new options to acquire 1,094,656 ordinary shares of our Company. The options fully vested on June 15, 2008. As a result of the changes made to the vesting period, the new options were considered as a modification of the former options granted. There was no difference between the fair value of the new options and that of the old options immediately prior to such modification. The remaining unamortized share-based compensation as of the date of such modification was recognized over the shorter vesting period. See Item 6.B, “Directors, Senior Management and Employees—Compensation.”

Pursuant to our Share Option Scheme, which was approved on November 9, 2007, we granted share options for the purchase of an aggregate of 867,527, 3,055,000, 1,276,000, 4,706,000, 5,120,000 and 4,000,000 ordinary shares to certain employees, officers and directors at exercise prices of US$4.80, US$5.30, US$5.30, US$1.33, US$0.61 and US$0.61, respectively, per ordinary share on December 18, 2007, March 25, 2008, September 1, 2008, January 22, 2009, March 16, 2010 and January 11, 2011, respectively. On November 11, 2010, we cancelled a total of 3,799,527 share options which were granted on December 18, 2007, March 25, 2008 and September 1, 2008. The remaining unamortized amount of share-based compensation of RMB3.5 million (US$0.5 million) was recognized in our statement of operations upon cancellation. We recognize compensation cost based on the grant date fair value over the period the grantees are required to provide services in exchange for the award, and adjusted to reflect the number of share options that are expected to be forfeited prior to vesting. As of the date of this annual report, there is an aggregate of 12,154,000 ordinary shares (excluding the share options granted in July 2006 to an executive prior to the adoption of the Share Option Scheme) issuable upon exercise of outstanding share options and there are 1,529,194 ordinary shares available for future issuance upon the exercise of future grants under our Share Option Scheme.

See “Share-Based Compensation” in the notes to our audited financial statements, included elsewhere in this annual report, for additional information with respect to the assumptions and methodologies we use in determining share-based compensation expenses.

Research and development expenses

Our research and development expenses primarily relate to costs incurred in connection with running Biomass, one of our PRC subsidiaries engaging in in-house research and development projects, and our former joint research and development programs with the Fujian Chemistry Science and Technology Research Institute and the Resource and Environmental Research Institute of Fuzhou University. We recognize research and development expenses as they are incurred. See Item 5.C, “Operating and Financial Review and Prospects—Research and Development” for additional information with respect to our research and development policies.

Other operating expenses

Other operating expenses are mainly comprised of depreciation on buildings and machinery and salary paid to factory workers during periods in which certain production plants suspended production for longer-than-

 

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expected periods for normal repairs and maintenance and due to reasons other than normal repairs and maintenance. For example, Fujian Gushan suspended its production due to the consumption tax issue since June 2009, Chongqing Gushan and Hunan Gushan also deferred the commencement of production because of the consumption tax issue since the construction of their production facilities were completed in May and July 2009, respectively, Beijing Gushan temporarily suspended its production due to the traffic control measures during the Beijing Olympic games in the third quarter of 2008, Sichuan Gushan suspended production since August 2010 for relocation of its production facilities, and, from mid April 2010 to October 2010, Shanghai Gushan suspended its production due to heightened enforcement of control measure adopted by Shanghai municipal government during the Expo 2010, and Shanghai Gushan continued to suspend its production due to a lawsuit filed against us by a production facility contractor in the People’s Court of Fengxian District, Shanghai alleging that we failed to pay the contract sum with respect to its construction of our Shanghai plant. In 2010, we recognized a loss from writing off a long-term payment of RMB4.8 million (US$0.7 million) relating to the termination of our supply contract in Indonesia, and a provision for compensation of RMB1.5 million (US$0.2 million) to a construction contractor of Shanghai Gushan in accordance with the court’s latest ruling.

Impairment loss on property, plant and equipment

We recognized impairment losses of RMB992.6 million (US$150.4 million) on certain property, plant and equipment in the third quarter of 2010. The impairment loss represented the excess of the carrying amount over the fair value of these assets. For the purpose of estimating the fair value, we utilized the projected cash flows of the property, plant and equipment discounted at its weighted average cost of capital. The recognition of the impairment loss of RMB951.0 million (US$144.1 million) for the facilities of Fujian Gushan, Handan Gushan, Beijing Gushan, Shanghai Gushan, Chongqing Gushan, Hunan Gushan and Biomass was driven by a combination of a series of adverse changes in the operating environment, in particular, the unresolved consumption tax issue and the increase in the cost of raw materials.

We suspended production at Sichuan Gushan beginning on August 1, 2010 in preparation for the relocation of the production lines of its existing plant in San Tai County to its new plant in Qin Dong Bei Industrial Park. Pursuant to the agreement signed between Sichuan Gushan and San Tai ECB, San Tai ECB agreed to pay RMB38.8 million (US$5.9 million) as compensation to Sichuan Gushan for its losses in disposing of certain machinery and equipment that cannot fit into the setting of the new plant, its relocation expenses and its losses from forfeiting the land use rights and returning the land to the municipal government of San Tai County. Furthermore, Sichuan Gushan will also be responsible for the cost of changing the registration of the land from industrial land to non-industrial land. All these losses and expenses are expected to amount to approximately RMB80.5 million (US$12.2 million). As such, in relation to the relocation, Sichuan Gushan recognized an impairment loss of RMB41.7 million (US$6.3 million) on its property, plant and equipment in 2010.

Loss on disposal of property, plant and equipment

The disposal and relocation of Sichuan Gushan’s property, plant and equipment was completed as of December 31, 2010. The loss on disposal of property, plant and equipment mainly represented certain additional machinery and equipment that was scrapped during the fourth quarter of 2010 and relocation expenses.

Change in fair value of contingent consideration liability

In November 2010, we acquired a 67% beneficial ownership interest in Jin Xin through a series of transactions in exchange for the Consideration Shares. The Consideration Shares are subject to an earn-out arrangement whereby six million ordinary shares were issued to Gold Hero at the closing of the acquisition, while the Contingent Consideration Shares were placed into escrow to be released in stages upon the determination of Jin Xin’s net income under U.S. GAAP for the year ended December 31, 2010 and the cumulative U.S. GAAP net income for the three-year period ending December 31, 2012. Under the earn-out arrangement, the maximum of six million Contingent Consideration Shares has been released to the selling

 

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shareholder with respect to the year ended December 31, 2010 as Jin Xin achieved a net income of over RMB30.0 million or more (approximately US$4.5 million). The remaining Contingent Consideration Shares are to be released to Gold Hero if Jin Xin achieves a cumulative net income of RMB190.0 million or more during the three-year period ended December 31, 2012. Based on the formula as set out in the purchase agreements in connection with the acquisition, if Jin Xin’s cumulative net income for the three-year period ending December 31, 2012, is nil or below, Gold Hero is required to return to us, all of the Consideration Shares received in connection with the acquisition (or Gold Hero has an option to pay in cash an amount equal to the number of Consideration Shares received in connection with the acquisition times US$1.00 per share) plus US$4.5 million in cash to our Company.

The Contingent Consideration Shares are classified as a liability and stated at their fair value at the acquisition date and each reporting date. The subsequent change in the fair value of the Contingent Consideration Shares at each reporting date is recognized in our statement of operations. For the year ended December 31, 2010, we recognized the increase in fair value of RMB2.9 million (US$0.4 million) as an operating expense.

Other operating income

Our other operating income in 2010 represents the reversal of a provision for consumption tax of RMB103.8 million (US$15.7 million), which was previously made in 2009.

Other income (expense)

Other income includes interest income, interest expense, foreign currency exchange losses, government grant income and other income (expense).

We incurred a foreign exchange loss of RMB99.8 million in 2008, compared to foreign exchange losses of RMB0.1 million in 2009 and RMB0.2 million in 2010. The exchange loss incurred in 2008 resulted from the depreciation of our foreign currency holdings in New Zealand dollars and Euros against U.S. dollars in the third and fourth quarters of 2008. In October 2008, we converted all of our cash deposits in New Zealand dollars and Euros to U.S. dollars. Since the third quarter of 2008, the currency exchange market has been under highly volatile conditions. As of the date of this annual report, we do not hold cash balances in currencies other than in Renminbi, Hong Kong dollars and U.S. dollars and do not expect to do so in the foreseeable future.

Other income (expenses) principally comprised of government grant income, income from a depositary bank, a provision for business tax on intercompany advances, VAT refunds and government subsidy income. We receive grants from the local government authorities in China from time to time. We received grants totaling RMB0.1 million, RMB0.2 million and RMB4.0 million (US$0.6 million) in 2008, 2009 and 2010, respectively. These grants included, among others, awards given by the government of Sichuan province on a non-exclusive basis to Sichuan-based corporate entities believed by the government to have made a positive contribution to Sichuan province. To receive such a grant, a company must complete an application disclosing certain details, including its financial data and the number of its employees located in Sichuan province. These grants are not tied to any research and development arrangements and we are not aware of any restrictions on the use of such grants. We also received income from our depositary bank in accordance to the depositary agreement and the income recognized amounted to RMB2.3 million, RMB5.7 million and RMB4.0 million (US$0.6 million) in 2008, 2009 and 2010, respectively. We also made a provision for business tax on intercompany advances and the provision amounted to RMB4.1 million, RMB2.9 million and RMB3.1 million (US$0.5 million) in 2008, 2009 and 2010, respectively. We also incurred interest expenses in 2010 of RMB0.7 million (US$0.1 million) in respect of short-term bank loans and discounting bills receivable by Jin Xin.

Income taxes

Under the current laws of the Cayman Islands and British Virgin Islands, we are not subject to any income or capital gains tax and dividend payments we make are not subject to any withholding tax in the Cayman Islands

 

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or British Virgin Islands. Under the current laws of Hong Kong, we are not subject to any income or capital gains tax and dividend payments we are not subject to any withholding tax in Hong Kong.

Prior to January 1, 2008, a domestic enterprise without foreign investment was subject to corporate income tax, or CIT, at the rate of 33% on its taxable income and a foreign investment company established in the PRC was typically subject to CIT at the rate of 30%, national income tax and 3% local income tax on its taxable income. However, PRC state and local tax laws used to provide for certain tax holidays and preferential tax rates applicable to certain enterprises, industries and locations, and our subsidiaries in China benefited from such tax holidays and preferential tax rates.

Under the New CIT Law, from January 1, 2008, foreign invested enterprises, such as our subsidiaries, and domestic companies are subject to CIT at a uniform rate of 25%, with certain exceptions. The State Council of the PRC passed an implementation guidance note, or the Implementation Guidance, on December 26, 2007, which sets out details of how existing preferential income tax rates will be adjusted to the standard rate of 25%. According to the Implementation Guidance, certain of our PRC subsidiaries which have not fully utilized their five-year tax holidays are allowed to continue to enjoy the full exemption from, or a 50% reduction in income tax rate until expiry of the tax holiday, after which the 25% standard rate will apply.

Based on the above, our PRC subsidiaries are subject to the following tax rates:

Sichuan Gushan is subject to income tax at 12.5% for 2008 and 2009, and at 25% from 2010 onwards.

Handan Gushan is subject to income tax at 12.5% for 2008 and 2009, and at 25% from 2010 onwards.

Fujian Gushan is entitled to transitional holiday CIT rates of 9%, 10% and 11% for 2008, 2009 and 2010, respectively, and a transitional CIT rate of 24% for 2011. Thereafter, Fujian Gushan’s CIT rate will be 25%.

Beijing Gushan and Shanghai Gushan were exempted from CIT for 2008 and 2009 and are subject to CIT at 12.5% from 2010 to 2012. Thereafter, their applicable CIT rate will be 25%.

Chongqing Gushan, Hunan Gushan and Biomass were incorporated in 2008 after the enactment of the New CIT Law on March 16, 2007. Therefore, Chongqing Gushan, Hunan Gushan and Biomass are subject to the unified CIT rate of 25% from 2008 onwards.

According to article 33 of the New CIT Law issued on March 16, 2007 and article 99 of the Implementation Rules on Corporate Income Tax Law issued on December 6, 2007 and the relevant circulars on “Comprehensive Utilization of Resources CIT Incentive” (Cai Shui [2008] No. 47 and Cai Shui [2008] No. 117), when calculating its taxable income, an enterprise that makes use of waste biomass oil or waste lubricant as 100% of its raw materials is entitled to a 10% reduction in revenue. To qualify for this reduction, an enterprise must first apply for and obtain the Certificate and then apply for the tax reduction.

As of the date of this annual report, each of Beijing Gushan, Shanghai Gushan, Fujian Gushan and Handan Gushan has obtained such Certificate, and Sichuan Gushan has made application for, but has not yet obtained, this Certificate.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect:

 

   

the reported amounts of our assets and liabilities;

 

   

the disclosure of our contingent assets and liabilities at the end of each reporting period; and

 

   

the reported amounts of revenues and expenses during each reporting period.

 

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We continually evaluate these estimates based on our own experience, knowledge and assessment of current business and other conditions and on our expectations regarding the future based on available information and reasonable assumptions, 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. Some of our accounting policies require a higher degree of judgment than others in their application. When reading our consolidated financial statements, you should consider:

 

   

our selection of critical accounting policies;

 

   

the judgment and other uncertainties affecting the application of such policies; and

 

   

the sensitivity of reported results to changes in conditions and assumptions.

We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements:

Long-lived assets

We depreciate property, plant and equipment on a straight-line basis over their estimated useful lives. We assess annually the useful lives of property, plant and equipment and if the assessment differs from the original estimate, such difference will be accounted for prospectively over the remaining economic useful lives, beginning in the year of the change in estimate. We estimate the useful lives of property, plant and equipment at the time the assets are put into production and we base our estimates on our experience as well as any anticipated technological evolution that may render an existing asset obsolete more quickly and therefore accelerate the rate at which such asset depreciates. If technological changes were to occur more rapidly than anticipated, the useful life of the assets may need to be shortened, resulting in the recognition of increased depreciation in future periods.

We assess annually whether property, plant, equipment and other long-lived assets have an indication of impairment. We also review long-lived assets, primarily consisting of property, plant and equipment and land use rights, for impairment whenever events or changes in the circumstances indicate that the carrying value of an asset may not be recoverable. We determine recoverability of long-lived assets to be held and used by comparing the carrying amount of an asset to the estimated future undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, we recognize an impairment charge by the amount by which the carrying amount of the asset exceeds the fair value of the asset. We measure fair value by the asset’s discounted cash flows or market value, if readily determinable. Restoration of previously recognized impairment charge is prohibited. Assets to be disposed of are separately presented in the consolidated balance sheet and reported at the lower of carrying amount or fair value less costs to sell, and are no longer depreciated.

We recognized impairment losses of RMB992.6 million on certain property, plant and equipment in 2010. The impairment losses represented the excess of the carrying amount over the fair value of these assets. For the purpose of estimating the fair value, we utilized the projected cash flows of the property, plant and equipment discounted at its weighted average cost of capital. The recognition of the impairment loss of RMB951.0 million for the facilities of Fujian Gushan, Handan Gushan, Beijing Gushan, Shanghai Gushan, Chongqing Gushan, Hunan Gushan and Biomass, was driven by a combination of a series of adverse changes in the operating environment, in particular, the consumption tax issue was unresolved when the impairment test was performed during the third quarter of 2010 and the continual increase in costs of raw materials over the last few quarters.

Significant judgment was involved in estimating the projected cash flows of these plants and key assumptions included, among others:

 

  (a) discount rates ranging from 15.88% to 17.88%;

 

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  (b) an overall utilization rates ranging from 5% to 60%;

 

  (c) consumption tax issue on biodiesel sold to the fuel market would not be resolved and our Company will only produce fatty acid methyl ester sold to the chemical market;

 

  (d) useful lives of the plants will not be extended;

 

  (e) average selling price of fatty acid methyl ester per ton will increase at an average compound nominal rate of 5.5% per annum from 2011 to 2026;

 

  (f) average selling price of glycerine per ton will increase at an average compound nominal rate of 5.5% per annum from 2011 to 2026;

 

  (g) average selling price of plant asphalt per ton will increase at an average compound nominal rate of 4.9% per annum from 2011 to 2026;

 

  (h) average unit cost of raw materials per ton will increase at an average compound nominal rate of 3.6% per annum from 2011 to 2026;

 

  (i) average unit cost of methanol per ton will increase at an average compound nominal rate of 3.8% per annum from 2011 to 2026; and

 

  (j) selling, general and administrative expenses will increase at rates ranging from 8.5% to 11.5% per annum from 2011 to 2026.

The estimated future undiscounted cash flows were based on assumptions (b) through (j) above. As the carrying amount of an asset exceeded its estimated future undiscounted cash flows, it indicated that the carrying amount of an asset cannot be recovered. Accordingly, we measured the fair value of the asset by applying the discount rates as mentioned in (a) above to recognize the impairment charge. Changes in projections or estimates could significantly change the estimated fair value of the property, plant and equipment of these plants. If we used different assumptions or estimates, the impairment charge could be different. In particular, if the overall utilization rate is significantly below our estimate, or if the average unit cost of raw materials increases at a rate significantly higher than our estimate, the fair value of the property, plant and equipment of these plants would be substantially lower and the impairment losses would have been higher.

We relocated the production lines of Sichuan Gushan’s old plant in San Tai County to its new plant in Qin Dong Bei Industrial Park. In preparing for the relocation, Sichuan Gushan suspended production beginning on August 1, 2010. Pursuant to the agreement signed between Sichuan Gushan and San Tai ECB, San Tai ECB agreed to pay Sichuan Gushan RMB38.8 million as compensation for its losses in disposing of certain machinery and equipment that cannot fit into the setting of the new plant, its relocation expenses and its losses from forfeiting the land use rights and returning the land to the municipal government of San Tai County. Furthermore, Sichuan Gushan will also be responsible for the cost of changing the registration of the land from industrial land to non-industrial land. All these losses and expenses were expected to amount to approximately RMB80.5 million. As such, in relation to the relocation, Sichuan Gushan recognized an impairment loss of RMB41.7 million on its property, plant and equipment upon signing the agreement.

Fair Value of Contingent Consideration

On November 3, 2010, we acquired a 67% beneficial ownership interest in Jin Xin to expand the scope of its environmental businesses. The consideration paid by us for the acquisition consisted principally of 24 million Consideration Shares to be issued to Gold Hero.

The Consideration Shares are subject to an earn-out arrangement whereby 6,000,000 shares were issued to Gold Hero at the closing of the acquisition, while the remaining 18,000,000 ordinary shares are placed into escrow. The Contingent Consideration Shares are to be released in stages upon the determination of Jin Xin’s net income under U.S. GAAP for the year ended December 31, 2010 and the cumulative U.S. GAAP net income of

 

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Jin Xin for the three-year period ending December 31, 2012. Under the earn-out arrangement, a maximum of 6,000,000 Contingent Consideration Shares was released to Gold Hero as Jin Xin achieved net income of RMB30.0 million for the year ended December 31, 2010. The remaining Contingent Consideration Shares are to be released to Gold Hero if Jin Xin achieves a cumulative net income of RMB190.0 million or more during the three-year period ended December 31, 2012. Based on the formula as set out in the purchase agreements in connection with the acquisition, if Jin Xin’s cumulative net income for the three-year period ending December 31, 2012, is nil or below, Gold Hero is required to return to us, all of the Consideration Shares received in connection with the acquisition (or Gold Hero has an option to pay in cash an amount equal to the number of Consideration Shares received in connection with the acquisition times US$1.00 per share) plus US$4.5 million in cash to our Company.

The Contingent Consideration Shares are classified as a liability and stated at their fair value at the acquisition date and each reporting date. By applying the present value technique, the subsequent change in the fair value of the contingent consideration liability at each reporting date is recognized in our statement of operations.

As of the acquisition date, the future possible outcome for the Company under the contingent consideration arrangement was between an issuance of 18 million ordinary shares to, and a return of 6 million ordinary shares and US$4.5 million in cash from Gold Hero. The fair value of the contingent consideration arrangement of RMB17.5 million was estimated by applying the income approach. Key assumptions include (a) a discount rate range of 6.10% to 7.38% and (b) a probability adjusted level of net income in Jin Xin between nil or below and RMB190.0 million or above for the three-year period ending December 31, 2012. As of December 31, 2010, the amount recognized for the contingent consideration arrangement increased by RMB2.9 million, mainly as a result of changes in the discount rate range of 6.61% to 7.87% and a passage of time of discounting. Other assumptions used to develop the estimates have not changed.

Fair Value of Assets Acquired

The property, plant and equipment and land use rights of the newly acquired subsidiary were stated at valuations reported by a third party valuation firm. The “Sales Comparison Approach” was the primary basis upon which the equipment was valued. The Sales Comparison Approach is a set of procedures in which an appraiser derives a value indication by comparing the assets being appraised to similar assets that have recently been sold, applying appropriate units of comparison, and making adjustments based on the elements of comparison to the sale prices of the comparable. The “Depreciated Replacement Cost Approach” was used in valuing the building and structure portions of the property. The Depreciated Replacement Cost Approach requires an estimation of the new replacement cost of the buildings and structures from which deductions are then made to allow for the age, condition and functional obsolescence. The Depreciated Replacement Cost Approach is subject to adequate potential profitability of the business. In respect of the land use rights, the “Direct Comparison Method” was adopted by making reference to comparable site transaction as available in the relevant industrial land market.

Goodwill

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is reviewed for impairment at least annually. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied

 

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fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.

We perform our annual impairment review of goodwill on December 31, and when a triggering event occurs between annual impairment tests. No impairment loss was recorded for the year ended December 31, 2010.

Valuation of share-based compensation

We 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 cost over the period during which an employee is required to provide service in exchange for the award, which is generally the vesting period. The amount of cost recognized is adjusted to reflect the number of share options that are forfeited prior to vesting. If an award is cancelled and is not accompanied by the concurrent grant of a replacement award, any previously recognized compensation cost is not reversed and any previously measured but unrecognized cost is fully recognized at the cancellation date.

The determination of fair value of share options requires making complex and subjective judgments about our projected financial and operating results. It also requires us to make certain assumptions such as cost of capital, general market and macroeconomic conditions, industry trends, comparable companies, share price volatility of the subject company, expected lives of options and discount rates. These assumptions are inherently uncertain. Changes in these assumptions could significantly affect the amount of employee share-based compensation expense we recognize in our consolidated financial statements.

Pursuant to the Share Option Scheme approved on November 9, 2007, we granted share options for the purchase of an aggregate of 867,527 ordinary shares to our directors and officers on December 18, 2007. The exercise price is US$4.80 per ordinary share (equivalent to US$48.00 per ADS, being the initial public offering price). The options vest one third 12 months from the date of grant, one third 24 months from the date of grant and the remaining one third 36 months from the date of grant. The options will expire ten years from the date of grant.

We determined, based on the “Binomial Option Pricing Model”, that the estimated fair value of the options at the grant date was approximately US$2.13 (RMB15.71) per ordinary share, or US$1.8 million (RMB13.6 million) in aggregate.

The expected volatility of 53.35% was based on the average volatility of several listed companies in the renewable energy sector. Since we did not have a sufficient trading history for valuation purpose at the grant date, we estimated the potential volatility of the ordinary shares price by referring to the average volatility of these comparable companies because management believed that the average volatility of such companies was a reasonable benchmark to use in estimating the expected volatility of our Company’s ordinary shares. We did not have any plan to declare dividends as of the date of grant on December 18, 2007.

Changes in the above assumptions could significantly affect the amount of employee share-based compensation expenses for the share options granted on December 18, 2007 that we recognize in our consolidated financial statements. If the expected volatility of our Company’s stock price were 43.35% per annum or 63.35%, compared to a volatility of 53.35%, the fair value of the share options would be US$1.7 million (RMB12.5 million) or US$2.0 million (RMB14.8 million), respectively.

These options were cancelled on November 11, 2010. The remaining unamortized amount of share-based compensation was fully recognized in our statement of operations upon the cancellation.

 

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Pursuant to the Share Option Scheme, we granted share options for the purchase of an aggregate of 3,055,000 ordinary shares to 65 of our officers and employees on March 25, 2008. The exercise price is US$5.30 per ordinary share (equivalent to US$53.00 per ADS). The options will vest one third 12 months from the date of grant, one third 24 months from the date of grant and the remaining one third 36 months from the date of grant. The options will expire ten years from the date of grant.

We determined, based on the Binomial Option Pricing Model, that the estimated fair value of these options at the grant date was approximately US$2.67 (RMB18.79) per ordinary share, or US$8.1 million (RMB57.4 million) in aggregate.

The expected volatility of 80.26% was based on the implied volatility of the options in the market which were based on our ordinary shares as the underlying asset. We believed that such implied volatility was a reasonable estimation of the expected volatility of our Company’s ordinary shares. The expected dividend yield of 0.83% was used as an assumption.

Changes in the above assumptions could significantly affect the amount of employee share-based compensation expenses for the share options granted on March 25, 2008 that we recognize in our consolidated financial statements. If the expected volatility of our Company’s stock price were 70.26% per annum or 90.26%, compared to a volatility of 80.26%, the fair value of the share options would be US$7.6 million (RMB53.4 million) or US$8.6 million (RMB60.5 million), respectively.

These options were cancelled on November 11, 2010. The remaining unamortized amount of share-based compensation was fully recognized in our statement of operations upon the cancellation.

Pursuant to the Share Option Scheme, we granted share options for the purchase of an aggregate of 1,276,000 ordinary shares to 27 individuals, including officers and employees and one director of our Company on September 1, 2008. The exercise price is US$5.30 per ordinary share (equivalent to US$53.00 per ADS). The options will vest one third 12 months from the date of grant, one third 24 months from the date of grant and the remaining one third 36 months from the date of grant. The options will expire ten years from the date of grant.

We determined, based on the Binomial Option Pricing Model, that the estimated fair value of these options at the grant date was approximately US$2.41 (RMB16.49) per ordinary share, or US$3.1 million (RMB21.0 million) in aggregate.

The expected volatility of 65.62% was based on the implied volatility of the options in the market which were based on our ordinary shares as the underlying asset. We believed that such implied volatility was a reasonable estimation of the expected volatility of our Company’s ordinary shares. The expected dividend yield of 0.97% was used as an assumption.

Changes in the above assumptions could significantly affect the amount of employee share-based compensation expenses for the share options granted on September 1, 2008 that we recognize in our consolidated financial statements. If the expected volatility of our Company’s stock price were 55.62% per annum or 75.62%, compared to a volatility of 65.62%, the fair value of the share options would be US$2.8 million (RMB19.0 million) or US$3.3 million (RMB22.8 million), respectively.

These options were cancelled on November 11, 2010. The remaining unamortized amount of share-based compensation was fully recognized in our statement of operations upon the cancellation.

Pursuant to the Share Option Scheme, we granted share options for the purchase of an aggregate of 4,706,000 ordinary shares to 97 individuals, including officers and employees and directors of our Company on January 22, 2009. The exercise price is US$1.33 per ordinary share (equivalent to US$13.30 per ADS). The

 

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options will vest one third 6 months from the date of grant, one third 18 months from the date of grant and the remaining one third 30 months from the date of grant. The options will expire ten years from the date of grant.

We determined, based on the Binomial Option Pricing Model, that the estimated fair value of the options at the grant date was approximately US$0.50 (RMB3.40) per ordinary share, or US$2.3 million (RMB16.0 million) in aggregate.

The expected volatility of 138.94% was based on the implied volatility of the options in the market which were based on our ordinary shares as the underlying asset. We believed that such implied volatility was a reasonable estimation of the expected volatility of our Company’s ordinary shares. The expected dividend yield of 5.22% was used as an assumption.

Changes in the above assumptions could significantly affect the amount of employee share-based compensation expenses for the share options granted on January 22, 2009 that we recognize in our consolidated financial statements. If the expected volatility of our Company’s stock price were 128.94% per annum or 148.94%, compared to a volatility of 138.94%, the fair value of the share options would be US$2.3 million (RMB15.5 million) or US$2.5 million (RMB16.9 million), respectively.

Pursuant to the Share Option Scheme, we granted share options for the purchase of an aggregate of 5,120,000 ordinary shares to 93 individuals, including officers and employees and directors of our Company on March 16, 2010. The exercise price is US$0.61 per ordinary share (equivalent to US$6.10 per ADS). The options will vest one third 12 months from the date of grant, one third 24 months from the date of grant and the remaining one third 36 months from the date of grant. The options will expire ten years from the date of grant.

We determined, based on the Binomial Option Pricing Model, that the estimated fair value of the options at the grant date was approximately US$0.37 (RMB2.52) per ordinary share, or US$1.9 million (RMB12.9 million) in aggregate.

The expected volatility of 126.59% was based on the implied volatility of the options in the market which were based on our ordinary shares as the underlying asset. We believed that such implied volatility was a reasonable estimation of the expected volatility of our Company’s ordinary shares. The expected dividend yield of 1.93% was used as an assumption.

Changes in the above assumptions could significantly affect the amount of employee share-based compensation expenses for the share options granted on March 16, 2010 that we recognize in our consolidated financial statements. If the expected volatility of our Company’s stock price were 116.59% per annum or 136.59%, compared to a volatility of 126.59%, the fair value of the share options would be US$1.8 million (RMB12.2 million) or US$2.0 million (RMB13.4 million), respectively.

Pursuant to the Share Option Scheme, we granted share options for the purchase of an aggregate of 4,000,000 ordinary shares to 17 individuals, including 1,000,000 ordinary shares to eight employees of our wholly owned subsidiaries engaged in our biodiesel business and 3,000,000 ordinary shares to nine employees of Jin Xin, on January 11, 2011. The exercise price is US$0.61 per ordinary share (equivalent to US$6.10 per ADS). The options will vest one third 12 months from the date of grant, one third 24 months from the date of grant and the remaining one third 36 months from the date of grant. The options will expire ten years from the date of grant.

We determined, based on the Binomial Option Pricing Model, that the estimated fair value of the options at the grant date was approximately US$0.36 (RMB2.36) per ordinary share, or US$1.4 million (RMB9.4 million) in aggregate.

 

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The expected volatility of 82.48% was based on the implied volatility of the options in the market which were based on our ordinary shares as the underlying asset. We believed that such implied volatility was a reasonable estimation of the expected volatility of our Company’s ordinary shares. The expected dividend yield of 0.87% was used as an assumption.

Changes in the above assumptions could significantly affect the amount of employee share-based compensation expenses for the share options granted on January 11, 2011 that we recognize in our consolidated financial statements. If the expected volatility of our Company’s stock price were 92.48% per annum or 72.48%, compared to a volatility of 82.48%, the fair value of the share options would be US$1.5 million (RMB9.8 million) or US$1.3 million (RMB8.9 million), respectively.

A summary of assumptions for the valuation of share options granted as of the date of this annual report is set forth as follows:

 

    Option
granted on
July 6, 2006
    Option
granted on
January 22, 2009
    Option
granted on
March 16, 2010
    Option
granted on
January  11, 2011
 

Valuation model

    Black-Scholes        Binomial        Binomial        Binomial   

Expected dividend yield

    0 %     5.22 %     1.93 %     0.87 %

Expected volatility

    40 %     138.94 %     126.59 %     82.48 %

Risk-free interest rate

    5.145 %     2.62 %     3.66 %     3.43 %

Suboptimal factor

    —          1.5        1.5        2.2   

Fair value of underlying ordinary share (per share)

  US$  3.49(RMB27.19)      US$  0.99(RMB6.80)      US$  0.57(RMB3.86)      US$  0.58(RMB3.82)   

 

Recently Issued Accounting Standards

FASB ASU 2010-28

In December 2010, the FASB issued ASU No. 2010-28, “Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts,” (a consensus of the Emerging Issues Task Force) which modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, consideration should be given to whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples in paragraph 350-20-35-30, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments are effective for fiscal years beginning after December 15, 2010. Upon adoption of the amendments, assessment should be made of the reporting units with carrying amounts that are zero or negative to determine whether it is more likely than not that the reporting units’ goodwill is impaired. If it is determined that it is more likely than not that the goodwill of one or more of its reporting units is impaired, Step 2 of the goodwill impairment test should be performed for those reporting unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings as required by Section 350-20-35. We expect the adoption of ASU No. 2010-28 will not have an impact on our Group’s financial position, results of operations or cash flows.

 

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Results of Operations

The following table sets forth a summary, for the periods indicated, of our consolidated statement of operations and operating data and certain items expressed as a percentage of our total net revenues:

 

     Year ended December 31,  
     2008     2009     2010  
     RMB     %     RMB     %     RMB     US$     %  
     (in millions, except for percentages, per share and operating data)  

Consolidated Statements of Operations Data

              

Revenues(1)

     1,495.6        100.0 %     628.2        100.0 %     408.5        61.9        100.0 %

Cost of revenues(2)

     (962.6 )     (64.4 )%     (766.7 )     (122.0 )%     (481.8     (73.0 )     (117.9 )%
                                                        

Gross profit (loss)

     533.0        35.6 %     (138.5     (22.0 )%     (73.3     (11.1     (17.9 )%

Operating expenses:

              

Research and development

     (2.1 )     (0.1 )%     (5.7 )     (0.9 )%     (3.9     (0.6 )     (1.0 )%

Selling, general and administrative

     (105.5 )     (7.1 )%     (89.9 )     (14.3 )%     (84.5     (12.8 )     (20.7 )%

Other operating expenses

     (3.2 )     (0.2 )%     (33.4 )     (5.3 )%     (70.7     (10.7 )     (17.3 )%

Impairment loss of property, plant and equipment

     —          —       —          —       (992.6     (150.4     (243.0 )%

Loss on disposal of property, plant and equipment

     (0.1     —       (0.1     —       (3.3     (0.5     (0.8 )% 

Change in fair value of contingent consideration liability

     —          —       —          —       (2.9     (0.4 )     (0.7 )%
                                                        

Total operating expenses

     (110.9 )     (7.4 )%     (129.1 )     (20.5 )%     (1,157.9     (175.4 )     (283.5 )%

Other operating income

     —          —       —          —       103.8        15.7        25.4
                                                        

Income (loss) from operations

     422.1        28.2 %     (267.6 )     (42.5 )%     (1,127.4     (170.8 )     (276.0 )%

Other income (expense):

              

Interest income

     32.7        2.2 %     2.4        0.4 %     1.4        0.2        0.3 %

Interest expense

     —          —       —          —       (0.7     (0.1 )     (0.2 )%

Foreign currency exchange losses, net

     (99.8 )     (6.7 )%     (0.1 )     (0.1 )%     (0.2     —          —  

Other income (expense), net

     (4.3 )     (0.2 )%     (0.7 )     (0.1 )%     2.9        0.4        0.7 %
                                                        

Earnings (loss) before income tax expense

     350.7        23.5 %     (266.0 )     (42.3 )%     (1,124.0     (170.3 )     (275.2 )%

Income tax benefit (expense)

     (81.7 )     (5.5 )%     (17.5 )     (2.8 )%     17.8        2.7        4.4 %
                                                        

Net income (loss)

     269.0        18.0     (283.5     (45.1 )%      (1,106.2     (167.6     (270.8 )% 

Net income attributable to non-controlling interest

     —          —       —          —       (2.8     (0.4     (0.7 )% 
                                                        

Net income (loss) attributable to the Company

     269.0        18.0 %     (283.5 )     (45.1 )%     (1,109.0     (168.0 )     (271.5 )%
                                                        

Earnings (loss) per share

              

—Basic

     1.61          (1.70       (6.68     (1.01  

—Diluted

     1.61          (1.70 )       (6.68     (1.01  

Consolidated Operating Data

              

Sales volume of biodiesel (in tons)

     231,377          143,818          42,391       

Average selling price of biodiesel
(in RMB per ton)

     5,748          4,040          4,505       

Sales volume of by-products (in tons)

     23,878          18,469          6,314       

Average selling price of by-products
(in RMB per ton)

     6,936          2,554          1,972       

Sales volume of recycled copper products (tons)

     —            —            3,787       

Average selling price of recycled copper products (in RMB/ton)

     —            —            53,697       

 

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(1) Revenues are comprised of:

 

     Year ended December 31,  
     2008     2009     2010  
     RMB      %     RMB      %     RMB      US$      %  
     (in millions, except for percentages)  

Biodiesel

     1,330.0         88.9     581.0         92.5     191.0         28.9         46.8

Biodiesel by-products:

                  

Glycerine and Stearic acid

     70.1         4.7     24.8         3.9 %     3.5         0.5         0.9 %

Erucic acid

     29.8         2.0     2.7         0.4 %     0.3         0.1         %

Erucic amide

     35.0         2.3     1.0         0.2 %     —           —           —  

Plant asphalt

     20.4         1.4     17.2         2.8 %     8.6         1.3         2.1 %

Refined glycerine

     10.3         0.7     1.5         0.2 %     —           —           —  
                                                            

Total biodiesel by-products

     165.6         11.1     47.2         7.5 %     12.4         1.9         3.0 %
                                                            

Total biodiesel products

     1,495.6         100     628.2         100     203.4         30.8         49.8

Recycled copper products

     —           —       —           —       205.1         31.1         50.2
                                                            

Total revenues

     1,495.6         100     628.2         100     408.5         61.9         100
                                                            

 

(2) Cost of revenues is comprised of:

 

     Year ended December 31,  
     2008     2009     2010  
     RMB      %     RMB      %     RMB      US$      %  
     (in millions, except for percentages)  

Cost of revenues

                  

Direct material cost

     870.8         58.2 %     557.0         88.7 %     419.8         63.6         102.7 %

Depreciation

     72.3         4.9 %     89.7         14.3 %     50.6         7.7         12.4 %

Provision for consumption tax

     —           —          103.8         16.5 %     —           —           —  

Other

     19.5         1.3 %     16.2         2.5 %     11.4         1.7         2.8 %
                                                            

Total cost of revenues

     962.6         64.4 %     766.7         122.0 %     481.8         73.0         117.9 %
                                                            

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenues

Our revenues amounted to RMB408.5 million (US$61.9 million) for 2010, representing a decrease of 35.0% from RMB628.2 million for 2009. The revenues included revenue of RMB205.1 million (US$31.1 million) from the recycled copper product business of Jin Xin for November and December 2010. As a result of our acquisition of an initial 67% beneficial ownership interest in Jin Xin, from November 2010, we began consolidating Jin Xin’s operating results into our operating results.

Our revenue from our biodiesel business totaled RMB203.4 million (US$30.8 million) for 2010, representing a decrease of 67.6% from RMB628.2 million for 2009. The decline in revenues from our biodiesel business was due to a decrease in the sales volume of both biodiesel and biodiesel by-products and a decrease in the average selling prices of biodiesel by-products.

The sales volume of biodiesel amounted to 42,391 tons for 2010, representing a decrease of 70.5% from 143,818 tons for 2009. The average selling price of biodiesel was RMB4,505 (US$682.6) per ton for 2010, representing an increase of 11.5% from RMB4,040 per ton for 2009.

The sales volume of biodiesel by-products amounted to 6,314 tons for 2010, representing a decrease of 65.8% from 18,469 tons for 2009. The average selling price of biodiesel by-products was RMB1,972 (US$298.8) per ton for 2010, representing a decrease of 22.8% from RMB2,554 per ton for 2009.

 

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The decrease in the sales volume of biodiesel was mainly due to the temporary suspension of operations at our Shanghai plant, Sichuan plant and Fujian Plant since April 2010, August 2010 and April 2009, respectively, and our previously announced strategy to shift our major sales channels from the refined oil market to the chemical market. We suspended production at our Shanghai plant beginning April 2010 due to the heightened enforcement control measures relating to poisonous, hazardous and flammable chemicals adopted by the Shanghai municipal government during the hosting of the Expo 2010 from May 1, 2010 to October 31, 2010. We decided to extend the suspension of production at our Shanghai plant as a result of an ongoing lawsuit filed against us by a construction contractor. We also suspended production at our old plant in San Tai County in Sichuan in August 2010 in preparation for the relocation of the production lines to our new plant in Qin Dong Bei Industrial Park. Fujian Gushan suspended production on April 19, 2009 due to road maintenance that restricted access to the plant by our suppliers and customers. Subsequently, we also decided to extend the suspension of operations at Fujian Gushan to minimize operating cash outflows that would result from the assessment of consumption tax from the local tax bureau based on the consumption tax regulation at that time. The consumption tax issue was resolved in our favor in December 2010.

Furthermore, to help mitigate the potential adverse impact from the consumption tax issue at that time, we continued our efforts to expand alternative sales channels, including biodiesel sales as fatty acid methyl ester to the chemical industry, while reducing our sales of biodiesel to the refined oil market. This strategy contributed in part to the year-to-year decrease in the sales volume of biodiesel because the size of our customer base in the chemical industry is smaller than that of the refined oil market. However, the proportion of biodiesel sold to the chemical market continued to increase from 23.3% of the total volume of biodiesel sold in 2009 to 67.2% in 2010.

The year-to-year increase in the average selling price of biodiesel was mainly attributable to improved conditions in the refined oil market in China following the decline in the market price of diesel in China, which began in the fourth quarter of 2008 and continued throughout the third quarter of 2009, resulting from a decrease in global oil prices and weaker industrial production in China amid the global financial crisis. The average selling price of biodiesel began to increase gradually from the fourth quarter of 2009.

Cost of Revenues

Cost of revenues for 2010 totaled RMB481.8 million (US$73.0 million), representing a decrease of 37.2% from RMB766.7 million for 2009. The cost of revenues included RMB191.7 million (US$29.0 million) from Jin Xin.

The cost of revenues of our biodiesel business totaled RMB290.1 million (US$44.0 million) for 2010, representing a decrease of 62.2% from RMB766.7 million, that included a provision for consumption tax of RMB103.8 million for 2009. The provision for consumption tax was made in 2009, but was reversed in 2010 and recorded as an item of other operating income in 2010.

Excluding the effect of provision for consumption tax, cost of revenues of our biodiesel business for 2010 decreased by 56.2% from 2009. The decrease in cost of revenues was primarily attributable to a decrease in our sales volume of both biodiesel and biodiesel by-products. The decrease in cost of revenues was partially offset by an increase in the overall average unit cost for vegetable oil offal and used cooking oil, which increased by 35.6% from RMB2,634.5 per ton for 2009 to RMB3,573.2 (US$541.4) per ton in 2010. The increases in the cost of vegetable oil offal and used cooking oil were caused by the increase in our suppliers’ costs, which are primarily affected by general cost inflation, particularly in labor and transportation in China, as well as a general increase in prices charged by their suppliers.

 

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Gross Loss

Our gross loss for 2010 totaled RMB73.3 million (US$11.1 million), compared to a gross loss of RMB138.5 million for 2009. Our gross loss consisted of a gross loss of 86.7 million (US$13.1 million) from our biodiesel business, representing a gross loss margin of 42.6%, and a gross profit of RMB13.4 million (US$2.0 million) from our recycled copper product business, representing a gross profit margin of 6.5%. The gross loss margin of our biodiesel business was 42.6% for 2010, compared to a gross loss margin of 22.0% for 2009.

The deterioration of the gross margin in our biodiesel business was mainly due to a general increase in the average unit costs of raw materials relative to selling prices and an increase in the average fixed production costs, resulting from a decrease in the production and sales volume of our biodiesel and biodiesel by-products. The average unit costs of our raw materials increased by 35.6%, while the average selling prices of our biodiesel only increased by 11.5% during the same period.

Research and Development Expenses

Research and development expenses totaled RMB3.9 million (US$0.6 million) in 2010, representing a decrease from RMB5.7 million for 2009. The decrease was mainly due to a decrease in materials used for research and development purposes in 2010.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2010 totaled RMB84.5 million (US$12.8 million), representing a decrease from RMB89.9 million for 2009. The overall decrease was mainly due to decreases in share-based compensation. Share-based compensation included in selling, general and administrative expenses for 2010 amounted to RMB21.8 million (US$3.3 million), representing a decrease from RMB28.8 million for 2009, mainly as a result of the fact that amounts of share-based compensation recognized are declining as the options become vested over the vesting period. The share-based compensation also included RMB3.5 million (US$0.5 million) recognized for the unamortized expenses on certain options upon the cancellation of such share options in the fourth quarter of 2010.

Other Operating Expenses

Other operating expenses for 2010 amounted to RMB70.7 million (US$10.7 million), compared to RMB33.4 million for 2009. The expenses for 2010 mainly consisted of depreciation of buildings and machinery, other amortization of the prepayment in relation to the long-term supply contract of castor bean oil with a supplier in Sichuan and salary paid to factory workers, totaling RMB64.4 million (US$9.8 million) during the periods in which certain plants suspended production, loss of writing off a prepayment of RMB4.8 million (US$0.7 million) as a result of terminating the supply contract in Indonesia and a provision for compensation of RMB1.5 million (US$0.2 million) to a construction contractor of Shanghai Gushan in accordance with the court’s latest ruling. The expenses for 2009 mainly consisted of depreciation of buildings and machinery and salary paid to factory workers of the suspended plants.

We suspended or deferred production due to the consumption tax issue, traffic controls under government directive and relocation of production facilities. As previously announced, we suspended production in Fujian Gushan beginning April 2009 due to road maintenance which restricted access to the plant by our suppliers and customers and, as of the date of this annual report, it has not resumed production. We suspended production in Shanghai Gushan since April 2010 due to heightened enforcement of control measures relating to poisonous, hazardous and flammable chemicals adopted by the Shanghai municipal government during the hosting of the Expo 2010 and have not resumed production as a result of an ongoing lawsuit brought against it by a construction contractor of Shanghai Gushan’s plant. Although construction of the production facilities for Chongqing Gushan and Hunan Gushan was completed in 2009, we deferred the commencement of production at these plants due to the consumption tax issue. We suspended production at our old plant in San Tai County in Sichuan in August

 

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2010 in preparation for the relocation of the production lines to our new plant in Qin Dong Bei Industrial Park. If these suspensions and deferrals had not occurred, the depreciation of buildings and machinery, the amortization of the prepayment in relation to the long-term supply contract of castor bean oil with a supplier in Sichuan and salary paid to factory workers of these plants would have been classified as cost of revenues. These expenses totaled RMB64.4 million (US$9.8 million), representing an increase from RMB33.5 million for 2009, mainly because Shanghai Gushan and Sichuan Gushan also suspended their operations during 2010.

Due to continuous problems with the climate and quality of the castor bean produced, we decided to terminate our supply contract in Indonesia. The long term payment in connection with such supply contract for castor bean was written off in the fourth quarter of 2010.

As previously announced, one of Shanghai Gushan’s construction contractors filed a lawsuit against us in respect of the contract sum payment and the quality of certain facilities. According to the latest decision issued by the People’s Court of Fengxian District, Shanghai, we are liable for a compensation of approximately RMB1.5 million (US$0.2 million) in addition to the contract sum payable. The compensation and contract sum payable has been accounted for as a liability in our balance sheet as of December 31, 2010.

Impairment Loss on Property, Plant and Equipment

We recognized impairment losses of RMB992.6 million (US$150.4 million) on certain property, plant and equipment in 2010 as compared to nil in 2009. The impairment loss represented the excess of the carrying amount over the fair value of these assets and consists of (i) an impairment loss of RMB951.0 million (US$144.1 million) for the facilities of Fujian Gushan, Handan Gushan, Beijing Gushan, Shanghai Gushan, Chongqing Gushan, Hunan Gushan and Biomass that was driven by a combination of a series of adverse changes in the operating environment, in particular, the unresolved consumption tax issue and the continual increase in the cost of raw materials over the last few quarters and (ii) an impairment loss of RMB41.7 million (US$6.3 million) in relation to the relocation of Sichuan Gushan’s production lines from San Tai County to our new plant in Qin Dong Bei Industrial Park. Reversal of previously recognized impairment loss is specifically prohibited under U.S. GAAP. For the purpose of estimating the fair value, we utilized the projected cash flows of the property, plant and equipment discounted at its weighted average cost of capital.

Loss on Disposal of Property, Plant and Equipment

We recognized a loss on disposal of property, plant and equipment of RMB3.3 million (US$0.5 million) as compared to RMB0.1 million in 2009. The loss on disposal of property, plant and equipment in 2010 primarily relates to the disposal and relocation of Sichuan Gushan’s property, plant and equipment which was completed as of December 31, 2010. The loss on disposal of property, plant and equipment mainly represented certain additional machinery and equipment that was scrapped during the fourth quarter of 2010 and relocation expenses.

Change in Fair Value of Contingent Consideration Liability

We recognized an increase in fair value of contingent consideration liability of RMB2.9 million (US$0.4 million) as an operating expense in 2010. This change in fair value was related to our previously announced initial acquisition of a 67% beneficial ownership interest in Jin Xin through a series of transactions in exchange for the Consideration Shares. The Consideration Shares are subject to an earn-out arrangement whereby six million ordinary shares were delivered to Gold Hero at the closing of the transactions, while the Contingent Consideration Shares were placed into escrow to be released in stages upon the determination of Jin Xin’s net income under U.S. GAAP for the year ended December 31, 2010 and the three-year period ending December 31, 2012. See “—Liquidity and Capital Resources—Acquisition and Capital Expenditures.”

 

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The Contingent Consideration Shares should be classified as a liability and stated at their fair value at the acquisition date and each reporting date. The subsequent change in the fair value of the Contingent Consideration Shares at each reporting date would be recognized in our statement of operations.

Other Operating Income

We had other operating income of RMB103.8 million (US$15.7 million) in 2010 as compared to nil in 2009 representing the reversal of a provision for consumption tax of RMB103.8 million (US$15.7 million) that represented the amount of the provisions made in 2009. The reversal of the provision for consumption tax was based on the issuance of Caishui 118 by the Ministry of Finance of the PRC and the SAT, which clarified that, subject to fulfillment of certain conditions, pure biodiesel made from waste animal fat or vegetable oil is exempt from consumption tax in China.

Other Income (Expense)

Other income (expense) primarily consists of interest income, interest expenses, foreign currency exchange gains or losses and other expenses, net. Interest income for 2010 amounted to RMB1.4 million (US$0.2 million) as compared to RMB2.4 million in 2009. Interest expenses amounted to RMB0.7 million (US$0.1 million), incurred by Jin Xin in respect of short-term loans and discounting bills receivable, as compared to nil in 2009. Foreign currency exchange losses amounted to RMB0.2 million (less than US$0.1 million) as compared to RMB0.1 million in 2009. Other income, net, amounted to RMB2.9 million (US$0.4 million) included, among others, income from our depositary bank, a provision for business tax on intercompany advances among our subsidiaries in China, VAT refunds and government subsidy income, as compared to other expense, net of RMB0.7 million in 2009.

Income Tax Benefit (Expense)

Income tax expense primarily consisted of CIT, a reversal of provision for dividend withholding tax and other withholding tax.

CIT for 2010 amounted to RMB3.5 million (US$0.5 million), compared to RMB8.1 million for 2009. CIT for the fourth quarter of 2010 included RMB2.9 million (US$0.4 million) incurred by Jin Xin for the period since the acquisition. The decrease in CIT was mainly due to a decrease in the taxable profit derived from our PRC operating subsidiaries engaged in the biodiesel business.

Our withholding tax expense for 2010 included a reversal of provision for dividend withholding tax of RMB23.6 million (US$3.6 million) in respect of our biodiesel business as a result of the net loss incurred by various PRC subsidiaries, a provision of RMB1.1 million (US$0.2 million) in respect of dividend withholding tax for Jin Xin’s profit since the acquisition in November 2010 and RMB1.2 million (US$0.2 million) in respect of other overseas withholding tax. We made a provision of RMB9.4 million for withholding tax in respect of 2009.

Net Loss Attributable to the Company

Net loss attributable to the Company amounted to RMB1,109.0 million (US$168.0 million) for 2010, compared to a net loss of RMB283.5 million for 2009. Jin Xin’s net income since our acquisition amounted to RMB8.3 million (US$1.3 million) which is consolidated into our financial statements, of which 67% of such profit or RMB5.6 million (US$0.8 million) is attributable to our Company.

 

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Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Revenues

Our revenues amounted to RMB628.2 million for 2009, representing a decrease of 58.0% from RMB1,495.6 million for 2008. The decline in revenues was due to a decrease in sales volume of our biodiesel and biodiesel by-products and a decrease in the average selling prices of biodiesel and biodiesel by-products.

The sales volume of biodiesel amounted to 143,818 tons for 2009, representing a decrease of 37.8% from 231,377 tons for 2008. The average selling price of biodiesel was RMB4,040 per ton for 2009, representing a decrease of 29.7% from RMB5,748 per ton for 2008.

The sales volume of biodiesel by-products amounted to 18,469 tons for 2009, representing a decrease of 22.7% from 23,878 tons for 2008. The average selling price of biodiesel by-products was RMB2,554 per ton for 2009, representing a decrease of 63.2% from RMB6,936 per ton for 2008.

The decrease in the sales volume of biodiesel was mainly due to the temporary suspension of operations at certain of our plants in 2009 and our strategy to shift our sales channels from the refined oil market to the chemical market as a result of the consumption tax issue. Fujian Gushan suspended production on April 19, 2009 due to road maintenances which restricted access to the plant by the Company’s suppliers and customers. We also decided to extend the suspension of operations at Fujian Gushan to seek to minimize operating cash outflows that would result from the assessment of consumption tax from the local tax bureau. As of the date of this annual report, Fujian Gushan has not resumed production. As a result of the suspension of operations, Fujian Gushan’s sales volume of biodiesel for 2009 decreased by 71.8% compared to 2008.

Furthermore, to seek to mitigate the potential adverse impact from the consumption tax issue, during this period, we continued our efforts to expand alternative sales channels, including biodiesel sales as fatty acids to the chemical industry, while reducing our sales of biodiesel to the refined oil market. This strategy contributed in part to the absolute decrease in the sales volume of biodiesel. However, the proportion of biodiesel sold to the chemical market continued to increase from 8.6% of the total volume of biodiesel sold in 2008 to 23.3% in 2009.

The decrease in the average selling price of biodiesel was mainly attributed to a decline in the market price of diesel in China, which began in the fourth quarter of 2008 and continued throughout the first and second quarters of 2009, resulting from a significant decrease in global oil prices and the rapid contraction of China’s industrial production amid the global financial crisis.

The average selling prices of all biodiesel by-products decreased as a result of a rapid decline in market prices of raw materials in the chemical industry caused by China’s slowing economy during the period.

Cost of Revenues

Cost of revenues for 2009 totaled RMB766.7 million, representing a decrease of 20.4% from RMB962.6 million for 2008.

Cost of revenues for 2009 included a provision for consumption tax of RMB103.8 million. The provision for consumption tax was made on a basis of RMB0.8 per liter for 129.7 million liters of biodiesel product sold as a refined oil product by us during 2009.

Factors other than the provision for consumption tax accounted for a decrease in cost of revenues by 31.1% from RMB962.6 million for 2008. This decrease was primarily attributable to a decrease in our sales volume of both biodiesel and biodiesel by-products. The decrease was partially offset by an increase in the overall average unit cost for vegetable oil offal and used cooking oil, which increased by 3.8% from RMB2,538 per ton in 2008 to RMB2,635 per ton in 2009.

 

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Gross Profit (Loss)

Our gross loss for 2009 totaled RMB138.5 million, compared to a gross profit of RMB533.0 million for 2008. Our gross loss margin was 22.0% in 2009, 16.5% of which was attributable to the provision for consumption tax as compared to a gross profit margin of 35.6% for 2008.

The decrease in gross profit margin was mainly due to a decrease in the average selling price of our biodiesel and biodiesel by-products, the general increase in our average unit costs of raw materials, the provision for consumption tax, and an increase in the average fixed production costs, which resulted from a decrease in the production and sales volume of our biodiesel and biodiesel by-products. The average unit costs of our raw materials increased by 3.8% in 2009 while the average selling prices of our biodiesel and biodiesel by-products decreased by 29.7% and 63.2%, respectively, during the same period.

Research and Development Expenses

Research and development expenses totaled RMB5.7 million in 2009, representing an increase from RMB2.1 million for 2008. The increase was mainly due to the depreciation on the machinery of Biomass, one of our subsidiaries, which commenced research and development projects in the PRC in 2009.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2009 totaled RMB89.9 million, representing a decrease from RMB105.5 million for 2008. The overall decrease was mainly due to decreases in share-based compensation, professional fees and other expenses. Share-based compensation included in selling, general and administrative expenses for 2009 amounted to RMB28.8 million, representing a decrease from RMB36.9 million for 2008, mainly as a result of the fact that amounts of share-based compensation recognized are declining as the options become vested over the vesting period. Professional fees totaled RMB13.3 million representing a decrease from RMB15.6 million for 2008, as a result of reductions of fees charged by some of our professional service providers when their service contracts were renewed in 2009. A decrease in other expenses included in selling, general and administrative expenses was partly due to the suspension of Fujian Gushan.

Other Operating Expenses

Other operating expenses for 2009 amounted to RMB33.4 million, compared to RMB3.2 million for 2008. The expenses for 2009 consisted of depreciation on buildings and machinery and salary paid to factory workers during periods in which we suspended or deferred production due to the consumption tax issue. We suspended production in Fujian Gushan starting in June 2009 and, although construction of the production facilities for Chongqing Gushan and Hunan Gushan were completed in May and June of 2009, respectively, we also deferred the commencement of production at these plants due to the consumption tax issue. The expenses for 2008 consisted of depreciation on buildings and machinery and salary paid to factory workers when Beijing Gushan temporarily suspended its production due to the Beijing Olympic games in the third quarter of 2008. If these suspensions and deferrals had not occurred, these expenses would have been capitalized as cost of inventories and charged to cost of revenues upon sales of inventories.

Other Income (Expense)

Other income (expense) primarily consists of interest income, foreign exchange loss and other income (expenses), net. Interest income for 2009 amounted to RMB2.4 million, representing a decrease from RMB32.7 million for 2008. The decrease was mainly due to a decrease in interest rates for cash deposited in commercial banks and a decrease in our cash balance. Foreign exchange loss for the year amounted to RMB0.1 million, compared to a foreign exchange loss of RMB99.8 million in 2008, which resulted from the severe depreciation of our foreign currency holdings in New Zealand dollars and Euros against U.S. dollars in the second half of 2008.

 

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During 2009, we held cash balances only in Renminbi, Hong Kong dollars and U.S. dollars. Other income (expense), net included, among others, income in the amount of RMB5.7 million from our depositary bank and a provision for business tax of RMB2.9 million on intercompany advances.

Income Tax Expense

Income tax expense primarily consisted of CIT, a provision for dividend withholding tax and other withholding tax.

CIT for 2009 amounted to RMB8.1 million, compared to RMB59.1 million for 2008. The decrease in CIT was mainly due to a decrease in the combined taxable profit derived from our PRC operating subsidiaries.

According to the New CIT Law and its relevant regulations, which came into effect from January 1, 2008, PRC-resident enterprises are levied withholding tax at 10% on dividends to their non-PRC-resident corporate investors for earnings accumulated beginning on January 1, 2008. Undistributed earnings generated prior to January 1, 2008 are exempted from such withholding tax. Since our PRC subsidiaries are invested by non-PRC-resident corporate investors, we are subject to withholding tax for earnings accumulated beginning on January 1, 2008. Under the Mainland China/HKSAR DTA, a qualified Hong Kong tax resident which is the “beneficial owner” and holds 25% or more of the equity interest in a PRC-resident enterprise is entitled to a reduced withholding rate of 5%. All of our foreign-invested enterprises are directly held by Hong Kong tax residents. Accordingly, a rate of 5% was applied to the calculation of withholding tax for the periods from January 1, 2008 to September 30, 2009, as we believed that the Mainland China/HKSAR DTA was applicable to these companies.

On October 27, 2009, the PRC SAT issued Guoshuihan [2009] No. 601 on “How to understand and recognize the “Beneficial Owner” in Double Taxation Agreements.” Circular 601 clarifies the general rules and the onus of proof in determining whether a tax relief applicant qualifies as a “beneficial owner.” Pursuant to Circular 601, a “beneficial owner” under a tax treaty is determined not purely by its place of legal registration but also by other factors which depend on the specific facts and circumstances and significant judgment may be involved. In view of the uncertainty in the definition of “beneficial owner” under the Mainland China/HKSAR DTA and after seeking professional advice on the matter, a withholding tax rate of 10% is applied on the undistributed earnings as of December 31, 2009. If local SATs approve a reduced rate of 5% when the dividends are actually wired out of the PRC, any excess provision will be reversed in subsequent financial statements. As a result, we made a provision of RMB7.7 million for 2009, compared to RMB22.0 million for 2008, in respect of the dividend withholding tax.

Furthermore, during 2009, we recognized income from our depositary bank, which, as required under the U.S. tax laws, withheld a certain portion of such income as withholding tax. Such withholding tax amounted to RMB1.7 million for 2009, compared to RMB0.7 million for 2008.

Net Income (Loss) attributable to the Company

Our net loss amounted to RMB283.5 million for 2009, compared to a net profit of RMB269.0 million for 2008.

B. Liquidity and Capital Resources

Liquidity and Capital Resources

We have historically met the majority of our working capital and other capital requirements principally from cash generated from operations and our initial public offering in December 2007. As of December 31, 2009 and 2010, we had working capital of RMB415.3 million and RMB275.7 million (US$41.8 million), respectively, reflecting a sufficient position for our present requirements. Of the total current assets, as of December 31, 2009 and 2010, we had RMB571.2 million and RMB272.8 million (US$41.3 million), respectively, in cash. As of December 31, 2010, our cash primarily consisted of interest bearing bank deposits of RMB15.9 million, HK$38.5 million and US$1.6 million deposited in licensed commercial banks in the PRC and HK$0.9 million

 

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and US$32.1 million deposited in licensed commercial banks in Hong Kong. In the future, we anticipate that our primary sources of liquidity will be cash provided by operations, bank loans, and the proceeds of debt or equity capital markets transactions, if necessary. We believe our current cash, cash flow from operations and available sources of financing will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and planned capital expenditures, for the foreseeable future. As of December 31, 2010, we had RMB60 million short term bank loans outstanding. As of the date of this annual report, our short term bank loans totaled RMB80 million.

We received net proceeds of US$131.5 million upon the completion of our initial public offering in December 2007. As SAFE strengthened its control over the conversion by foreign-invested enterprises of foreign currency into Renminbi by restricting how the converted Renminbi may be used, our ability to transfer the net proceeds from the offering to our subsidiaries in the PRC was significantly limited. In order to diversify the downside risk of U.S. dollars against Renminbi, we converted part of the net proceeds into other currencies including New Zealand dollars and Euros which were comparatively stable against Renminbi in the first and second quarter of 2008. Subsequently, the exchange market became extremely volatile during the financial crisis. As a result, we incurred a foreign exchange loss of RMB99.8 million in 2008, resulting from the depreciation of our foreign currency holdings in New Zealand dollars and Euros against U.S. dollars in the third and fourth quarters of 2008. In October 2008, we converted all of our cash deposits in New Zealand dollars and Euros to U.S. dollars. Under the current highly volatile market conditions, we do not hold cash balances in currencies other than in Renminbi, Hong Kong dollars and U.S. dollars at this moment and do not expect to do so in the foreseeable future.

The ability of our PRC operating subsidiaries to pay dividends may be restricted by PRC foreign exchange control restrictions. Each of Chongqing Gushan, Hunan Gushan, Shanghai Gushan, Beijing Gushan, Fujian Gushan, Handan Gushan, Sichuan Gushan, Biomass and Jin Xin, as a wholly owned foreign enterprise, is required under PRC laws and regulations to provide for a statutory surplus reserve fund. Each of these subsidiaries is required to allocate at least 10% of its after tax profits as reported in its PRC statutory financial statements to the general reserve fund and enterprise expansion fund and has the right to discontinue allocations to these reserve funds once the reserve balance has reached 50% of its registered capital. These statutory reserves are not available for distribution to the shareholders, except in liquidation, and may not be transferred in the form of loans, advances, or cash dividends. As of December 31, 2010, the amount of these restricted portions was RMB71.9 million (US$10.9 million) in total for our PRC subsidiaries. Limitations on the ability of our PRC subsidiaries or affiliated PRC entities to transfer funds to our intermediate holding companies and to us in the form of dividends, loans or advances could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, and otherwise fund and conduct our business.

The following table summarizes our cash flows for each of the periods indicated:

 

     Year ended December 31,  
     2008     2009     2010     2010  
     RMB     RMB     RMB     US$  
     (in thousands)  

Net cash provided by (used in) operating activities

     507,889        529        (130,230 )     (19,732

Net cash used in investing activities

     (698,934 )     (365,413 )     (130,626 )     (19,792 )

Net cash used in financing activities

     (83,181 )     (26,693 )     (26,263     (3,979

Effect of foreign exchange rate changes

     (143,281 )     (463 )     (11,247 )     (1,704 )
                                

Net decrease in cash

     (417,507 )     (392,040 )     (298,366 )     (45,207 )

Cash at beginning of year

     1,380,735        963,228        571,188        86,544   
                                

Cash at end of year

     963,228        571,188        272,822        41,337   
                                

 

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Operating activities

Our net cash outflow from operating activities for the year ended December 31, 2010 was RMB130.2 million (US$19.7 million) compared to net cash inflow of RMB0.5 million for the year ended December 31, 2009. The decrease in cash inflow from operating activities was primarily due to a decrease in revenues and the increasing cost of raw materials during 2010. The decrease in revenues was primarily caused by the decrease in the production and sales volume of our biodiesel and biodiesel by-products, which was, in turn, due to the temporary suspension of operations at our Shanghai and Sichuan plant since April and August 2010, respectively. The net cash outflow was further increased by an increase in working capital needs which include an increase in inventory, increase in prepaid expenses and other current assets which were partially offset by an increase in accounts payable of Jin Xin.

Our net cash inflow from operating activities for the year ended December 31, 2009 was RMB0.5 million compared to RMB507.9 million for the year ended December 31, 2008. The decrease in cash inflow from operating activities was primarily due to a decrease in revenues during 2009. The decrease in revenues was caused primarily by a decrease in the average selling price of our biodiesel and biodiesel by-products and a decrease in the production and sales volume of our biodiesel and biodiesel by-products, which was, in turn, due to our strategy to seek to mitigate the potential adverse impact of the consumption tax issue.

Our net cash inflow from operating activities for the year ended December 31, 2008 was RMB507.9 million compared to RMB412.8 million for the year ended December 31, 2007. The increase in cash inflow from operating activities was primarily due to the combined effect of an increase in revenues resulting from the Beijing and Shanghai plants, which commenced operations in January 2008 and June 2008, respectively, and an increase in the average selling price of our biodiesel and biodiesel by-products. This increase, however, was offset by both an increase in the aggregate expenditure on raw materials as a result of increased production and an increase in per unit costs for our raw materials. The increase in cash flow was further offset by an increase in professional fees incurred, in particular, in relation to our proposed follow-on ADS offering which was subsequently terminated in the second quarter of 2008 and the increased need for legal and other professional services as a result of us becoming a U.S.-listed company and by an increase in staff costs resulting from expansion of our Beijing, Shanghai, Chongqing and Hunan plants. The increase in the cash inflow from operating activities for the year ended December 31, 2008 was also offset by the increase in certain current assets and, in particular, an increase of RMB27.7 million in inventory levels resulting from the enlarged size of operation in 2008 and an increase of RMB13.5 million in income tax receivable.

Investing activities

For the year ended December 31, 2010, we had a net cash outflow of RMB130.6 million (US$19.8 million) from investing activities, primarily due to the purchase of property, plant and equipment of RMB169.8 million (US$25.7 million), payment for land use rights of RMB0.6 million (less than US$0.1 million) mainly in connection with the construction of Chongqing Gushan, Hunan Gushan, additional facilities of Beijing Gushan and Shanghai Gushan and the new plant in Sichuan, which were partly offset by the proceeds from disposal of property, plant and equipment of RMB36.9 million (US$5.6 million) of Sichuan Gushan, and net of cash of RMB2.9 million acquired in connection with the acquisition of an initial 67% beneficial ownership interest in Jin Xin.

For the year ended December 31, 2009, we had a net cash outflow of RMB365.4 million from investing activities, primarily due to the purchase of property, plant and equipment of RMB349.4 million and payment for land use rights of RMB16.0 million mainly in connection with the construction of Chongqing Gushan, Hunan Gushan, additional facilities of Beijing Gushan and Shanghai Gushan and the new plant in Sichuan.

For the year ended December 31, 2008, we had a net cash outflow of RMB698.9 million from investing activities, primarily due to the purchase of property, plant and equipment of RMB662.7 million and payment for land use rights of RMB36.3 million in connection with the construction of Shanghai Gushan, Chongqing Gushan, Hunan Gushan and additional facilities of Beijing Gushan.

 

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Financing activities

For the year ended December 31, 2010, we had a net cash outflow of RMB26.3 million (US$4.0 million) from financing activities, primarily due to the purchase of treasury stock of RMB33 million (US$5.0 million) under our share repurchase program and our repayment of advances received from directors of RMB3.3 million (US$0.5 million) of Jin Xin which was partly offset by the proceeds from new short term loans of RMB10.0 million.

For the year ended December 31, 2009, we paid RMB26.7 million in respect of dividends, which was the only cash outflow for financing activities.

For the year ended December 31, 2008, we had a net cash outflow of RMB83.2 million for financing activities, primarily due to the payment of dividends of RMB68.4 million and settlement of payables for initial public offering related expenses of RMB14.8 million.

Acquisition and Capital Expenditures

In November 2010, we acquired an initial 67% beneficial ownership interest in Jin Xin for a consideration of up to 24 million ordinary shares of our Company of which 18 million shares were put in escrow for release in stages, subject to an earn-out arrangement. We also made a capital contribution to Jin Xin of RMB30 million (approximately US$4.5 million). On January 1, 2011, we acquired an additional 8% beneficial ownership interest in Jin Xin and increased our beneficial ownership in Jin Xin to 75%. For more information about Jin Xin’s operations, see Item 4.B. “Information on the Company—Business Overview.”

In 2008, 2009 and 2010, our capital expenditures were RMB698.9 million, RMB365.4 million and RMB170.4 million (US$25.8 million). Our capital expenditures in the table below are cash outflows for the purchase of long-lived assets and land use rights, for the expansion of our production facilities. In 2008, 2009 and 2010, we funded our capital expenditures primarily through cash flows from operating activities and proceeds from the issuance of ordinary shares. We intend to fund our future capital expenditures through cash flows from operations. The following table sets forth our capital expenditures by plant or office locations for the periods indicated:

 

     Year ended December 31,  
     2008      2009      2010      2010  
     RMB      RMB      RMB      US$  
     (in millions)  

Hong Kong office

     24.7         0.2         —           —     

Sichuan Gushan

     2.7         127.6         110.0         16.7   

Fujian Gushan

     22.1         6.8         1.0         0.1   

Handan Gushan

     1.1         —           —           —     

Beijing Gushan

     103.2         23.5         3.3         0.5   

Shanghai Gushan

     207.6         74.4         5.5         0.8   

Chongqing Gushan

     168.2         53.0         10.0         1.5   

Hunan Gushan

     147.2         68.8         13.4         2.0   

Biomass

     22.1         11.1         3.7         0.6   

Jin Xin

     —           —           23.5         3.6   
                                   

Total

     698.9         365.4        
170.4
  
     25.8   
                                   

Consistent with our previously announced strategy to expand our production capacity to 490,000 tons by the end of the second quarter of 2011:

 

   

we incurred capital expenditures of RMB170.4 million (US$25.8 million) in 2010, primarily composed of RMB110.0 million (US$16.7 million), RMB10.0 million (US$1.5 million), RMB13.4 million (US$2.0 million) and RMB23.5 million (US$3.6 million) for the construction of our new production facilities in Sichuan, Chongqing, Hunan and Jin Xin, respectively, RMB3.3 million (US$0.5 million)

 

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and RMB5.5 million (US$0.8 million) for the expansion of our production capacity in Beijing and Shanghai, respectively, by 50,000 tons each, RMB1.0 million (US$0.1 million) and RMB3.7 million (US$0.6 million) for acquisition of assets in Fujian and Biomass, respectively.

 

   

we incurred capital expenditures of RMB365.4 million in 2009, primarily composed of RMB127.6 million, RMB53.0 million and RMB68.8 million for the construction of our new production facilities in Sichuan, Chongqing and Hunan, respectively, RMB23.5 million and RMB74.4 million for the expansion of our production capacity in Beijing and Shanghai, respectively, by 50,000 tons each, RMB11.1 million for our research and development facilities in Fujian and RMB6.8 million for the infrastructure facilities in Fujian.

 

   

we incurred capital expenditures of RMB698.9 million in 2008, primarily composed of RMB56.7 million, RMB207.6 million, RMB168.2 million and RMB147.2 million for the construction of our production facilities in Beijing, Shanghai, Chongqing and Hunan, respectively, RMB46.5 million for the expansion of our production capacity in Beijing by 50,000 tons, RMB22.1 million for our research and development facilities in Fujian and RMB22.1 million for the infrastructure facilities in Fujian.

Estimated Capital Expenditures for the Remainder of 2011

We currently estimate our aggregate capital expenditures, on a cash basis, to be approximately RMB52 million for the fiscal year of 2011, which will be used primarily for construction of our new production facility in Sichuan that is expected to be completed by the end of the second quarter of 2011 and the expansion of the existing production facilities in Jin Xin. The actual amounts of expenditures may vary from the estimated amounts for a variety of reasons, including changes in market conditions and other factors. We believe that our current cash balance and anticipated cash flow from our operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures for the next 12 months. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to sell additional equity securities or debt securities or to borrow from lending institutions. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.

C. Research and Development

Our biodiesel manufacturing technology was developed in-house by our research and development department. Our research and development team comprises 19 internal professional researchers as of December 31, 2010. Our advanced manufacturing process utilizes vegetable oil offal, used cooking oil and methanol as raw materials and produces biodiesel and by-products on a commercial scale.

We plan to continue our research and development efforts to strengthen our competitive position as a leader in the PRC biodiesel market and to expand into new markets for our other products. We are currently developing new fuel additives, which are substances added to fuels to improve their properties, and glycerine ethers, which are added to biodiesel to improve the low temperature qualities of biodiesel. Our newly developed fuel additive products are based on a grinding and filtering process and are designed to increase power and efficiency while lowering the emission level of fuels. We have completed laboratory testing for these products. We also are developing the technology to produce glycerine ethers from glycerine produced during our biodiesel production. We have also conducted research on and implemented non-catalyst biodiesel production methods.

We had entered into a technology cooperation agreement with the Resource and Environmental Research Institute of Fuzhou University, dated June 6, 2006, for research on the conversion of castor bean fiber into methanol. Under this agreement, which expired on June 6, 2008, we agreed to provide RMB1.0 million per annum to Fuzhou University for research expenses and Fuzhou University agreed to develop the technology. The agreement specified that any intellectual property that arose from the research would belong to us. We had also

 

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entered into a technology cooperation agreement with the Fujian Chemistry Science and Technology Research Institute, dated May 22, 2006, which expired on May 22, 2008, for research regarding castor bean fiber detoxification. Our primary purpose in establishing this relationship was to process castor bean fiber for use as animal feed, which could be sold to reduce our cost of raw materials. These two research projects have been completed and we are currently considering commercializing the research results.

On November 3, 2008, we established Biomass as a wholly foreign-owned enterprise in the PRC to centralize research and development activities to seek to further strengthen our research abilities and develop new products and more efficient and lower cost manufacturing processes. For example, we are currently working to develop new processing methods to further improve our technology of using inedible oils, such as jatropha oil, as feedstock and to further improve the quality of one of our by-products. We will also continue to research the commercial applications of other by-products generated during biodiesel production.

We incurred research and development expenses of RMB2.1 million, RMB5.7 million and RMB3.9 million (US$0.6 million) for the years ended December 31, 2008, 2009 and 2010, respectively.

D. Trend Information

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2010 to December 31, 2010 that are reasonably likely to have a material adverse effect on our revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

E. Off-Balance Sheet Commitments and Arrangements

Except for the operating lease commitments disclosed in Item 5.F below, we do not have any off-balance sheet commitments or arrangements, including outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. We do not engage in trading activities involving non-exchange traded contracts. In our ongoing business, we do not enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financials partnerships that are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

F. Tabular Disclosure of Contractual Obligations

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2010:

 

     Total      Less than
1 year
     1-3
years
     3-5
years
     More than
5 years
 
     RMB      RMB      RMB      RMB      RMB  
     (Amounts in millions)  

Short-term debt obligations (including interest payable)

     61.7         61.7         —           —           —     

Capital commitment in respect of the acquisition of property, plant and equipment

     52.0         52.0         —           —           —     

Consideration to acquire additional 8% shareholdings in Jin Xin

     42.7         42.7         —           —           —     

Operating lease commitments

     11.7         11.7         —           —           —     
                                            

Total

     168.1         168.1         —           —           —     
                                            

We have raw materials supply contracts with durations of up to two years but extendable by negotiation under which we purchase raw materials from certain suppliers. Pursuant to the contracts, the purchase prices are renegotiated periodically. As of December 31, 2010, we had committed to purchase an aggregate of 111,253 tons of raw materials through December 31, 2011.

 

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

The following table sets forth information regarding our directors and executive officers as of the date of this annual report. The business address for each of our directors and executive officers is c/o Gushan Environmental Energy Ltd., No. 37, Golden Pond Road, Golden Mountain Industrial District, Fuzhou City, Fujian Province, People’s Republic of China.

 

Name

   Age     

Position

Jianqiu Yu

     46       Chairman, Director, and Principal Executive Officer

Deyu Chen

     73       Director and Chief Technology Officer

Kang Nam Chu

     55       Independent Director

Dongming Zhang

     67       Independent Director

Denny Lee

     43       Independent Director

Wilson Wai Sun Kwong

     45       President

Frank Ngai Chi Chan

     39       Principal Financial Officer and Principal Accounting Officer

Haisui Chen

     55       Chief Operating Officer and President of the Management Department

Gonghao Chen

     34       Chief Logistics Officer and Vice President of the Management Department

Xia Zhiying

     39       Chief Sales and Marketing Officer

Junxiong Li

     44       Chief Engineer

Ying Kwan Cheung

     51       Financial Controller

Huimin Chen

     32       Senior Finance Manager

Tansy Jin Cai

     33       Chief Administrative Officer and Secretary to the Chairman

Mr. Jianqiu Yu is our founder and our chairman and principal executive officer. Mr. Yu is also currently a director of our various investment holding companies incorporated in the British Virgin Islands and operating subsidiaries incorporated in the PRC. Mr. Yu has over 17 years of experience in corporate operations and management in the petrochemical and automobile sectors. Mr. Yu founded our Company in 2000 to conduct biodiesel research and development. In 2002, he was elected a member of the Fuzhou Committee of the 10th Chinese People’s Political Consultative Committee and “Santai County Committee of the 11th Chinese People’s Political Consultative Committee.” Mr. Yu is responsible for our overall operation and strategic planning. He was appointed as a director of our Company on June 6, 2006. Mr. Yu holds a EMBA degree from HEC Paris. Mr. Yu is also one of our major shareholders through his ownership in Gemino Success Limited as disclosed in Item 6.E, “Directors, Senior Management and Employees—Share Ownership” below.

Mr. Deyu Chen is a director and has been the chief technology officer of our Company since 2001. Mr. Chen is also currently a director of Sichuan Gushan and Fujian Gushan. Mr. Chen graduated from the East China Institute of Textile and Technology in 1958 with a major in chemical fiber engineering. Mr. Chen has worked in the chemical technology area for more than 38 years and has received many awards. In October 1992, Mr. Chen received the “Certificate for Special Allowance” from the State Council, an award given to specialists with outstanding contributions to technology development. Mr. Chen has also received the “Third Award for Science and Technology Advancement” by the Mianyang County Government and “First Award for Science and Technology Advancement” by the Sichuan Provincial Government. Mr. Chen is responsible for our research and development. He was appointed as a director of our Company on June 6, 2006.

Mr. Kang Nam Chu is an independent director of our Company. Mr. Chu graduated from Xiamen University with a Bachelors of Arts degree and thereafter lectured at the Xiamen University. Mr. Chu worked in certain

 

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government departments of the Fujian province of the PRC for the period from June 1984 to November 1989 and held research and management positions in the areas of economics and foreign trade. Mr. Chu also has held senior management positions at various trading and retail companies since 1989. Since September 1995, he has been employed as a research analyst at the Fujian Provincial Government Development Research Centre. Mr. Chu has over 22 years of management and operations experience in the areas of economics and trading. Mr. Chu is currently an independent non-executive director of China Mining Resources Group Limited, a company listed on the Hong Kong Stock Exchange. He was appointed as an independent director of our Company on August 1, 2007.

Mr. Dongming Zhang is an independent director of our Company. He graduated from the department of chemistry of Tianjin Nankai University in 1967. From 1967 to 1973, Mr. Zhang served as a technician in the chemical processing unit of a dye processing plant in Sichuan. From 1973 to 1992, Mr. Zhang held various positions, including assistant plant manager, plant manager and senior economist, in the Sichuan Weililin Plant of China Petrochemical Corporation. Mr. Zhang was assistant manager, manager and senior economist at the China Petrochemical Sales Corporation from 1992 to 2000. He also served as head of the chemical processing unit at China Petrochemical Corporation from 2000 until his retirement in 2004. Mr. Zhang received the “China Petrochemical Corporation Technology of Outstanding Contribution and Management Specialist Award” in 2000 and the “Science and Technology Advancement Award” in 2001 from the China Petrochemical Corporation. He was appointed as an independent director of our Company on August 1, 2007.

Mr. Denny Lee is an independent director of our Company. He was the chief financial officer of NetEase.com Inc. from 2002 until 2007, one of the China’s leading internet and online game service providers. Prior to joining NetEase, Mr. Lee worked in the Hong Kong office of KPMG for more than ten years specializing in auditing international clients. Mr. Lee currently serves as a non-executive director on the board of NetEase.com, Inc., which is listed on the Nasdaq Stock Exchange. He also serves as independent non-executive director of New Oriental Education & Technology Group Inc. and Concord Medical Services Holdings Ltd., all of which are listed on the NYSE. Mr. Lee graduated from Hong Kong Polytechnic University and majored in accounting and is a member of the Chartered Association of Certified Accountants and the Hong Kong Institution of Certified Public Accountants. He was appointed as an independent director of our Company on December 18, 2007.

Mr. Wilson Wai Sun Kwong joined us in July 2006 and is the president in charge of business, strategic development and overall responsibility for investor relations for our Company. Since joining our Company, Mr. Kwong also served as the vice president of business development until January 24, 2008, after which he was promoted to the newly created position of president. Mr. Kwong has 14 years of experience in corporate finance and equity capital markets in Asia, having previously worked at a number of investment banks in Hong Kong. Prior to joining us, he was a managing director of investment banking and head of Hong Kong and China ECM at CLSA Equity Capital Markets Limited, a position he had held since March 2004. From 2002 to 2003, Mr. Kwong was the head of equity capital markets for Cazenove Asia Limited. After graduating from Cambridge University, England with a Bachelor’s degree in 1987, he qualified as a chartered accountant in the United Kingdom with KPMG in 1990 and as a chartered secretary and administrator in the United Kingdom in 1991. Mr. Kwong is currently an associate member of the Hong Kong Institute of Certified Public Accountants and the Hong Kong Institute of Chartered Secretaries.

Mr. Frank Ngai Chi Chan joined us in August 2007 and is the principal financial officer and principal accounting officer of our Company. Mr. Chan has over 15 years of experience in financial management, compliance and auditing. Prior to joining our Company, Mr. Chan had worked in the audit division of PricewaterhouseCoopers Hong Kong and in three listed companies as the financial controller and company secretary in Hong Kong. From 2004 to August 2007, Mr. Chan worked in Tong Ren Tang group, the largest producer of Chinese Medicine in China as the financial controller and company secretary. Mr. Chan holds a Bachelor’s degree from The Hong Kong University of Science and Technologies and a Master’s degree from The

 

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