F-1 1 df1.htm FORM F-1 Form F-1
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As filed with the Securities and Exchange Commission on July 18, 2008.

Registration No. 333-            

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

GCL Silicon Technology Holdings Inc.

 

(Exact Name of Registrant as Specified in Its Charter)

 

Not Applicable

(Translation of Registrant’s Name into English)

 

 

 

Cayman Islands   3674   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

  (IRS Employer
Identification Number)

 

Suite 3601, Two Exchange Square

Central, Hong Kong

(852) 2526 8368

(Address telephone number of Registrant’s principal executive offices)

 

 

 

CT Corporation System

111 Eighth Avenue, 13th Floor

New York, New York 10011

(212) 894-8641

(Name, address and telephone number of agent for service)

 

 

 

Copies to:

 

Douglas A Tanner, Esq.

Milbank, Tweed, Hadley & McCloy LLP

1 Chase Manhattan Plaza

New York, New York 10005

Tel: (212) 530-5000

Fax: (212) 822-5219

 

Chris Lin, Esq.

Simpson Thacher & Bartlett LLP

35th Floor, ICBC Tower

3 Garden Road

Central, Hong Kong

Tel: (852) 2514-7600

 

 

 

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

 

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

 

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

 

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

 

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

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class of Securities to be Registered    Proposed Maximum
Aggregate Offering Price
     Amount of
Registration Fee

Ordinary Shares, par value $0.00001 per share(1)(2)

   $ 862,500,000 (3)    $ 33,896.25

 

 

(1)   American depositary shares issuable upon deposit of the ordinary shares registered hereby will be registered under a separate registration statement on Form F-6. Each American depositary share represents              ordinary shares.
(2)   Includes (i) ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this Registration Statement and the date the shares are first bona fide offered to the public, and (ii) ordinary shares that may be purchased by the underwriters pursuant to an option to purchase additional ordinary shares represented by American depositary shares. These ordinary shares are not being registered for the purpose of sales outside the United States.
(3)   Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

 

 

 

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

 

 


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

 

PROSPECTUS (Subject to Completion)

Dated July 18, 2008

 

American Depositary Shares

 

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GCL Silicon Technology Holdings Inc.

 

REPRESENTING              ORDINARY SHARES

 

 

 

GCL Silicon Technology Holdings Inc. is offering              American depositary shares, or ADSs, each representing              ordinary shares. This is our initial public offering and no public market currently exists for our ADSs or ordinary shares. We anticipate that the initial public offering price of the ADSs will be between $             and $             per ADS.

 

 

 

We have applied to list our ADSs on the New York Stock Exchange under the symbol “GCL.”

 

 

 

Investing in our ADSs involves risks. See “Risk Factors” beginning on page 15.

 

 

 

PRICE $             PER ADS

 

 

 

      

Price to Public

    

Underwriting
Discounts and
Commissions

    

Proceeds
to
Company

Per ADS

     $                  $                  $            

Total

     $                  $                  $            

 

The selling shareholders have granted the underwriters the right to purchase up to an additional              ADSs to cover over-allotments.

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the ADSs on August         , 2008.

 

 

 

MORGAN STANLEY

 

CREDIT SUISSE

 

 

HSBC

 

 

COWEN AND COMPANY

  PIPER JAFFRAY

 

                    , 2008


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You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information which is different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, these ADSs only in jurisdictions where offers to buy and sell are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or time of any sale of our ADSs.

 

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

 

Until September            , 2008 (25 days after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

 

The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors” before deciding whether to buy our ADSs.

 

Overview

 

We supply polysilicon and wafers to companies operating in the solar industry. Polysilicon is the primary raw material for wafers used in the solar and electronics industries. We manufacture polysilicon at our production facility in Xuzhou, Jiangsu Province, China and intend to commence wafer manufacturing in the third quarter of 2009. Our business was founded in March 2006 and we intend to ramp up our production capacity to 13,500 metric tonnes, or MT, per year by March 2010. We currently plan to build 1.9 gigawatts, or GW, of wafer production capacity by the end of 2010. We commenced construction of our first polysilicon production facility, our Phase I production facility, which produces solar grade polysilicon, in July 2006 and produced our first batch of polysilicon in September 2007. In the three months ended March 31, 2008, we produced 302 MT of polysilicon and in the three months ended June 30, 2008, we produced 359 MT of polysilicon. We began selling wafers produced for us through tolling arrangements with third party manufacturers in the second quarter of 2008 and expect wafer sales to contribute a significant majority of our revenues in the future.

 

We ramped up our Phase I production facility to its designed annual capacity of 1,500 MT in March 2008. We commenced pilot production at our Phase II production facility with an annual production capacity of 1,500 MT in June 2008. We commenced commercial production of our Phase II production facility in July 2008 and expect it to achieve its fully ramped up capacity by December 2008. In December 2007, we commenced preparation for construction of our Phase III production facility, which is expected to have an aggregate annual production capacity of 10,500 MT. We expect our Phase III production facility to commence commercial production in January 2009. We intend to fully ramp up our Phase III production facility by March 2010 and to further expand our total annual polysilicon production capacity to 24,000 MT by 2011. We may look for a location outside of Xuzhou, Jiangsu Province, China for our polysilicon production expansion beyond Phase III. We expect to determine the location by the end of 2008, and will then begin to apply for necessary permits and commence equipment orders. We have implemented proven technologies in our polysilicon production facilities. We utilize a modified Siemens process to produce polysilicon and starting from Phase II onwards, our production facilities are designed to produce both solar and electronic grade polysilicon.

 

We use industrial trichlorosilane, or TCS, to produce polysilicon. TCS is one of the main and most costly production inputs and to date, we have relied on third party suppliers for substantially all of our TCS requirements. To reduce our reliance on TCS from third party suppliers, we are increasingly incorporating TCS production into our production process. We integrated the hydrochlorination process for our Phase I production facility in February 2008 and expect to integrate the hydrochlorination process in our Phase II production facility in September 2008. Our Taixing joint venture is constructing a TCS production facility with an initial annual capacity of 20,000 MT in Taizhou, Jiangsu Province, China which we expect to commence pilot production shortly after this offering. We intend to increase the Taixing joint venture annual TCS production capacity to up to 60,000 MT by 2010. We intend to commence construction of a hydrogenation facility and a TCS production facility in Xuzhou in August 2008 which we expect to have combined capacity to produce up to 90,000 MT of TCS per year by the third quarter of 2009. Upon ramp up of these facilities, we expect to substantially reduce our reliance on third parties for our TCS requirements.

 

We intend to begin construction of our first multicrystalline and monocrystalline wafer production facility in Xuzhou by the end of 2008 and expect to commence pilot production by the third quarter of 2009. We intend to ramp up these facilities to a combined 0.8 GW production capacity by the end of 2009 and to further expand our

 

 

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production capacity to 1.9 GW by the end of 2010. We have entered into equipment supply contracts to purchase over half of the wire saws and squarers for our expansion to 1.9 GW with the first deliveries expected to commence in late 2008. We also intend to explore opportunities to further expand our wafer production capacity through strategic acquisitions and partnerships. Until we have sufficient in-house wafer production capacity, we will continue to rely on medium- to short-term wafer tolling arrangements to support our wafer sales. We are currently in preliminary discussions with one of our wafer tolling producers, Changzhou Huasheng Hengneng Optoelectronics Co., Ltd., or Huasheng, with respect to a potential acquisition of such producer to increase our in-house wafer production capacity.

 

We have entered into long-term wafer supply agreements with JingAo Solar Co., Ltd., or JA Solar, an onshore subsidiary of JA Solar Holdings Co., Ltd, Jiangsu AIDE Solar Energy Technology Co., Ltd., or AIDE, and Solarcell S.p.A., or Solarcell, an offshore subsidiary of Solar Industries AG and long-term polysilicon supply agreements with Changzhou Trina Solar Energy Co., Ltd, or Trina Solar, an onshore subsidiary of Trina Solar Limited Technology Co., Ltd. and Jiangsu Linyang Solarfun Co., Ltd., or Solarfun, an onshore subsidiary of Solarfun Power Holdings Co., Ltd. These contracts extend from 2008 through 2015 and generally require customers to make advance payments, have pre-set prices which decline significantly over the length of the contract and have pre-set volumes that increase significantly in the early years of the contract. We agreed to supply approximately 6.0 GW of wafers to JA Solar at a total contract price of $6.3 billion (RMB44.2 billion), approximately 0.9 GW of wafers to AIDE at a total contract price of $1.0 billion (RMB7.3 billion) and approximately 0.7 GW of wafers to Solarcell at a total contract price of $0.9 billion (RMB6.3 billion), over the terms of their respective supply contracts. We also agreed to supply 16,350 MT of polysilicon to Trina Solar at a total contract price of $1.5 billion (RMB10.3 billion) and 9,990 MT of polysilicon to Solarfun at a total contract price of $1.1 billion (RMB7.6 billion) over the terms of their respective supply contracts. Prior to our entry into these long-term supply contracts, we sold all of our polysilicon on the spot market to major Chinese solar manufacturers. We intend to enter into additional long-term supply contracts with a goal of selling approximately 85% of our output under long-term supply agreements and the remaining non-contracted portion of our polysilicon and wafers on the spot market in the future.

 

For the year ended December 31, 2007, we sold 153 MT of polysilicon. For the three months ended March 31, 2008, we sold 256 MT of polysilicon. Our revenues for the year ended December 31, 2007 and the three months ended March 31, 2008 were $40.8 million and $81.5 million, respectively. Net loss attributable to holders of ordinary shares was $2.9 million in the year ended December 31, 2007 and net profit attributable to holders of ordinary shares was $34.7 million in the three months ended March 31, 2008.

 

Our business in China is conducted through our subsidiary, Jiangsu Zhongneng Polysilicon Technology Development Co., Ltd., or JZPTD. For all periods for which financial statements are presented in this prospectus, we or our predecessor owned 64% of JZPTD. Prior to this offering, Sun Wave Group Ltd., or Sun Wave and Greatest Joy International Limited, or Greatest Joy, acquired 20% and 16% equity interest of JZPTD, respectively, from the remaining minority shareholders. These two companies are jointly owned by entities affiliated with Mr. Zhu Gongshan, our chairman, and Moonchu Foundation for Culture & Education, or Moonchu, a charitable entity established by Mr. Zhang Songyi, one of our directors, and his family. We intend to acquire Sun Wave and Greatest Joy concurrently with the closing of this offering so that we will own 100% of JZPTD. See “— Corporate Structure — Corporate Structure Immediately After the Acquisition and the Offering” and “Related Party Transactions — Acquisition of 36% JZPTD Onshore Equity Interests”.

 

 

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Our Competitive Strengths

 

We believe that the following competitive strengths of our company enable us to compete effectively and to capitalize on the rapid growth in the market for polysilicon and wafers:

 

   

proven capability in constructing and ramping up polysilicon production capacity;

 

   

contracted long-term customer revenues;

 

   

cost effective production process, facilities and operations; and

 

   

experienced management team.

 

Our Strategies

 

Our goal is to become a leading global supplier of wafers for the solar industry. We intend to achieve this goal by pursuing the following strategies:

 

   

significantly expanding polysilicon production capacity;

 

   

establishing in-house wafer production capacity;

 

   

entering into additional long-term wafer and polysilicon supply agreements;

 

   

reducing our production costs; and

 

   

selectively pursuing strategic acquisitions and alliances to expand our business.

 

Our Challenges

 

We believe that the following are some of the major risks and uncertainties that may materially affect our business, results of operations and financial condition:

 

   

our limited operating history may not serve as an adequate measure of our future prospects and results of operations;

 

   

if we are unable to manage our growth effectively, our business and financial results may be adversely affected;

 

   

we did not achieve profitability until the three months ended December 31, 2007 and we may not maintain profitability;

 

   

we currently rely on two wafer manufacturers to manufacture wafers for all of our wafer sales. Any event that prevents our current manufacturers from producing wafers for us, or our failure to successfully manage our relationship with these manufacturers or future manufacturers could damage our relationships with our customers, decrease our sales and limit our growth;

 

   

we may not be successful in producing polysilicon cost-effectively;

 

   

we do not yet have NDRC approval for the remaining 4,500 MT of our Phase III production facility and failure to get such approval could adversely affect our growth and profitability;

 

   

we have no experience in wafer production and may not be able to establish in-house production;

 

   

we do not have the land use rights on the land on which we are building our Phase III production facilities and we have not obtained the required construction permits for our Phase III production facilities. Without such rights and permits we may be forced to terminate the construction of our Phase III production facilities;

 

 

 

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we operate in a highly competitive market and we may not be able to compete successfully with competitors who have greater resources than us;

 

   

our future success depends substantially on our ability to significantly expand both our polysilicon production capacity and output, which exposes us to a number of risks and uncertainties;

 

   

any failure by us to control the use, to adequately restrict the discharge, of hazardous substances, or to obtain work safety and professional health approvals could subject us to potentially significant monetary damages and fines or suspensions in our business operations;

 

   

if we are unable to remedy the material weakness and significant deficiencies in our internal control over financial reporting, we may be unable to timely and accurately record, process and report financial data or comply with disclosure controls and procedures, internal control over financial reporting and other obligations;

 

   

Our Taixing joint venture has not obtained land use rights and related planning and construction permits for the buildings it is constructing and may be required to stop construction and cure deficiencies and could be subject to fines;

 

   

if we were required to obtain the prior approval of the MOFCOM, for or in connection with our restructuring, or of the CSRC, for or in connection with this offering and the listing and trading of our ADSs on the New York Stock Exchange, our failure to do so could have a material adverse effect on our business, operating results, reputation and trading price of our ADSs, and may also create uncertainties for this offering; and

 

   

uncertainties with respect to the Chinese legal system could have a material adverse effect on us.

 

See “Risk Factors” and other information included in this prospectus for a more detailed discussion of these and other risks, uncertainties and challenges that we face.

 

Corporate Information

 

Our principal executive offices are located at Suite 3601, Two Exchange Square, Central, Hong Kong and our telephone number at that location is (852) 2526 8368. Our registered office in the Cayman Islands is located at Offshore Incorporations (Cayman) Limited, Scotia Centre, 4th Floor, P.O. Box 2804, George Town, Grand Cayman KY1-1112, Cayman Islands. Our agent for service of process in the United States is CT Corporation System at 111 Eighth Avenue, 13th Floor, New York, New York 10011.

 

Our website address is http://www.gcl-silicon.com. Information contained on our website does not constitute a part of this prospectus.

 

Conventions Which Apply to This Prospectus

 

Except where the context otherwise requires and for purposes of this prospectus only:

 

   

“we,” “us,” “our company,” “our” and “GCL” refer to GCL Silicon Technology Holdings Inc., a Cayman Islands company, and its subsidiaries;

 

   

“ADSs” refers to our American depositary shares, each of which represents              ordinary shares, and “ADRs” refers to the American depositary receipts that evidence our ADSs;

 

   

“China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this prospectus only, Taiwan, Hong Kong and Macau;

 

 

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“GCL HK” refers to GCL Silicon Technology Holdings Limited, a Hong Kong company, wholly-owned by our company;

 

   

“Happy Genius” means Happy Genius Holdings Limited, our principal shareholder which is indirectly owned and controlled by Mr. Zhu Gongshan, our chairman;

 

   

“JZPTD” refers to Jiangsu Zhongneng Polysilicon Technology Development Co., Ltd., our operating company in China;

 

   

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

 

   

“convertible redeemable preferred shares” or “Series A Shares” refers to our Series A Convertible Redeemable Preferred Shares;

 

   

“floating rate bonds” refers to our Tranche A Floating Rate Secured Redeemable Bonds due 2009 and our Tranche B Floating Rate Secured Convertible Bonds due 2009;

 

   

“Golden Concord Group” refers to the group of companies controlled by Mr. Zhu Gongshan, our chairman;

 

   

“2008 Convertible Bonds” refers to the convertible bonds we intend to issue in connection with the acquisition of 36% of the equity interests of JZPTD from entities affiliated with Mr. Zhu Gongshan, our chairman, and Moonchu, concurrently with this offering, which will be transferred to the holders of exchangeable bonds issued by Happy Genius;

 

   

“watts” or “W” refer to the measurement of total electrical power, where “kilowatts” or “KW” means one thousand watts, “megawatts” or “MW” means one million watts and “gigawatts” or “GW” means one billion watts, GW when used to calculate the amount of wafers sold pursuant to our wafer contracts assume a conversion efficiency of 2.4 W per monocrystalline wafer and 3.7 W per multicrystalline wafer; and

 

   

all references to “RMB” or “Renminbi” refer to the legal currency of China; all references to “$,” “dollars” and “U.S. dollars” refer to the legal currency of the United States.

 

Unless otherwise mentioned, all numbers of our shares and ADSs set forth in this prospectus assume: (1) no exercise by the underwriters of their option to purchase up to             additional ADSs from the selling shareholders to cover over-allotments; (2) conversion of all outstanding convertible redeemable preferred shares into 16,667,000 ordinary shares upon completion of this offering; (3) conversion of our outstanding Tranche B Floating Rate Secured Convertible Bonds due 2009 into 27,183,400 ordinary shares, (4) the issuance of 268,537,970 shares to entities affiliated with Mr. Zhu Gongshan and Moonchu in connection with the acquisition of the 36% of JZPTD concurrently with the closing of this offering assuming that the ADSs are sold at $             per ADS (the midpoint of the estimated range of the initial public offering price). If the initial public offering price is less than $             per ADS, the number of shares issued will be lower, as discussed under “Related Party Transactions—Acquisition of 36% of JZPTD Onshore Equity Interests”; (5) exclusion of 50,000,000 ordinary shares issuable upon exercise of options issued under the 2007 Share Incentive Plan and 15,000,000 ordinary shares available for grant under our 2008 Restricted Share Compensation Plan; and (6) exclusion of              ordinary shares, issuable in the form of ADSs upon conversion of the 2008 Convertible Bonds being issued at the closing of this offering in connection with our purchase of the remaining 36% of JZPTD, assuming that the ADSs are sold at $             per ADS, the midpoint of the estimated range of the initial public offering price. See “Description of Share Capital — Tranche A Floating Rate Secured Redeemable Bonds due 2009 and Tranche B Floating Rate Secured Convertible Bonds due 2009”. Assuming the initial public offering price is $1.00 less than $             per ADS, the number of shares issued upon conversion would increase by              shares.

 

 

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This prospectus contains translations of certain Renminbi amounts into U.S. dollars at the rate of RMB7.0120 to $1.00, the noon buying rate in effect on March 31, 2008 in New York City for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On July 17, 2008, the noon buying rate was RMB6.8189 to $1.00.

 

 

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CORPORATE STRUCTURE

 

Ownership of Our Business

 

In March 2006, our operating subsidiary in China, JZPTD, was formed, as a limited liability company, by Guotai Energy Investments Ltd., or Guotai, Suyuan Group Ltd., or Suyuan, Beijing Zhongneng Renewable Energy Investments Ltd., or Beijing Zhongneng, Xuzhou Suyuan Group Ltd., or Xuzhou Suyuan, Nanjing Linyang Power Investment, or Nanjing Linyang and Hebei Jinglong Group Ltd., or Hebei Jinglong. At JZPTD’s inception, Guotai, Suyuan, Beijing Zhongneng, Xuzhou Suyuan, Nanjing Linyang and Hebei Jinglong held 55%, 15%, 10%, 10%, 5% and 5%, respectively, of JZPTD. Guotai and Beijing Zhongneng were originally owned by Mr. Zhu Gongshan. In September 2007, Mr. Zhu Gongshan became our chairman as a result of the transactions described below.

 

In November 2006, GCL Silicon Technology Holdings Limited, or GCL HK, was formed as a limited liability company in Hong Kong. Mr. Zhang Songyi owned a controlling interest in GCL HK through Happy Genius. GCL HK agreed to purchase 64% of JZPTD from Guotai and Beijing Zhongneng on November 29, 2006 and completed the purchase on December 13, 2006. In May 2007, our company was formed in the Cayman Islands and owned by Mr. Zhang Songyi through Happy Genius.

 

From December 2006 to April 2007, Mr. Zhang Songyi sold shares of Happy Genius to various individuals and institutional investors aggregating approximately 10% of the ownership of Happy Genius, a substantial majority of the proceeds of which were downstreamed through Happy Genius and GCL HK to JZPTD to finance the construction of our Phase I production facility and provide working capital. On August 10, 2007, Mr. Zhang Songyi agreed to sell the remaining shares of Happy Genius held by him, after completion of the reorganization discussed below, to Boulina Investments Limited, or Boulina, a company owned by Mr. Zhu Gongshan. On August 21, 2007, as part of the reorganization, the shareholders of Happy Genius exchanged approximately 25% of the ownership interest of Happy Genius for approximately 25% of our ordinary shares. Also, Happy Genius exchanged all of its ownership interest in GCL HK for approximately 75% of our shares. In September 2007, the previously agreed transfer of ownership of Happy Genius was completed from Mr. Zhang Songyi to Boulina. As a result of these transactions, Mr. Zhu Gongshan became the indirect owner of all the outstanding shares of Happy Genius, which owned approximately 75% of our ordinary shares, Mr. Zhang Songyi became the indirect owner of approximately 15% of our ordinary shares and other shareholders became the owners of an aggregate of approximately 10% of our shares. We became the indirect owner of 64% of the equity interest in JZPTD indirectly through GCL HK.

 

In December 2007, Sun Wave and Greatest Joy, companies owned by entities affiliated with Mr. Zhu Gongshan and Moonchu, agreed to acquire 20% and 16% of JZPTD, respectively, from the remaining minority shareholders for an aggregate purchase price of $430.5 million. These purchases were completed in early May and early June 2008. Concurrently with the closing of this offering, we will acquire Sun Wave and Greatest Joy, which hold the remaining 36% of JZPTD. As a result, JZPTD will become our wholly-owned indirect subsidiary.

 

As consideration for our acquisition of Sun Wave and Greatest Joy, we intend to: (1) pay $240.6 million to entities affiliated with Mr. Zhu Gongshan and Moonchu, in cash using a portion of the proceeds from the offering, which will be used partially to redeem the exchangeable bonds issued by Happy Genius; (2) issue the 2008 Convertible Bonds to entities affiliated with Mr. Zhu Gongshan and Moonchu in the aggregate principal amount of $446.9 million which will be exchanged for the exchangeable bonds issued by Happy Genius; and (3) issue 268,537,970 of our shares to entities affiliated with Mr. Zhu Gongshan and Moonchu. The purchase price and the form of consideration were established through negotiations involving the sellers, our shareholders and holders of the exchangeable bonds issued by Happy Genius and were approved by our shareholders in July 2008. See “Related Party Transactions — Acquisition of 36% JZPTD Onshore Equity Interests”.

 

 

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Corporate Structure Immediately After the Acquisition and the Offering

 

The following chart sets forth our corporate structure immediately after the offering, assuming that the underwriters do not exercise their option to purchase additional ADSs:

 

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Notes:

 

  (1)   Includes entities owned and controlled by Mr. Zhu Gongshan.
  (2)   Includes Mandra Esop Ltd., or Mandra Esop, and Mandra Materials Ltd., or Mandra Materials, Mandra Esop and Mandra Materials are entities owned and controlled by Mr. Zhang Songyi.
  (3)   Moonchu wholly owns Woo Foong Hong Ltd., or Woo Foong Hong. Woo Foong Hong wholly owns Mandra Silicon, which is the direct holder of shares of Sun Wave and Greatest Joy. See Notes (4) and (5) below.
  (4)   Immediately prior to the offering, Sun Wave was 82% owned by Happy Genius and 18% owned by Mandra Silicon, an entity indirectly owned by Moonchu.
  (5)   Immediately prior to the offering, Greatest Joy was 82% owned by Happy Genius and 18% owned by Mandra Silicon, an entity indirectly owned by Moonchu.

 

 

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THE OFFERING

 

Offering price

$             per ADS.

 

ADSs offered by us

              ADSs.

 

ADSs outstanding immediately after this offering

              ADSs.

 

Ordinary shares outstanding immediately after this offering

              ordinary shares, par value $0.00001 per share.

 

Ordinary shares

Each ordinary share is entitled to one vote on all matters subject to shareholders’ vote.

 

The ADSs

Each ADS represents              of our ordinary shares, par value $0.00001 per share. The ADSs will be evidenced by ADRs.

 

   

The depositary will hold the shares underlying your ADSs. You will have rights as provided in the deposit agreement.

 

   

If, however, we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after deducting its fees and expenses.

 

   

You may turn in your ADSs to the depositary in exchange for ordinary shares. The depositary will charge you fees for any exchange.

 

   

We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.

 

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

 

Over-allotment option

The selling shareholders have granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to          additional ADSs at the offering price less underwriting discounts and commissions.

 

Use of Proceeds

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

 

   

approximately $400 million for contribution to JZPTD;

 

   

$20.0 million to redeem the Tranche A Floating Rate Secured Redeemable Bonds due 2009 issued by us in September 2007;

 

 

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$240.6 million to acquire Sun Wave and Greatest Joy in connection with our acquisition of 36% of JZPTD from our affiliates;

 

   

approximately $15.3 million to repay the principal of, and fees in connection with arranging a short-term loan, in June 2008, from Happy Genius, our controlling shareholder; and

 

   

the remaining amount for general corporate purposes, including potential acquisitions or investments such as wafer operations. We are currently in preliminary discussions with one of our tolling wafer producers, Huasheng, with respect to a potential acquisition of such producer.

 

Proceeds in the amount of approximately $400 million contributed to JZPTD will be used to fund the capital expenditures related to our Phase III production facilities expansion and our in-house wafer production facilities.

 

The $240.6 million to be used as part of the consideration to acquire the remaining 36% of JZPTD, which will be payable to entities affiliated with Mr. Zhu Gongshan and Moonchu, will be used to partially redeem the exchangeable bonds issued by Happy Genius.

 

See “Use of Proceeds” for additional information.

 

We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.

 

Lock-up

We, each of the selling shareholders, our directors and executive officers and             % of our other existing holders and beneficial owners of our ordinary shares, except for persons subject to the restrictions in the following sentence, have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or dispose of, directly or indirectly, any of our ADSs or ordinary shares or securities convertible into or exercisable or exchangeable for our ADSs or ordinary shares for a period of 180 days following the date of this prospectus. In addition, holders and owners of economic and beneficial interests of the 2008 Convertible Bonds that will be issued concurrently with the closing of this offering in exchange for exchangeable bonds issued by Happy Genius are expected to agree with the underwriters, subject to certain exceptions, not to sell, transfer or dispose of, directly or indirectly, any of the 2008 Convertible Bonds or enter into certain hedging transactions with respect to the 2008 Convertible Bonds for a period of 130 days following the date of this prospectus. See “Underwriting” for more information.

 

Listing

We have applied to list the ADSs on the New York Stock Exchange under the symbol “GCL.” Our ADSs and ordinary shares will not be listed on any other stock exchange or traded on any automated quotation system.

 

 

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Risk Factors

See “Risk Factors” and other information included in this prospectus for a discussion of risks you should carefully consider before investing in our ADSs.

 

Depositary

The Bank of New York Mellon.

 

Reserved ADSs

At our request, the underwriters have reserved for sale, at the initial public offering price, up to an aggregate of              ADSs, to certain of our directors, officers, employees or their friends and families, business associates and other persons associated with us through a directed share program.
 

 

 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

 

The following tables present the summary consolidated financial information of us and our predecessor, JZPTD. You should read the following information in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The historic results are not necessarily indicative of results to be expected in any future period.

 

The following summary consolidated statement of operations data and consolidated statement of cash flow data for the period from March 7, 2006 to December 13, 2006 (predecessor), the period from November 13, 2006 to December 31, 2006 (successor) and the year ended December 31, 2007 (successor) and the consolidated balance sheet data as of December 31, 2006 and December 31, 2007 have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. JZPTD is considered our predecessor because we acquired 64% of the equity interest in JZPTD on December 13, 2006 and our own operations prior to the succession were insignificant relative to the operations assumed or acquired.

 

The following summary consolidated statement of operations data and consolidated statement of cash flow data for the three months ended March 31, 2007 and 2008 and the summary consolidated balance sheet data as of March 31, 2008 have been derived from the unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited pro forma balance sheet information as of March 31, 2008, which is derived from information included in our unaudited condensed consolidated financial statements included elsewhere in this prospectus, assumes the conversion upon completion of this offering of our convertible redeemable preferred shares and the convertible portion of our floating rate bonds. We have prepared the unaudited condensed consolidated financial statements on the same basis as the audited consolidated financial statements. The unaudited financial information includes all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented. The unaudited results for the three months ended March 31, 2008 may not be indicative of our results for the full year ending December 31, 2008.

 

 

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     March 7, 2006
to December 13,
2006
(Predecessor)
    November 13,
2006 to
December 31,
2006
(Successor)
    Year Ended
December 31,
2007
(Successor)
    Three Months Ended
March 31,
 
           2007
(Successor)
    2008
(Successor)
 
    

(in thousands, except per share and per ADS data)

 
   

Consolidated Statements of Operations Data

            
 

Revenues

   $     $     $ 40,848     $     $ 81,531  

Gross profit

                 29,852             63,048  

Operating income (loss)

     (2,776 )     (239 )     12,016       (1,179)       59,487  

(Loss) income before income tax and minority interest

     (3,449 )     (330 )     6,867       (1,968 )     56,378  

Net (loss) income

     (3,449 )     (212 )     (1,796 )     (1,304 )     35,522  

Deemed distribution on convertible redeemable preferred shares-accretion of redemption premium

                 (1,111 )           (833 )

Net (loss) income attributable to holders of ordinary shares

   $ (3,449 )   $ (212 )   $ (2,907 )   $ (1,304 )   $ 34,689  

Weighted average shares used in (loss) earnings per share calculation

          

Basic—ordinary share

       1,000,000       994,292       1,000,000       981,355  

Basic—convertible redeemable preferred share

                         16,667  

Diluted—ordinary share

       1,000,000       994,292       1,000,000       983,094  

(Loss) earnings per ordinary share and ADS

          

Basic—ordinary share

       (0.0002 )     (0.0029 )     (0.0013 )     0.0348  

Basic—convertible redeemable preferred share

                         0.0847  

Diluted—ordinary share

       (0.0002 )     (0.0029 )     (0.0013 )     0.0347  

Basic—ADS

          

Diluted—ADS

          

Weighted average shares used in proforma earnings per ordinary share

          

Basic

             [             ]

Diluted

            
 
[            
 
]
 

Proforma earnings per ordinary share and ADS

          

Basic—ordinary share

            
 
[            
 
]
 

Diluted—ordinary share

            
 
[            
 
]
 

Basic—ADS

          

Diluted—ADS

          

 

 

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     March 7,
2006 to
December 13,
2006
(Predecessor)
    November 13,
2006 to
December 31,
2006
(Successor)
    Year Ended
December 31, 2007
(Successor)
    Three Months Ended
March 31,
 
           2007
(Successor)
    2008
(Successor)
 
     (in thousands)  

Consolidated Statements of Cash Flow Data

          

Net cash (used in) provided by operating activities

   $ (2,782 )   $ (842 )   $ 15,515     $ (2,475 )   $ 84,136  

Net cash (used in) provided by investing activities

     (60,857 )     1,865       (96,716 )     (10,847 )     (90,306 )

Net cash (used in) provided by financing activities

     87,670       4,010       116,120      
30,006
 
   
(51
)

Capital expenditures(1)

     (40,928 )     (6,562 )     (96,025 )     (28,317 )     (89,572 )

 

Note:

 

  (1)   Capital expenditures consists of payments for purchase of property, plant and equipment and deposits for purchase of plant and equipment.

 

     December 31,
2006
(Successor)
   December 31,
2007
(Successor)
    March 31,
2008
(Successor)
    March 31,
2008

Pro Forma
(Successor)
 
     (in thousands)  

Consolidated Balance Sheet Data

         

Cash and cash equivalents

   $ 5,033    $ 40,067     $ 35,205     $ 16,894  

Total current assets

     21,840      63,724       65,507       45,507  

Property, plant and equipment, net

     18,909      141,731       227,311    

Total assets

     94,291      232,970       339,449       317,628  

Distribution payable

                      240,625  

Total current liabilities

     49,258      60,948       83,745       324,370  

Floating rate bonds

          62,099       63,904        

Convertible bonds

                      446,875  

Total liabilities

     82,680      181,697      
233,006
 
    856,602  

Minority interest

     9,823      34,935       58,607       58,607  

Series A convertible redeemable preferred shares

          21,111       21,944        

Total shareholders’ equity (deficit)

     1,788      (4,773 )     25,892       (597,581 )

 

     March 7,
2006 to
December 13,
2006
(Predecessor)
   November 13,
2006 to
December 31,
2006
(Successor)
   Year Ended
December 31, 2007
(Successor)
   Three Months
Ended
March 31, 2008
(Successor)

Selected Operating Data

           

Polysilicon produced (in MT)

               154      302

Polysilicon sold (in MT)

               153      256

Average polysilicon selling price (net of VAT) (per kg)

   $   —    $   —    $ 267    $ 318

 

 

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RISK FACTORS

 

An investment in our ADSs involves significant risks. You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, 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 if it actually occurs. 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 Business

 

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

 

We have only limited historical operating data and financial information available on our company upon which you can base your evaluation of our business and prospects. Our business was founded in March 2006 and we only began manufacturing polysilicon in September 2007. We only began commercial shipment of polysilicon in October 2007. As a result, we sold only a limited amount of polysilicon and we have never manufactured wafers in-house. In the second quarter of 2008, we began selling wafers produced for us through tolling arrangements with third party wafer manufacturers. Several members of our senior management and key employees have worked together at our company for a relatively short period of time. Our chief executive officer and director, Mr. Hunter Jiang, joined us in September 2007. Our chief financial officer, Mr. Zou Jun, joined us in May 2008. Our three independent directors will join us only upon our listing on the New York Stock Exchange. As a result, we may not have sufficient experience to address the risks frequently encountered by companies with limited operating history, including our potential failure to:

 

   

increase our polysilicon manufacturing capacity significantly beyond current levels;

 

   

successfully manufacture wafers;

 

   

maintain profitability;

 

   

acquire and retain customers;

 

   

attract, train, motivate and retain qualified personnel;

 

   

keep up with evolving industry standards and market developments;

 

   

manage our expanding operations and product offerings, including the integration of any future acquisitions;

 

   

anticipate and adapt to any changes in government regulation, mergers and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics;

 

   

maintain adequate control over our costs and expenses; or

 

   

manage risks relating to intellectual property rights, including the documentation and protection of our proprietary technologies.

 

If we fail to address any of these risks, our business and financial results would be materially and adversely affected. Accordingly, you should consider our business and prospects in light of the risks, expenses and challenges that we will face as a company with limited operating history seeking to produce polysilicon and wafers in a rapidly growing market.

 

If we are unable to manage our growth effectively, our business and financial results may be adversely affected.

 

We have experienced a period of rapid growth and expansion that has placed, and continues to place, significant strain on our management and resources. To accommodate our growth, we anticipate that we will

 

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need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems, all of which require substantial management efforts. We also will need to continue to expand, train, manage and motivate our workforce and manage our customer relationships. All of these endeavors will require substantial management effort and skill and require significant additional expenditures. We cannot assure you that we will be able to manage our growth effectively, and any failure to do so may have a material adverse effect on our business and financial results.

 

We did not achieve profitability until the three months ended December 31, 2007 and we may not maintain profitability.

 

We incurred net losses attributable to holders of ordinary shares of $3.4 million, $0.2 million and $2.9 million in the period from March 7, 2006 to December 13, 2006, the period from November 13, 2006 to December 31, 2006 and the year ended December 31, 2007, respectively, and achieved a net income attributable to holders of ordinary shares of $34.7 million in the three months ended March 31, 2008. As of December 31, 2007 and March 31, 2008, we had accumulated a deficit of $23.1 million and retained earnings of $11.6 million, respectively. Our initial losses resulted principally from general and administrative expenses and interest expenses. In addition, we will have start-up expenses for our expansion facilities, increased compensation expenses from our option issuances, depreciation of our expanded facilities, amortization of intangible assets acquired in our purchase of the 36% JZPTD we will own upon the completion of the offering and increased interest expenses related to additional borrowings to support our growth. Further, while we achieved a net income attributable to holders of ordinary shares of $34.7 million for the three months ended March 31, 2008, our profitability may decline for the three months ended June 30, 2008. We also expect our net income may further decline for the three months ending September 30, 2008, and we may not be able to achieve or maintain profitability in the near term. We expect these declines as all of our revenues in the three months ended March 31, 2008 were derived from spot market sales, while our revenues in later periods have been and will be increasingly derived from our long-term polysilicon or wafer supply contracts. Under these long-term supply contracts, we recognize revenues on a weighted average basis, and the resulting per unit selling price for polysilicon or wafers is significantly lower than our historical spot market sales prices and lower than the initial set prices in the early years of our long-term contracts. For the three months ended June 30, 2008, a substantial majority of our revenues continued to be derived from spot market sales, and we expect that for the three months ending September 30, 2008, less than 50% of our sales volumes will be derived from spot market sales. Historical losses have had an adverse effect on our working capital, total assets and stockholders’ equity. Due to the numerous risks and uncertainties associated with growing our business, we may not be able to achieve long-term profitability. If we fail to maintain profitability in the future, the market price of our ADSs could decline.

 

We currently rely on wafer tolling producers to manufacture wafers for all of our wafer sales. Any event that prevents our current third party manufacturers from producing wafers for us, or our failure to successfully manage our relationships with these manufacturers or our future manufacturers could damage our relationships with our customers, cause us to default on our long-term wafer supply agreements, decrease our sales and limit our growth.

 

Currently, we do not own or operate any wafer production facility. Instead we rely on wafer tolling arrangements with third parties to manufacture our wafers. Even though we have plans to produce wafers in-house by the end of 2009, and we are currently in preliminary discussions with Huasheng with respect to a potential acquisition, we do not expect our in-house wafer production to entirely replace our reliance on wafer tolling arrangements. Presently, Huasheng and Hebei Ningjin Songgong Semiconductor Co., Ltd., or Hebei Semiconductor, manufacture all of our wafers. As a result, if either of these companies experiences any catastrophic or other event that causes them to be unable to conduct manufacturing operations, or otherwise chooses to discontinue manufacturing wafers, our ability to sell wafers would be adversely impacted. Even if other manufacturers were willing to produce wafers for us, they may be unable to provide us with the same pricing, committed capacity, or be able to manufacture our wafers with the same yield rate or quality, as we

 

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currently have with Huasheng or Hebei Semiconductor. Most of the wafers produced for us by Huasheng and Hebei Semiconductor are committed to customers under our long-term wafer supply agreements. Failure of either to meet their obligations under the tolling agreements could result in our default under such long-term wafer supply contracts. As a result, we are highly dependent on our relationship with our wafer manufacturers and their continued ability to manufacture our wafers, to maintain our revenues and customer relationships.

 

There are additional risks associated with our reliance on wafer tolling arrangements with third parties, including:

 

   

their inability to increase production and achieve acceptable quality on a timely basis;

 

   

reduced control over delivery schedules and product quality;

 

   

limited warranties on wafers supplied to us;

 

   

shortages of materials and consumables other than polysilicon that wafer manufacturers use to manufacture wafers;

 

   

labor shortages, strikes or disputes; and

 

   

actions taken by such third-parties that breach our agreements.

 

We may not be successful in producing polysilicon cost-effectively.

 

We made our first commercial shipment of polysilicon in October 2007. We have limited operating experience and may face significant challenges relating to polysilicon production. The technology used to manufacture polysilicon is complex, requires costly equipment and is continuously being modified in an effort to improve yields and product performance. Microscopic impurities such as dust and other contaminants, difficulties in the manufacturing process, disruptions in the supply of utilities or defects in the key materials and tools used to manufacture polysilicon could interrupt manufacturing, reduce yields or cause a portion of the polysilicon to be rejected by our customers or be difficult or costly to use in wafer production, which would negatively affect our profitability. If we are unable to build our polysilicon production capability on a timely basis, or if we face technological difficulties in our production of polysilicon, we may be unable to achieve cost-effective production of polysilicon which could prevent us from competing successfully in the polysilicon and wafer markets.

 

Our effective capacity and ability to produce high volumes of polysilicon depend on the cycle times for each batch of polysilicon. We may encounter problems in our manufacturing process or facilities as a result of, among other things, production failures, construction delays, human error, equipment malfunction or process contamination, all of which could seriously harm our operations. We may experience production delays if any modifications we make in the manufacturing process to shorten production cycles are unsuccessful. Moreover, the failure to achieve acceptable manufacturing levels may cause our polysilicon costs not to be competitive, which could adversely affect our business, financial condition and results of operations.

 

We expect the price of polysilicon to decrease in the future. In order for us to maintain profitability, we need to reduce costs, in particular TCS costs. We believe the market price of TCS, which is the principal raw material used for polysilicon production, will remain high in the near future. See “—We will need to purchase TCS in substantial quantities to operate our production facilities and if we are unable to source such TCS at a reasonable cost or at all, it could have a material adverse effect on our financial condition and results of operations.” If we are unable to reduce TCS costs, we may not be able to cost-effectively produce polysilicon, which will adversely affect our business, financial condition and results of operations.

 

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We may not be able to complete our hydrogenation process and in-house TCS production facilities within our expected timeframe, within our budget, or at all, and may not be more cost-efficient than purchasing TCS from third party suppliers.

 

TCS is one of the main and most costly raw materials in the production of polysilicon, the costs of which accounted for a majority of our total cost of sales for the year ended December 31, 2007 and the three months ended March 31, 2008. We intend to reduce production costs by producing TCS internally and through our affiliates. We own a 70% controlling interest in the Taixing joint venture which is constructing a TCS production facility with an initial annual capacity of 20,000 MT expected to commence pilot production shortly after this offering. We intend to increase the Taixing joint venture annual TCS production capacity to up to 60,000 MT by 2010. We intend to commence construction of a hydrogenation facility and a TCS production facility in Xuzhou in August 2008 which we expect to have combined capacity to produce up to 90,000 MT of TCS per year by the third quarter of 2009. However, the production of TCS is difficult and requires strict controls over the management of raw materials and over the production process itself. We have no previous experience in the production of TCS. Therefore, we cannot assure you that we will complete our TCS production facilities within the expected timeframe, within our budget or at all, or that our own production of TCS will be more cost-efficient than purchasing TCS from third party suppliers. Any failure to complete our TCS production facilities may have a material adverse effect on our business, prospects, financial condition and results of operations.

 

We do not yet have approval for the remaining 4,500 MT of our Phase III production facilities and failure to obtain such approval could adversely affect our growth and profitability.

 

We have obtained approval to produce an aggregate annual production of 6,000 MT of polysilicon at our Phase III production facilities, and intend to apply for approval from NDRC for an additional 4,500 MT annual production capacity. Such approval is required before we can increase our investment to construct the additional 4,500 MT annual production capacity and commence construction of such facilities. If we are not able to get such approval, we will not be able to achieve a production capacity of 13,500 MT per year by March 2010, which could delay our expansion and could adversely affect our growth and profitability.

 

We have no experience in wafer production and may not be able to establish in-house production.

 

Our strategy includes commencing our own wafer production on a pilot basis by the third quarter of 2009. We intend to use a portion of the proceeds of this offering to procure the necessary equipment, land and other facilities to construct our in-house wafer production facility. If equipment suppliers fail to deliver, or delay the delivery of, our equipment for any reason, the implementation of our expansion plan would be materially and adversely affected. In addition, there are limited sources of supply for the principal wafer manufacturing equipment we intend to use and we may not be able to replace such sources at all, at reasonable costs and on a timely basis to implement our wafer production expansion plan.

 

To carry out our wafer production strategy we will need to integrate the personnel we have hired to create an effective team and infrastructure to supervise construction and oversee the start-up and operation of our production facility.

 

We cannot assure you that we will be able to establish our own wafer production capacity on a timely basis or at all. Our ability to successfully establish wafer manufacturing capacity and to increase sales is subject to various risks and uncertainties, including:

 

   

the need to acquire the land on which to construct our wafer production facility at a reasonable cost and on a timely basis;

 

   

the need to procure wafer production equipment at reasonable costs and on a timely basis;

 

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the need to procure supplies of consumables and other materials at reasonable costs and on a timely basis;

 

   

the need to raise additional funds to finance our purchase of equipment and the construction of manufacturing facilities, which we may be unable to obtain on reasonable terms or at all;

 

   

construction delays and cost overruns;

 

   

difficulties in recruitment and training of additional skilled employees, including technicians and managers at different levels;

 

   

diversion of significant management attention and other resources;

 

   

delays or denials of required permits and approvals for our land acquisition, plant construction and operations, including but not limited to environmental approvals, by relevant government authorities;

 

   

the need to achieve acceptable wafer yields, thickness and quality; and

 

   

the need to produce wafers cost-effectively.

 

We will need to purchase TCS in substantial quantities to operate our production facilities and if we are unable to source such TCS at a reasonable cost or at all, it could have a material adverse effect on our financial condition and results of operations.

 

Before we are able to produce TCS internally or through our affiliates, we will need to purchase most of the TCS required for our production of polysilicon. The quality of TCS that we have been able to purchase has fluctuated, and the price has increased substantially since we commenced TCS procurement. Even if we or our affiliates are able to produce TCS, we may from time to time be required to purchase from external sources a substantial quantity of the TCS required for our production of polysilicon. Although we have a controlling interest in the Taixing joint venture to produce TCS, the Taixing joint venture will not start production until shortly after this offering, or at all. See “— Our Taixing joint venture has not obtained the land use rights and related planning and construction permits for the buildings it is constructing and may be required to stop construction and cure deficiencies and could be subject to fines.” The expansion or development of polysilicon production capacity by existing or new solar industry participants could increase the price or limit the supply of TCS available to us. If we are unable to source the TCS we require at a reasonable cost or at all, it could have a material adverse effect on our financial condition and results of operations.

 

The production of polysilicon presents operational difficulties and dangers; if we are unable to operate effectively or natural disasters or operational disruptions occur, our business, results of operations and financial condition could be adversely affected.

 

Production of polysilicon requires the use of volatile materials and chemical reactions sensitive to temperature, pressure and requires the use of external controls to maintain safety and provide commercial production yields. For example, in the production of polysilicon we use TCS, which is a type of chlorosilane gas that when purified can be a highly combustible substance upon contact with moisture in the air and is therefore potentially destructive and extremely dangerous if mishandled or used in uncontrolled circumstances. The occurrence of a catastrophic event involving TCS as a result of a natural disaster or human error or otherwise at one of our polysilicon production facilities could threaten, disrupt or destroy a significant portion or all of our polysilicon production capacity at such facility for a significant period of time. Additionally, our polysilicon production facilities, in particular, are highly reliant on our ability to maintain temperatures and pressure at appropriate levels, the supply of steam at a consistent pressure level, the availability of adequate electricity and our ability to control the application of such electricity. Accordingly, mistakes in operating our equipment or an interruption in the supply of electricity at our production facilities could result in the production of substandard polysilicon or substantial shortfalls in production and could reduce our production capacity for a significant period of time. In connection with the start up of our Phase II production facility, we experienced trial production

 

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quality issues caused by a shortfall in the supply of steam to our Phase II production facility. Damage from any such events or disruptions may not be adequately covered by insurance, and could also damage our reputation, any of which could have a material adverse effect on our business, operating results and financial condition.

 

Polysilicon and wafer production is energy-intensive and if our energy costs rise or if our energy supplies are disrupted, our results of operations will be materially adversely affected.

 

The polysilicon production process is highly dependent on a constant supply of electricity to maintain the optimal conditions for polysilicon production. The wafer production process is similarly dependent on electricity. If these levels are not maintained, we may experience significant delays in the production of polysilicon and wafers. With the rapid development of the PRC economy, demand for electricity has continued to increase. There have been shortages in electricity supply in various regions across China, especially during peak seasons, such as summer. We currently depend on four different and independent grid sources of electric power, but we do not have any backup electricity generators in case there is a power shortage. In the event that energy supplies to our manufacturing facilities are disrupted, our business, results of operations and financial condition could be materially and adversely affected. In addition to shortages, we are subject to potential risks of interruptions in energy supply due to equipment failure, weather events or other causes. There can be no assurance that we will not face power related problems in the future.

 

Even if we had access to sufficient sources of electricity, as we consume substantial amounts of electricity in our manufacturing process, any significant increase in the costs of electricity could adversely affect our profitability. Our supply arrangement with our sole electric power supplier, the Xuzhou Electricity Company, does not provide protection against electricity price fluctuations. In June 2008, the National Development and Reform Commission of the People’s Republic of China announced an increase in electricity rates by RMB0.025 per kwh. Although this policy has not been implemented in Xuzhou to date, we expect an increase in the future. The electricity price in China will also be largely dependent on the price for coal, which has been increasing. If energy costs were to rise, our business, financial condition, results of operations or liquidity position could be adversely affected.

 

We obtain certain production equipment from a limited number of suppliers and if such equipment is not delivered on time, is damaged in shipment or is otherwise unavailable, our ability to deliver polysilicon and wafers on time will suffer, which in turn could result in order cancellations and loss of revenue.

 

Our operations and expansion plans depend on our ability to obtain a sufficient amount of equipment that meets our specifications on a timely basis. Some of our equipment used in polysilicon, TCS and wafer production is not readily available from alternative vendors and would be difficult to repair or replace if it were to become damaged or stop working. If any of these suppliers were to experience financial difficulties or go out of business, or if there were any damage to or a breakdown of our production equipment, our business would suffer. In addition, a supplier’s failure to supply our ordered equipment in a timely manner, with adequate quality and on terms acceptable to us, could delay the capacity expansion of our manufacturing facilities and otherwise disrupt our production schedule or increase our costs of production. Failure to obtain equipment meeting our specifications could have a material adverse effect on our business, financial condition and results of operations.

 

We have experienced significant delays in the delivery of our key equipment in the past. For example, the delivery of our Phase I reactors was delayed up to six months from the original contracted delivery schedule. In the event we experience delays in equipment deliveries for any of our production facilities in the future, we will not be able to increase our output at the rates we anticipate. In addition, demand for polysilicon and wafer production equipment may result in significant increases to prices of such equipment or shortages in related components for our intended expansion. If deliveries are delayed or such prices increase beyond our expectations, our business, financial condition and results of operations would be adversely affected.

 

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We have sourced and will continue to source some of our production equipment from PRC manufacturers and we cannot assure you that this domestically sourced equipment will perform at the same level as our imported equipment or will meet our quality requirements.

 

We have purchased key equipment from domestic suppliers. In particular, 13 out of a total of 18 reactors for our Phase II production facility were purchased from domestic suppliers. In our Phase III production facility, we intend to use substantially all domestic reactors. We have entered into a reactor supply agreement with Tap Mate Limited to obtain 144 reactors manufactured by Shanghai Morimatsu Chemical Equipment Engineering Co., Ltd., or Shanghai Morimatsu. We have separately entered into a guaranty agreement with Tap Mate Limited and Shanghai Morimatsu, under which Shanghai Morimatsu has guaranteed the obligations of Tap Mate Limited under the reactor supply agreement. A substantial number of these reactors will be used for our Phase III production facility. Shanghai Morimatsu, like the other domestic suppliers of our reactors, has limited experience in producing polysilicon reactors. Although we believe the domestic reactors we have purchased and have contracted to purchase are of at least similar quality as those we have sourced from foreign suppliers, these locally made reactors may not perform at similar levels of quality and reliability or they may not be delivered in a timely manner. We cannot assure you that the polysilicon we may produce using equipment from domestic suppliers will be of similar quality or quantity as those we currently produce which may lead to rejections of our polysilicon by our customers. In the event the domestic equipment does not perform as well as the imported equipment or does not perform at all, our business, financial condition and results of operations could be adversely affected.

 

In addition, certain components of the hydrochlorination equipment for our Phase I production facility, most of which were sourced from domestic suppliers, have shown significant corrosion, which has increased and may continue to increase our maintenance costs and may adversely affect our results of operations. While we have replaced the affected parts and have required the domestic suppliers to improve the quality of the components supplied to us, we cannot assure you that the components we will receive from such suppliers will meet our quality requirements in the future.

 

We do not have the land use rights on the land on which we are building our Phase III production facilities and we have not obtained the required construction permits for our Phase III production facilities. Without such rights and permits, we may be forced to terminate the construction of our Phase III production facilities.

 

Our Phase III production facility is being built on 80.9 acres of land adjacent to our Phase I and Phase II production facilities in the Xuzhou Economic Development Zone in Jiangsu Province, China. Under PRC law, the land use right of such parcel cannot be granted until various governmental approvals have been obtained and successfully winning the public auction in connection with such parcel. With the knowledge of the Xuzhou Economic and Development Committee and pursuant to a memorandum of understanding between us and such Committee, we have commenced the construction of our Phase III production facility without winning the public auction for the sale of such parcel and the receipt of all necessary approvals. We expect such public auction to occur in the third quarter of 2008. Because we do not have the land use right for the underlying land, we have not obtained the required construction or zoning permits for the construction of our Phase III production facility, and therefore we are not be the rightful owner for this facility. In addition, construction on land prior to its legal approval for sale is a violation of PRC law and could result in prosecution of us and the imposition of monetary penalties, which could be substantial. In the event we fail to obtain the land use rights, we will need to locate another site and delay our planned expansion which will have a material impact on our ability to meet contractual obligations to our customers. As a result, we may incur a loss on the cost of constructing our Phase III production facility on our current site, which will negatively affect our profitability. We cannot assure you that we will be able to obtain the formal land use rights for the construction of our Phase III production facility. Our rights as owner or occupier of the parcel on which our current Phase III production facility is located and buildings on such parcel may be adversely affected as a result of the absence of formal land use rights and we may be subject to lawsuits or other actions taken against us and/or lose the right to continue to operate on such property.

 

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Our Taixing joint venture has not obtained land use rights and related planning and construction permits for the buildings it is constructing and may be required to stop construction and cure deficiencies and could be subject to fines.

 

Our Taixing joint venture does not have land use rights to the land on which construction has begun and does not have the required planning and construction permits for the buildings it is constructing. The joint venture could be required to stop construction of the project and cure the deficiencies and could be subject to a fine related to such construction. If the joint venture is unable to obtain the necessary approvals and land use rights, it would not be able to produce TCS for us and we will need to continue to source TCS from third parties, which could prevent us from achieving self sufficiency in TCS production and adversely affect our results of operations.

 

We operate in a highly competitive market and we may not be able to compete successfully with competitors who have greater resources than us.

 

The solar wafer market is highly competitive and the polysilicon market is expected to become increasingly competitive. While we currently do not manufacture wafers, we compete directly with wafer manufacturers for wafer sales. Our competitors include polysilicon producers, such as DC Chemical Co., Ltd., or DC Chemical, Hemlock Semiconductor Corporation, or Hemlock, Osaka Titanium Technologies Co., Ltd., or Osaka Titanium, MEMC Electronic Materials, Inc., or MEMC, Renewable Energy Corporation ASA, or REC, Tokuyama Corporation, or Tokuyama, Wacker Chemie AG, or Wacker, and wafer manufacturers, such as Deutsche Solar AG, a subsidiary of Solarworld AG, or SolarWorld, Green Energy Technology, Inc., or Green Energy, Glory Silicon Energy Co., Ltd., or Glory Silicon, Jiangsu Shunda PV-Tech Co., Ltd., or Shunda, Jinglong Industry and Commerce Group Co., Ltd., or Jinglong, Kyocera Corporation, or Kyocera, LDK Solar Co., Ltd., or LDK Solar, MEMC, M.SETEK Co. Ltd., or M.SETEK, PV Crystalox Solar AG, or PV Crystalox, REC, ReneSola Ltd., or ReneSola, and Sino-American Silicon Products Inc., or Sino-American Silicon. We also compete with producers of upgraded metallurgical silicon such as Dow Corning Corporation, or Dow Corning, Elkem AS, or Elkem and Becancour Silicon Inc., or Becancour, which is a division of Timminco Limited, or Timminco.

 

We believe our competitors have substantially greater financial, technical, manufacturing and other resources than we do. Our competitors’ greater size and longer operating history in some cases provide them with a competitive advantage with respect to manufacturing costs because of their economies of scale and their ability to purchase raw materials at lower prices. In addition, our competitors may have stronger relationships or may enter into exclusive relationships with some of our key customers. As a result, they may be able to respond more quickly to changing customer demands or to devote greater resources to the development, promotion and sales of polysilicon or wafers than we can. Our failure to adapt to changing market conditions and to compete successfully with existing or new competitors may materially and adversely affect our financial condition and results of operations.

 

We depend on a limited number of customers and supply contracts for a significant portion of our revenues; and the loss of any customer or cancellation of any contract may cause significant fluctuations or declines in our revenues.

 

We have entered into three long-term wafer supply contracts and two long-term polysilicon supply contracts. We agreed to supply approximately 6.0 GW of wafers at a total contract price of $6.3 billion (RMB44.2 billion) to JA Solar, approximately 0.9 GW of wafers at a total contract price of $1.0 billion (RMB7.3 billion) to AIDE, and approximately 0.7 GW of wafers at a total contract price of $0.9 billion (RMB6.3 billion) to Solarcell, respectively, over the terms of their respective supply contracts. We also agreed to supply 16,350 MT of polysilicon at a total contract price of $1.5 billion (RMB10.3 billion) to Trina Solar and 9,990 MT of polysilicon at a total contract price of $1.1 billion (RMB7.6 billion) to Solarfun over the term of their respective supply contracts. These commitments will constitute more than 50% of our anticipated production in future periods after giving effect to our current polysilicon and wafer expansion plans. Our commitments in 2009 and 2010 under the supply contracts exceed our Phase I and Phase II production capacity by 1,364 MT and 6,189 MT, respectively. Any significant delays in our

 

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anticipated capacity expansion or deviation from the contract terms on our customers’ part or our inability to negotiate or renegotiate acceptable quantities, prices and delivery terms from time to time with our customers may disrupt our operations and materially adversely affect our financial results. In addition, if any customers were to default on their obligations under our polysilicon and wafer supply contracts, we may need to find other buyers for our products. Sales to these other customers may be on less favorable terms or may not be feasible at all.

 

We intend to expand our customer base and enter into additional polysilicon and wafer supply contracts. There can be no assurance that we will be able to enter into contracts with any additional customers. Furthermore, there can be no assurance that if we enter into such contracts with other customers, that the terms of such contracts will be on equal or more favorable terms as those contracts we have with our existing customers or that such additional customers will be of equal quality to our existing customers. Failure to enter into additional supply contracts will have a material adverse effect on our business, financial condition and results of operations.

 

If we are unable to fulfill our commitments to customers or customer orders on a timely basis or at all, we may lose customers, our reputation may be damaged, and we may face significant penalties for breach of contract.

 

Due to delays in the delivery of the reactors for our Phase I production facility, we did not meet contractual commitments for delivery of polysilicon as a result of delayed ramp-up of commercial production in 2007. Our ability to meet existing contractual commitments to our customers depends on the successful and timely implementation of our expansion plan. Delays in the delivery of equipment, like those we experienced in the past, could delay implementation of our expansion plan. If we are unable to fulfill our commitments to customers or customer orders on a timely basis or at all, we may lose our customers and our reputation may be damaged. Moreover, our contracts with our customers sometimes provide for specified monetary damages or penalties, which may be significant, for non-delivery or failure to meet delivery schedules or product specifications and allow a termination of the contract by our customer. See “Business—Customers and Markets”. If any of our customers invoke these clauses against us, we may lose future sales and need to defend against the relevant claims, which could be time consuming and expensive. We may be found liable under these clauses and be required to pay damages.

 

Our future success depends substantially on our ability to significantly expand both our polysilicon production capacity and output, which exposes us to a number of risks and uncertainties. Our announced intention to increase polysilicon production capacity to 24,000 MT per year is preliminary and may not be implemented.

 

Our future success depends on our ability to significantly increase both our polysilicon production capacity and output. If we are unable to do so, we may be unable to benefit from economies of scale to decrease our costs per kilogram of polysilicon, apply capital efficiently, meet our obligations under long-term supply agreements, maintain our competitive position and improve our profitability. Our ability to establish additional production capacity and increase output is subject to significant risks and uncertainties, including:

 

   

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

 

   

cost overruns and delays as a result of a number of factors, many of which are beyond our control, such as increases in the price of electricity and problems with equipment delivery, particularly with respect to major equipment such as our polysilicon deposition reactors;

 

   

delays or denial of required approvals by relevant government authorities;

 

   

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

 

   

diversion of significant management attention and other resources; and

 

   

failure to execute our expansion plan effectively.

 

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We intend to construct additional production facilities that would bring our aggregate annual polysilicon production capacity to 24,000 MT. We have not identified the location of such expanded facilities, have not secured the land for such production facility, have not applied nor been granted any construction or operation permits, have not ordered any production equipment and will only begin implementation planning towards the end of 2008 and would not commence commercial operations until 2010. Market conditions change very rapidly in the solar industry. Industry research institutions such as Solarbuzz and others have forecasted substantial overcapacity in polysilicon and wafer manufacturing in the next few years. We may not complete our polysilicon manufacturing expansion due to cost, demand, financing or other reasons. If we do not complete such expansion, we may not be able to meet contractual obligations and our share price and financial results could be adversely affected.

 

Our profitability may suffer as we continue with our capacity expansion.

 

We expect to experience increased costs as a result of the ramp-up of our Phase II production facility and the construction and ramp-up of our Phase III and any additional production facilities, including our wafer production facility. Before our production facilities become fully operational, we will need to make substantial payments for the installation of machinery and equipment, the training of personnel and other related expenses. Much of these payments will be incurred prior to any revenue being realized from these projects, as the Phase II production facility is not expected to be fully ramped up until December 2008, the first production line of the Phase III production facility is not expected to begin initial production until January 2009 and our production facilities for our intended expansion to 24,000 MT by 2011 are not expected to begin initial production until 2010. We expect to experience initial operational inefficiencies and lower production yields during the early stages of production at our newly constructed production facilities. As with our Phase I production facility, we will install the hydrochlorination process equipment in our Phase II production facility and two of the three lines of our Phase III production facilities and will integrate the hydrochlorination process after initial production has commenced on our newly constructed production facilities. For one of the three production lines in our Phase III production facilities we intend to install and integrate a hydrogenation process. We have no experience in constructing, installing or operating a facility that employs the hydrogenation process. Unless we are able to integrate our hydrochlorination or hydrogenation processes at these facilities and increase production yields and benefit from efficiencies in purchasing, manufacturing, sales and shipping, we may not be able to achieve lower costs per unit of production, which would decrease our margins and lower our profitability.

 

We have significant outstanding bank borrowings and may not be able to arrange adequate financing to repay these borrowings when they mature.

 

As of March 31, 2008, we had principal amount of $60.0 million of outstanding floating rate bonds, one-third of which will be redeemed upon the closing of this offering and the remaining two-thirds will be converted into 27,183,400 ordinary shares. See “Use of Proceeds” and “Description of Share Capital—Tranche A Floating Rate Secured Redeemable Bonds due 2009 and Tranche B Floating Rate Secured Convertible Bonds due 2009”. As of March 31, 2008, we had $101.0 million in RMB denominated bank borrowings, approximately $22.1 million of which were due within one year. Subsequent to March 31, 2008, we incurred an additional RMB767.4 million in onshore borrowings which will be used to finance our intended expansion of polysilicon production facilities and in-house wafer production facility. Although we believe with existing onshore bank borrowings, the proceeds of this offering and our cash flow from operation will have sufficient cash flow for our current expansion, there can be no assurance that additional funding needs will not arise. We cannot assure you that we will be able to meet these or other current obligations as they become due. In the event we are unable to meet these obligations or obtain extensions of borrowings, or if we are unable to obtain sufficient alternative funding at reasonable terms or at all to make payment, we will have to make payments with cash generated by our operating activities. In addition, meeting the payment obligations of these borrowings with cash generated by our operating activities will divert our financial resources from the requirements of our ongoing operations and future growth, and would have a material adverse effect on our business, financial condition and future prospects.

 

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It is difficult to plan for capital requirements in our rapidly changing industry. Future market conditions or other developments may require us to obtain additional funds.

 

Our ability to obtain additional funds on acceptable terms will be subject to a variety of uncertainties, including:

 

   

investor perceptions of and demand for securities of companies engaged in the solar industry;

 

   

conditions of the U.S. and other capital markets in which we may seek to raise funds;

 

   

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

 

   

Chinese governmental regulation of foreign investment;

 

   

economic, political and other conditions in China;

 

   

the amount of capital that other Chinese entities may seek to raise in the U.S. and other foreign capital markets; and

 

   

Chinese governmental policies relating to foreign currency borrowings.

 

Our inability to raise additional funds in a timely manner and on terms acceptable to us, or at all, may have a material adverse effect on our business, financial condition and results of operations. For example, we may be required to scale back our planned expenditures, which could adversely affect our ability to achieve economies of scale or achieve our planned growth. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

We may not have sufficient cash available to pay holders of the 2008 Convertible Bonds if we are required to repay the outstanding principal amount at maturity.

 

The 2008 Convertible Bonds will be issued concurrently with this offering in the aggregate principal amount of $446.9 million. The 2008 Convertible Bonds mature 18 months after this offering. In the event bondholders choose not to exercise their conversion rights prior to maturity, we would be required to repay the outstanding principal amount of the 2008 Convertible Bonds at maturity. The 2008 Convertible Bonds will be U.S. dollar obligations and our sole source of operating cash flows are all generated in the PRC by our onshore subsidiaries. There can be no assurance that we will be able to upstream cash from our operating subsidiary, to successfully raise capital or that we will be able to access other credit facilities. Therefore, we may not have sufficient cash on hand or credit available to redeem all of the 2008 Convertible Bonds that mature. Payment of amounts owed on the 2008 Convertible Bonds and the related financial covenant requiring us to maintain consolidated net indebtedness no more than              times our consolidated earnings before interest, taxes, depreciation and amortization may prevent us from maintaining our capital expenditures at the levels we have planned. Any delay in capital expenditures will have a material adverse effect on our business, financial condition and results of operations.

 

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

 

With our increased production we intend to sell a portion of our wafers outside of China. The marketing, distribution and sale of our wafers in the international markets expose us to a number of risks, including:

 

   

fluctuations in currency exchange rates;

 

   

increased costs associated with maintaining marketing efforts in various countries;

 

   

difficulty and costs relating to compliance with the different commercial and legal requirements of the overseas markets in which we offer our products; and

 

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

 

If we are unable to effectively manage these risks, we may not be able to successfully expand our business abroad, operate profitably, exploit our expansion and grow our business as we have planned.

 

We may construct our polysilicon production facilities in geographical regions in which we have no prior experience.

 

We intend to expand our production capacity to 24,000 MT per year. We may construct such capacity in other regions of China or outside China. We have no experience producing polysilicon outside of Jiangsu Province, China and no international manufacturing experience. We may face different legal requirements, experience delays in acquiring the necessary permits for construction and difficulties in complying with the various labor laws and other regulations. In addition, our operations could be more sensitive to fluctuations in the relative value of currencies. Any such difficulties or delays could have a material adverse effect on our business, financial condition and future prospects.

 

Product defects could result in increased costs, decreased sales, and damage to our customer relationships and our reputation.

 

Our polysilicon and wafers may contain defects that are not detected until after they are shipped or installed. As all of our wafers currently are and a portion of our wafers will continue to be produced by wafer manufacturers under tolling arrangements, we do not have complete control over whether our contractors use our polysilicon or the quality of wafers our contractors produce. If our tolling partners use defective polysilicon to produce wafers, such wafers will likely be defective. In the event our products are returned to us due to non-conformity with customers’ specifications or product defects, we would be required to replace our products promptly. Product defects could cause significant damage to our customer relationships and our reputation. If we cannot successfully maintain the quality throughout our production process, this will result in substandard quality or performance of our polysilicon and wafers, including the reduced photovoltaic conversion efficiency of solar cells and modules made from the wafers we supply and higher wafer breakage. If we deliver products with defects, or if there is a perception that our products are of substandard quality, we may incur substantially increased costs associated with termination of contracts, replacements of polysilicon or wafers, and our credibility and market reputation will be harmed and sales of our products may be adversely affected.

 

Most of our production, storage, administrative and research and development facilities are located in close proximity to one another in an industrial park in China. Any damage or disruption at these facilities would have a material adverse effect on our financial condition and results of operations.

 

Our production, storage, administrative, research and development facilities are located in close proximity to one another in an industrial park in Xuzhou, Jiangsu Province, China. Significant damage or other impediments at such location, whether as a result of fire, weather, disease, civil strike, industrial strikes, breakdowns of equipment, difficulties or delays in obtaining materials and equipment, natural disasters, such as earthquakes, terrorist incidents, industrial accidents or other causes, could temporarily disrupt or even shut down our operations, which would have a material adverse effect on our business, financial condition and results of operations. Some of the processes utilized in our operations place us at risk of fire and other damage. We cannot assure you that the insurance we maintain will be sufficient to cover all of our potential losses.

 

On May 12, 2008, an earthquake reaching a magnitude of 8.0 on the Richter scale according to the State Seismological Bureau of China hit Sichuan Province, China. Businesses and production operations in the affected areas of Sichuan Province have been shut down due to safety concerns. Although our operations were not affected by the earthquakes in Sichuan Province, there can be no assurance that we may not be directly or indirectly affected by similar natural disasters in the future.

 

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Our business depends substantially on the continuing efforts of our executive officers and qualified technical personnel, and our business may be severely disrupted if we lose their services.

 

Our industry is characterized by high demand and intense competition for talent. Our strategy and success therefore depends substantially on the continued services of our executive officers and, to a significant extent, on our ability to attract, train and retain qualified technical personnel, particularly those with expertise in the solar and electronics industries. We depend on the efforts of Mr. Zhu Gongshan, our chairman, for a significant portion of our business operations. If one or more of our executive officers or key employees were unable or unwilling to continue in his or their present positions, we might not be able to replace him or them easily or at all. There is substantial competition for qualified technical personnel in China, and we cannot assure you that we will be able to attract new or retain our existing qualified technical personnel. As we are still a relatively young company and our business has grown rapidly, our ability to train and integrate new employees into our operations may not meet the growing demands of our business.

 

If any of our executive officers or key employees were to join a competitor or form a competing company, we may lose customers, suppliers, know-how and key professionals and staff members. Each of our executive officers has entered into an employment agreement with us, which contains non-competition provisions. However, if any dispute arises between our executive officers or key employees and us, we cannot assure you the extent to which any of these employment agreements could be enforced in China or Hong Kong, where these executive officers and key employees reside, in part as a result of the uncertainties with China’s legal system. See “—Risks Relating to Doing Business in China—Uncertainties with respect to the Chinese legal system could have a material adverse effect on us.”

 

Our chairman recently resigned from his position as our chief executive officer and will not devote as much time and attention to us as he did in the past.

 

Mr. Zhu Gongshan, our chairman, was also our chief executive officer in a formative period of our development. He is also the chairman of GCL-Poly Energy Holdings Limited, or GCL-Poly, a company listed on the Hong Kong Stock Exchange. He is also the head of the Golden Concord Group and actively involved in several businesses within such group. The Golden Concord Group has portfolio companies in fuel production, procurement, transportation and power plant safety. Mr. Zhu Gongshan, in his non-executive role, will devote less attention to the operation and management of our business than in past periods.

 

Our existing shareholders have substantial influence over our company and their interests may not be aligned with the interests of our other shareholders.

 

Mr. Zhu Gongshan, our chairman, will beneficially own approximately             % of our outstanding ordinary shares upon completion of this offering, assuming no exercise of the over-allotment option, and             % of our outstanding ordinary shares upon completion of this offering assuming the full exercise of the over-allotment option. As such, Mr. Zhu Gongshan has substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions, timing and amount of our dividend payments, and otherwise controls or influences actions that require the approval of our shareholders.

 

This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs in this offering. Furthermore, our amended articles of association, which will become effective immediately upon the closing of this offering, contain a quorum requirement of two of our members present in person or by proxy in excess of 50% of the total issued voting shares in our company. Existing shareholders may approve actions which may not be in the best interest of our minority shareholders. In addition, Mr. Zhu Gongshan controls the Golden Concord Group. As a result, his

 

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interests in the Golden Concord Group may conflict with the interests of our other shareholders, as he may cause us to enter into transactions or take (or fail to take) other actions or make decisions that conflict with the best interests of our other shareholders.

 

Any failure by us to control the use, to adequately restrict the discharge, of hazardous substances, or to obtain work safety and professional health approvals could subject us to potentially significant monetary damages and fines or suspensions in our business operations.

 

We use, generate, store and discharge toxic, volatile and otherwise hazardous chemicals and wastes in our research and development and production processes, and we are subject to regulations and periodic monitoring by local environmental protection and work safety authorities and are required to comply with all PRC national and local environmental protection and work safety laws and regulations. Under PRC environmental and work safety regulations, we are required to obtain a pollutant discharging permit, a work safety permit for the storage and use of hazardous chemicals and a permit for the use of atmospheric pressure containers, from relevant governmental authorities after we have completed the installation of our manufacturing lines but before the manufacturing lines commence formal commercial production. We are also required to undergo the acceptance inspections of environmental protection, work safety and professional health and obtain respective approval with relevant governmental authorities before the manufacturing lines commence full production. We have obtained the pollutant discharge permit, the work safety permit for storage and use of hazardous chemicals and permit for the registration of use of atmospheric pressure containers for the pressure containers we have installed. We passed the environmental protection examination and work safety examination for our Phase I production facility in June 2008 and expect to receive the government approval in connection with professional health for Phase I production facility shortly following the completion of this offering. However, there can be no assurance that we will pass the necessary examinations and receive the necessary approvals for our Phase II, Phase III and other production facilities. In addition, we have commenced production at our Phase II production facility without the work safety and professional health approvals but expect to receive them shortly after the completion of this offering.

 

If we fail to comply with relevant environmental work safety and professional health laws, regulations and/or administrative rules relating to hazardous materials and chemicals in the future, we may be required to pay fines, suspend production or cease operation. In addition, if more stringent regulations are adopted in the future, the costs of compliance with these new regulations could be substantial. Any failure by us to control the use of, or to adequately restrict the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspensions in our business operations.

 

Our ability to cost-effectively manufacture polysilicon depends on our ability to recycle the STC produced as a by-product of the polysilicon production process into TCS, which ability is materially dependent on our continued ability to install and integrate our hydrochlorination process into a closed loop system and our ability to install and operate a hydrogenation process and TCS production capability in our facilities.

 

Our ability to recycle the STC produced as a by-product from the polysilicon production process into TCS is a critical factor in reducing production costs and environmental costs and is principally accomplished through hydrochlorination and hydrogenation.

 

We apply a hydrochlorination process in a closed loop application in our production facility to date. We have licensed our hydrochlorination process technology from Hualu Engineering Technology Co., Ltd, or Hualu, and Xuzhou Southeast Polysilicon Materials Research and Development Ltd., or Xuzhou Southeast, which are relatively new participants in hydrochlorination process design. We are currently the sole licensee of this intellectual property. Hualu and Xuzhou Southeast have informed us that they are in the process of applying for patents for the intellectual property we are licensing from them. We cannot assure you that Hualu and Xuzhou Southeast will be granted such patents. Moreover, we cannot assure you that they have not infringed other market participants’ patents, trade secrets, know-how or other intellectual properties. Because the relevant technologies we licensed from Hualu and Xuzhou Southeast have not previously been tested on a commercial scale, we cannot assure you that we will be successful in operating the hydrochlorination process on a continuing basis or with high conversion rates.

 

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We intend to commence construction of a hydrogenation and a TCS production facility in Xuzhou in August 2008 which is designed to have a capacity to produce up to 90,000 MT of TCS per year by the third quarter of 2009. This is a separate facility to produce TCS which can then be used in our production process. We are purchasing equipment for the facility which includes the rights to the intellectual property incorporated into such equipment, but we have no experience in constructing, installing or operating a facility that employs the hydrogenation process. Our ability to cost-effectively manufacture polysilicon will depend, in part, on our ability to operate the hydrochlorination and hydrogenation process to produce TCS from STC efficiently.

 

Unless we are able to integrate our hydrochlorination or hydrogenation processes at our production facilities and increase production yields and benefit from efficiencies in purchasing, manufacturing, sales and shipping, we may not be able to achieve lower costs per unit of production, which would decrease our margins and lower our profitability. In addition, we do not have any proprietary access to hydrochlorination or hydrogenation technologies and our competitors may have access to better technologies or have greater resources and the ability to develop advanced process technologies based on the intellectual property to which we have access. If our current licenses with Hualu and Xuzhou Southeast are terminated, there can be no assurance that we will be able to independently develop equivalent technology successfully or obtain licenses for alternative technologies, or that we will be able to redesign our production lines to eliminate the need for such a license. Any of the foregoing factors could materially and adversely affect our business, operating results or financial condition.

 

Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights may be costly and may not be resolved in our favor.

 

We seek to protect our proprietary production processes, documentation and other written materials primarily through intellectual property laws and contractual restrictions. However, we have not obtained patent protection for our technology related to our polysilicon production processes. Instead, we rely on know-how, trade secrets and other similar protections. We also require employees and consultants with access to our proprietary information to execute confidentiality agreements with us. The steps taken by us to protect our proprietary information may not be adequate to prevent misappropriation of our technology. In addition, our proprietary rights may not be adequately protected because:

 

   

others may not be deterred from misappropriating our technologies despite the existence of laws or contracts prohibiting it;

 

   

policing unauthorized use of our intellectual property may be difficult, expensive and time-consuming, and we may be unable to determine the extent of any unauthorized use; and

 

   

the intellectual property laws and enforcement proceedings in China are uncertain and do not protect intellectual property rights to the same extent as do the laws and enforcement procedures in the United States. See “—Risks Relating to Doing Business in China—Uncertainties with respect to the PRC legal system could have a material adverse effect on us.”

 

Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for doing so. Any inability to adequately protect our proprietary rights could harm our ability to compete, to generate revenue and to grow our business.

 

To protect our intellectual property rights and to maintain our competitive advantage, we may file suits against parties who we believe infringe our intellectual property. Such litigation may be costly and may divert management attention and expend our resources away from our business. In certain situations, we may have to bring suit in foreign jurisdictions, in which case we will be subject to additional risks as to the result of the proceedings, the amount of damages that we can recover and our ability to enforce a judgment. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties. The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

 

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Although we are currently strengthening our research and development capability, to date, substantially all of the intellectual property used in our polysilicon production process was developed by third parties. We may be exposed to infringement or misappropriations claims by third parties which, if determined adversely to us, could cause us to pay significant damage awards.

 

Our success depends largely on our ability to develop and use our technology and know-how without infringing the intellectual property rights of third parties. The validity and scope of claims relating to technology patents involve complex scientific, legal and factual questions and analysis and, therefore, may be highly uncertain. While we have a non-exclusive license from Hualu for the hydrochlorination process, for other steps of our production process, we do not have any patents or licenses. Hualu has also entered into agreements with us for the design of the production process for our Phase I, Phase II and Phase III production facilities. Although Hualu has represented to us that it has not violated any third party intellectual property rights in providing us the designs for our production facilities, these agreements only provide us with indemnity for a maximum of 50% of the total value of the agreements we have entered into with them in the event that we incur losses for intellectual property infringement claims as a result of engaging Hualu.

 

We also rely on protection against infringement claims afforded in the intellectual property indemnification provisions under our equipment supply contracts. Most of our equipment supply contracts with international suppliers include an indemnification provision, under which the supplier undertakes to indemnify us against actions, claims, demands, costs, charges, and expenses arising from or incurred by reason of any infringement or alleged infringement of patents, copyrights, trade marks or trade names by the use of the equipment provided by the supplier. However, it is unclear that we will be entitled to such indemnification in the event that we use the equipment supplied by such supplier in conjunction with other equipment not supplied by such supplier. In addition, a portion of our equipment from international manufacturers were supplied by several intermediate trading companies, not the manufacturer themselves. There is no assurance that such intermediate trading companies have sufficient assets to meet their indemnification obligations under their equipment supply contracts with us. Moreover, some of our equipment supply contracts with domestic suppliers do not provide any intellectual property indemnification provisions.

 

Historically, China has afforded less protection to a company’s intellectual property than the United States and western Europe. 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 subject us to injunctions prohibiting the manufacture and sale of our products or the use of our technologies. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation.

 

Claims that we or our affiliates have participated in misappropriation of trade secrets could result in severe monetary damages or injunctive relief.

 

The polysilicon industry in China, and especially in Sichuan Province and Jiangsu Province, has received a great deal of attention with respect to potential trade secret violations. In response to departures of employees of certain Sichuan Province-based silicon companies and the increasing development of the silicon-based industry in Jiangsu Province, representatives from the Sichuan and Jiangsu provincial governments met on several occasions in 2007 and 2008 to discuss the development of the solar industry in China in general and the issues arising from a specific ex-employee of a polysilicon manufacturer in Sichuan Province. This individual was detained and convicted of trade secret theft and sentenced to imprisonment and a RMB1 million fine. Although certain news articles indicated that the Sichuan manufacturer’s commercial secrets alleged to be misappropriated by the ex-employee were provided to JZPTD, our domestic operating company, and were used in JZPTD’s production process, neither we nor any of our affiliates has been named a party to any trade secret or other

 

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intellectual property case, civil or criminal. One news report indicated that the convicted individual collaborated with representatives of JZPTD and that JZPTD should be severally responsible for the damage caused, which the news report stated the court found to be RMB34.1 million ($4.9 million). Although we do not believe that we have infringed on any party’s intellectual property, we may nevertheless be subject in the future to civil intellectual property infringement claims or criminal prosecution against us, JZPTD or our other affiliates. If we lose in any such claim, we may be subject to severe monetary damages and/or injunctive relief, any of which would have a material impact on our reputation and results of operations.

 

Our operations present risks of fire, explosions and other accidents that can create damage to our property or third-parties and we have limited insurance coverage. Such accidents may result in losses from operating hazards, product liability claims or business interruptions.

 

As with other polysilicon producers, our operations involve the use, handling, generation, processing, storage, transportation and disposal of hazardous materials, which may result in fires, explosions, spills and other unexpected or dangerous accidents causing personal injuries or death, property damage, environmental damage and business interruption.

 

We are also exposed to risks associated with product liability claims in the event that the use of our wafers results in injury. Since our wafers are made into electricity producing devices, any product malfunctions, defects, improper installations or other deficiencies may endanger wafer users. Due to our limited operating history, we cannot predict whether product liability claims will be brought against us in the future or the effect of any resulting negative publicity on our business. Moreover, we do not have any product liability insurance and may not have adequate resources to satisfy a judgment in the event of a successful claim against us. The successful assertion of product liability claims against us could result in potentially significant monetary damages and require us to make significant payments. In addition, as the insurance industry in China is still in an early stage of development, business interruption insurance available in China offers limited coverage compared to that offered in many other countries. We cannot assure you that our existing insurance policies are sufficient to insulate us from all loss and liabilities that we may incur and significant damage to any of our production facilities could have a material adverse effect on our business, financial condition or results of operations.

 

We have previously operated as a private company and have no experience in attempting to comply with U.S. public company obligations. In addition, we only recently began to prepare our financial reports in accordance with U.S. GAAP. Attempting to comply with these requirements will increase our costs and require additional management resources, and we still may fail to comply.

 

We only recently began to prepare our financial reports in accordance with U.S. GAAP. Although we are in the process of expanding our accounting and finance staff, we expect to encounter substantial difficulty attracting qualified staff with requisite experience due to the high level of competition for experienced financial professionals. In the short term, we are providing training for our current staff with respect to U.S. GAAP. However, our training may not be effective.

 

We will face increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur as a private company. Compliance with the U.S. Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as other rules of the Securities and Exchange Commission, or the SEC, the Public Company Accounting Oversight Board and the New York Stock Exchange, will result in significant initial costs to us as well as an ongoing increase in our legal, audit and financial compliance costs, and we still may fail to comply.

 

If we are unable to remedy the material weakness and significant deficiencies in our internal control over financial reporting, we may be unable to timely and accurately record, process and report financial data or comply with disclosure controls and procedures, internal control over financial reporting and other obligations.

 

During the course of the preparation and external audit of our consolidated financial statements as of December 31, 2006 and 2007 and for the period from March 7, 2006 to December 13, 2006 (predecessor), the

 

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period from November 13, 2006 to December 31, 2006 (successor) and the year ended December 31, 2007 (successor), we and our independent registered public accounting firm identified a number of deficiencies in our internal control over financial reporting, including a number of material weaknesses and significant deficiencies, as defined in the standards established by the U.S. Public Company Accounting Oversight Board.

 

The material weaknesses identified were: (1) lack of an accounting policies and procedures manual; and (2) a lack of dedicated financial reporting and accounting resources necessary to comply with U.S. GAAP. In addition, we and our independent registered public accounting firm identified certain significant deficiencies in our internal control over financial reporting. These significant deficiencies were: (1) lack of a risk assessment process; and (2) related party transactions were not accounted for separately from non-related party transactions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.”

 

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

 

We will be subject to reporting obligations under the U.S. securities laws upon completion of this offering. The SEC, as required by Section 404 of the Sarbanes-Oxley Act, adopted rules requiring each public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. In addition, an independent registered public accounting firm must attest to and report on the effectiveness of the company’s internal controls over financial reporting. These requirements will first apply to our annual report on Form 20-F for the fiscal year ending on December 31, 2009. 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 still issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us.

 

We plan to continue to address and remedy these deficiencies in time to meet the deadline for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. If, however, we fail to timely achieve and maintain the adequacy of our internal controls, 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. Furthermore, we anticipate that we will incur considerable costs and devote significant management time and efforts and other resources to comply with Section 404 of the Sarbanes-Oxley Act.

 

The grant of employee share options and other share-based compensation will dilute your investment in us and will reduce our reported net income.

 

On February 29, 2008, we granted options to purchase 50,000,000 ordinary shares in the aggregate to our directors, officers and certain other employees and consultants at an exercise price of $0.5 per share. These

 

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options can only be exercised if we successfully complete this offering. As this grant price is substantially below the estimated initial offering price, if option holders exercised their options, such exercises will be dilutive to purchasers in this offering. In accordance with the Financial Accounting Standards Board, or FASB, Statement No. 123 (Revised 2004), Share-Based Payment or SFAS No. 123R, we account for compensation costs for all share options including share options granted to our directors and employees using a fair-value based method. The estimated fair value for the 5,000,000 options granted under the share incentive plan aggregates $69.4 million. Such amount will begin to amortize on the closing of this offering as an expense over the vesting period for the options, which ends at the end of the 48th month after the closing of this offering. Assuming this offering is completed by the end of August 2008, we expect the amortization will decrease our net profit attributable to holders of our ordinary shares by $23.4 million in the second half of 2008, of which approximately $16.4 million and $7.0 million will be recognized in the third and fourth quarters of 2008, respectively, and $23.2 million will be recognized in 2009. We have adopted a restricted share compensation plan that provides for the grant of up to 15,000,000 restricted shares in the future. See “Management—2008 Restricted Share Compensation Plan”.

 

Future acquisitions and expansion into the production of wafers may have an adverse effect on our financial condition and results of operations.

 

We intend to produce wafers in-house and may consider future acquisitions of or investments in existing wafer manufacturers. We are currently in preliminary discussions with one of our tolling wafer manufacturers, Huasheng, regarding the potential purchase of the business. Such discussions are preliminary and there can be no assurance that any transaction will occur. We will likely acquire technologies, businesses or assets in businesses other than polysilicon production. Future acquisitions could expose us to potential risks, including risks associated with the assimilation of new technologies, businesses and personnel, unforeseen or hidden liabilities, the diversion of management attention and resources from our existing business, and the inability to generate sufficient revenue to offset the costs and expenses of acquisitions. Further, we have no experience in the business of ingot or wafer production. There can be no assurance we will be successful in producing wafers in-house. Any difficulties encountered in the acquisition of, or expansion into, any business other than polysilicon production may have an adverse effect on our financial condition and results of operations.

 

Risks Relating to Our Industry

 

Prices for polysilicon and wafers are expected to decline in the next few years, which is reflected in the pricing of our long-term supply contracts, and could adversely affect our gross margin.

 

According to Solarbuzz’s Balanced Energy Forecast Scenario, global average polysilicon capacity is projected to grow from 63,000 MT per year in 2008 to 234,000 MT per year by 2012. If current capacity expansion plans are met, the polysilicon production industry may experience a period of excess capacity. During a period of excess capacity, polysilicon producers will experience pricing pressures and may be forced to reduce polysilicon prices until such time, if ever, as demand increases to such extent to offset such overcapacity. In addition, our long-term polysilicon supply agreements provide for substantial reductions in the prices we will be paid over the life of the agreements. If the price of polysilicon decreases faster than we are able to reduce our manufacturing costs, our operating margins will be reduced and our financial condition and results of operations may be adversely affected.

 

According to Solarbuzz, wafer prices on a per-watt basis are expected to decline in the next few years. Our long-term wafer supply agreements provide for substantial reductions in the prices we will be paid over the life of these agreements. If we are unable to lower our costs in line with the price decline, our gross margins would be adversely affected. In addition, if polysilicon availability increases and prices decline faster than we are able to reduce our manufacturing costs, wafer manufacturers may be more inclined to produce wafers for their own sales and their willingness to enter into tolling agreements may decrease.

 

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Our future growth and profitability depend on the demand for solar power and semiconductor products and the development of solar power and semiconductor technologies.

 

The solar industry is at a relatively early stage of development, and the extent of acceptance of solar power products is uncertain. Market data on the solar power industry are not as readily available as those for the electronics industry and other more established industries for which trends can be assessed more reliably from data gathered over a longer period of time. In addition, demand for solar power may not develop or may develop to a lesser extent than we anticipate. Many factors may affect the viability of widespread adoption of solar power technology and demand for solar power products, including:

 

   

decreases in government subsidies and incentives to support the development of the solar power industry;

 

   

the relative cost-effectiveness, performance and reliability of solar power products compared to conventional and other renewable energy sources and products;

 

   

success of other alternative energy sources, such as wind power, hydroelectric power and biofuel;

 

   

fluctuations in economic and market conditions that affect the viability of conventional and other renewable energy sources, such as increases or decreases in the prices of oil and other fossil fuels;

 

   

capital expenditures by end users of solar power products, which tend to decrease when the economy slows down; and

 

   

deregulation or other regulatory actions affecting the electric power industry and broader energy industry.

 

The electronics industry has experienced substantial and sustained growth globally over the last 20 years. In the PRC, demand for semiconductor products has been a more recent phenomenon and growth may not be sustained. Moreover, semiconductor technology development may not lead to greater demand for silicon-based products. In a mature industry it may be more difficult for us to break into the polysilicon market if demand growth is not sustained.

 

In the event demand for solar and semiconductor products does not expand as we expect or solar power or semiconductor technologies do not develop in a manner consistent with continued demand for polysilicon, our future growth and profitability will be adversely affected.

 

The reduction or elimination of government subsidies and economic incentives could cause demand for our products and our revenue to decline.

 

We believe that the near-term growth of the market for on-grid applications of solar energy depends in large part on the availability and size of government subsidies and economic incentives. The reduction or elimination of government subsidies and economic incentives may hinder the growth of this market or result in increased price competition for solar energy products, which could cause our revenue to decline.

 

Today, when upfront system costs are factored into cost per kilowatt hour, the cost of solar power substantially exceeds the cost of power furnished by the electric utility grid in many locations. As a result, federal, state and local governmental bodies in many countries, such as Germany, Spain, Italy, the United States, Japan and China, have provided subsidies and economic incentives in the form of feed-in tariffs, rebates, tax credits and other incentives to distributors, system integrators and manufacturers of solar power products to promote the use of solar energy in on-grid applications and to reduce dependency on other forms of energy. These government subsidies and economic incentives could be reduced or eliminated altogether. For example, Germany has been a strong supporter of solar power products and systems. Utilities in Germany are generally obliged to purchase electricity generated from grid-connected solar power installations at defined feed-in tariff rates, which decline over time according to a predetermined schedule. Any political or market changes in

 

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Germany could result in significant reductions or the elimination of subsidies or economic incentives, such as a more accelerated reduction of feed-in tariffs than as planned according to the current schedule. Reductions in, or elimination of, government subsidies and economic incentives for on-grid solar energy applications before the solar power industry reaches the economies of scale necessary for solar power to become cost-effective in a non-subsidized market place could result in decreased demand for solar generation products and, as a result, for polysilicon, which could cause our revenue to decline.

 

Existing regulations and policies and changes to these regulations and policies may present technical, regulatory and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products.

 

The market for electricity generation products is heavily influenced by government regulations and policies concerning the electric utility industry, as well as policies adopted by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In a number of countries, these regulations and policies are being modified and may continue to be modified. Customer purchases of, or further investment in the research and development of, alternative energy sources, including solar power technology, could be deterred by these regulations and policies, which could result in a significant reduction in the potential demand for our products. For example, without a regulatory mandated exception for solar power systems, utility customers are often charged interconnection or standby fees for putting distributed power generation on the electric utility grid. These fees could increase the cost to the end customers of using the solar power products and make them less desirable, thereby harming our business, prospects, results of operations and financial condition.

 

We anticipate that our customers’ products that use polysilicon will be subject to oversight and regulation in accordance with national and local regulations relating to building codes, safety, environmental protection, utility interconnection and metering and related matters. New government regulations or utility policies pertaining to solar power products may result in significant additional expenses to our customers and, as a result, could cause a significant reduction in demand for our products.

 

Alternative technologies in cell manufacturing may replace the need to use polysilicon or wafers such as the wafers we sell and intend to manufacture in solar applications.

 

The vast majority of silicon-based solar cell manufacturers uses chunk or granular polysilicon. However, alternative technologies are being developed. One such technology, thin-film cell production, uses little to no amounts of silicon in the production of solar cells. Thin-film solar cells are currently less costly to produce than silicon-based solar cells. Significant expansion of thin-film solar cell production has been announced which may put pressure on the entire value chain of silicon-based solar cell production. This expansion may in turn restrict the market for silicon-based solar cells which would decrease the demand for our polysilicon and wafers. The further development of thin-film or other alternative technologies may have a significant impact on the solar industry by reducing the necessity for wafers made from polysilicon. If the demand for polysilicon or wafers is negatively affected by increased demand for and improvements to alternative technologies, our revenue and results of operations could be negatively affected.

 

Further development in the fluidized bed reactor method, upgraded metallurgical silicon or other alternative polysilicon production technologies or other changes in the solar power industry could render our production process too costly or obsolete, which could reduce our market share and cause our sales and profits to decline.

 

Although the vast majority of the polysilicon produced in the world utilizes the Siemens process, several alternative production processes that may have significantly lower production costs have been developed. A clear disadvantage of the Siemens process is the large volume of electricity required. MEMC, REC and Wacker are three competitors that operate or are constructing facilities that use the FBR method for producing polysilicon. Tokuyama has developed a polysilicon technology called the “Vapor-to-Liquid

 

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Deposition” process. Companies such as Becancour, Dow Corning, Elkem and others are establishing facilities for the production of upgraded metallurgical silicon.

 

Further developments in competing polysilicon production technologies may result in lower manufacturing costs or higher product performance than those achieved from Siemens processes, including the one we employ. We will need to invest significant financial resources in research and development to expand our market position, keep pace with technological advances in polysilicon production and effectively compete in the future. Failure to further refine our technology could make our production process too costly or obsolete, which could reduce our margins and market share, cause our revenue to decline and adversely affect our results of operations.

 

Risks Relating to Doing Business in China

 

If we were required to obtain the prior approval of the China Ministry of Commerce, or MOFCOM, for or in connection with our restructuring, or of the China Securities Regulatory Commission, or the CSRC, for or in connection with this offering and the listing and trading of our ADSs on the New York Stock Exchange, our failure to do so could have a material adverse effect on our business, operating results, reputation and trading price of our ADSs, and may also create uncertainties for this offering.

 

On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated a regulation, or Regulation No. 10, that became effective on September 8, 2006. This regulation has provisions that purport to require an offshore special purpose vehicle, or SPV, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals to obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. However, the application of this PRC regulation remains unclear and no consensus currently exists among the leading PRC law firms regarding the scope and applicability of the CSRC approval requirement.

 

JZPTD was originally controlled by Mr. Zhu Gongshan through two PRC domestic entities which were direct equity holders of JZPTD. In December 2006, GCL HK acquired its initial 64% equity interest in JZPTD from these two PRC domestic entities, or the GCL HK acquisition. At the time of the GCL HK acquisition, GCL HK was a subsidiary of Happy Genius, which was controlled by Mr. Zhang Songyi. In September 2007, after the reorganization discussed in “Corporate Structure — Ownership of Our Business”, Mr. Zhu Gongshan, through Boulina, purchased 100% of the total outstanding shares of Happy Genius from entities controlled by Mr. Zhang Songyi, or the Boulina acquisition. Mr. Zhang and Mr. Zhu had no affiliated relationship or entrustment arrangement for the GCL HK acquisition and the Boulina acquisition at the time of any of these two acquisitions.

 

Our PRC counsel, Grandall Legal Group, has advised us, based on their understanding of the current PRC laws, regulations and the procedures announced on September 21, 2006, and subject to any future rules, regulations, requirements, or explanations to the contrary promulgated by competent PRC governmental authorities, that:

 

   

the CSRC approval requirement under Regulation No. 10 described above is only applicable to an offshore special purpose vehicle which is defined as an offshore entity formed for listing purposes and controlled directly or indirectly by PRC domestic companies or individuals. Neither Mr. Zhu Gongshang nor Mr. Zhang Songyi is a PRC domestic natural person under Regulation No. 10. Mr. Zhu Gongshan, who currently controls our company, was not a PRC domestic natural person at the time of, or subsequent to, the GCL HK acquisition or the Boulina acquisition, and has not been a PRC domestic natural person since the GCL HK acquisition, as Mr. Zhu Gongshan has maintained non-immigrant permanent residency in the Philippines since 2002 and residency in Hong Kong since 2004, and deregistered his PRC residency in 2005. Mr. Zhang Songyi, a director and our second largest shareholder, was not a PRC domestic natural person at the time of, or subsequent to, the GCL HK

 

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acquisition or the Boulina acquisition, as Mr. Zhang Songyi has always been a permanent resident of Hong Kong. Our Company is not an offshore special purpose vehicle as defined in Regulation No. 10 since our Company is not directly or indirectly controlled by any PRC domestic enterprise or individuals. Therefore, we are not required to submit applications to the CSRC for its approval for the listing and subsequent trading of our ADSs on the New York Stock Exchange.

 

   

Article 11 of Regulation No. 10 requires domestic enterprises or domestic natural persons to submit application to the MOFCOM for approval when they, in the name of the offshore companies legally established or controlled by them, merge or acquire domestic companies having a connected relationship with them. The GCL HK acquisition did not require MOFCOM approval since no affiliated relationship existed between the GCL HK and the selling equity holders of JZPTD. Regulation No. 10 was not applicable to the Boulina acquisition since the Boulina acquisition did not involve any PRC domestic enterprise and was not subject to any PRC laws on cross border transactions. Since there was no affiliated relationship or arrangement between Mr. Zhu Gongshan and Mr. Zhang Songyi for the GCL HK acquisition and the Boulina acquisition, Mr. Zhu Gongshan and Mr. Zhang Songyi have not circumvented such MOFCOM approval requirement under Regulation No. 10, and the GCL HK acquisition and the Boulina acquisition, taken as a whole, will not be regarded as a circumvention of relevant approval requirement under Regulation No. 10. Therefore, the MOFCOM approval requirement under Regulation No. 10 is not applicable to the GCL HK acquisition, the Boulina acquisition or the combination of these two acquisitions, and we are not required to submit an application to the CSRC to obtain its approval.

 

A copy of Grandall Legal Group’s legal opinion regarding this new PRC regulation is being filed as an exhibit to our registration statement on Form F-1, which is available at the website of the SEC at www.sec.gov.

 

The application of Regulation No. 10 is unclear in certain respects, including the definition of a PRC domestic natural person and what constitutes a circumvention of its approval requirements. If the MOFCOM or the CSRC subsequently determines that MOFCOM approval of the transfer of JZPTD or CSRC approval was required for this offering, we may face regulatory actions or other sanctions from the MOFCOM or the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, restrict or prohibit payment or remittance of dividends by JZPTD, or take other actions that may have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies also may take actions that require us, or make it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur.

 

Also, if the CSRC requires in the future that we obtain its approval for any part of our reorganization, 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.

 

Recent regulations relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies and could adversely affect our business, financial condition and results of operations.

 

In October 2005, the SAFE promulgated a regulation entitled “Circular on several issues concerning foreign exchange regulation of corporate finance and roundtrip investments by PRC residents through special purpose companies incorporated overseas,” or Circular No. 75. Circular No. 75 states that PRC residents, including both legal persons and natural persons, must register with the relevant local SAFE branches before establishing or controlling any company outside of China with assets or equity interests in PRC companies for the purpose of capital financing. Any such company is referred to as an “offshore special purpose company”. Although we

 

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believe that Circular No. 75 does not apply to the sale of the interest in JZPTD to Happy Genius in December 2006 because Happy Genius was set up and owned by Mr. Zhang Songyi, who was a permanent Hong Kong resident at the time of sale and has not been a PRC resident since then, we cannot assure you that SAFE will not interpret Circular No. 75 to apply to the transactions through which our shareholders acquired their interests and conclude that under Circular No. 75 one or more of our existing shareholders should be treated as PRC domestic residents required to register with SAFE. Such PRC residents must also file amendments to their registrations if their offshore companies are engaged in material events involving capital variation, such as changes in share capital, share transfers, mergers and acquisitions, spin-off transactions, long-term equity or debt investments or creation of any security interest over any assets located in China or any other material change in share capital. Under Circular No. 75, PRC domestic residents are allowed to pay profits to offshore special purpose companies in the form of dividends, to transfer shares in liquidation of a company, to decrease capital and take similar actions only after effecting registration pursuant to the registration procedures set forth in such regulation. Failure to comply with the registration procedures may result in restrictions being imposed on the foreign exchange activities of the relevant PRC entity, including the payment of dividends and other distributions to its offshore parent company, as well as restrictions on the capital inflow from the offshore entity to the PRC entity. We understand that any future failure by any of our shareholders who is a PRC resident, or controlled by a PRC resident, to comply with relevant requirements under Circular No.75 could subject our company to fines or sanctions imposed by the PRC government, including restrictions on JZPTD’s ability to pay dividends or make distributions to us and our ability to increase our investment in or to provide loans to JZPTD.

 

As it is uncertain how SAFE will interpret or implement its Circular No. 75, we cannot predict how Circular No. 75 and other SAFE circulars will affect our business operations or future strategies. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign currency-denominated borrowings, which may adversely affect our business and prospects. See “PRC Government Regulation — Circular No. 75.”

 

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

 

Substantially all of our business operations are conducted in China and we expect most of our sales will be made in China. Accordingly, we expect our business, financial condition, results of operations and prospects to be affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including the fact that it:

 

   

has a high level of government involvement;

 

   

is in the early stages of development of a market-oriented economy;

 

   

has tight government foreign exchange controls; and

 

   

has demonstrated inefficient allocation of resources.

 

While the Chinese economy has grown significantly in the past 20 years, the growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. The PRC government has implemented measures, including recent interest rate increases, to control the pace of economic growth.

 

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

 

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corporate governance in business enterprises, a substantial portion of the productive assets in China are still owned by the PRC government. The continued control of these assets and other aspects of the national economy by the PRC government could materially and adversely affect our business. The PRC government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the PRC government to slow the pace of growth of the Chinese economy could result in decreased capital expenditure by solar energy users and semiconductor manufacturers, which in turn could reduce demand for our polysilicon and wafers.

 

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

 

Uncertainties with respect to the Chinese legal system could have a material adverse effect on us.

 

We conduct substantially all of our manufacturing operations through our wholly-owned subsidiary, JZPTD, a limited liability company established in China. JZPTD is generally subject to laws and regulations applicable to foreign investment in China. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties. We cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, the preemption of local regulations by national laws, or the overturn of local government’s decisions by the national government. These uncertainties 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.

 

PRC regulation of direct investment and loans by offshore holding companies to PRC entities may delay or limit us from using the proceeds of this offering to make additional capital contributions or loans to JZPTD.

 

Any capital contributions or loans that we, as an offshore entity, make to JZPTD, including from the proceeds of this offering, are subject to PRC regulations. For example, none of our loans to JZPTD can exceed the difference between the total amount of investment in JZPTD approved under relevant PRC laws and the registered capital of JZPTD, and the loans must be registered with the local branch of the SAFE. In addition, our capital contributions to JZPTD must be approved by the PRC Ministry of Commerce and the National Development and Reform Commission, or the NDRC, or their respective local counterparts. We cannot assure you that we will be able to obtain these approvals on a timely basis, or at all. If we fail to obtain such approvals, our ability to make equity contributions or provide loans to JZPTD or to fund its operations may be negatively affected, which could adversely affect JZPTD’s liquidity and its ability to fund its working capital and expansion projects and meet its obligations and commitments.

 

An economic slowdown in China may adversely affect our financial condition and results of operations, as well as our future prospects.

 

We conduct most of our business and generate most of our revenue in China. As a result, economic conditions in China have a significant effect on our financial condition and results of operations, as well as our future prospects. Since 1978, China has been one of the world’s fastest growing economies in terms of GDP growth. We cannot assure you, however, that such growth will be sustained in the future. Moreover, the recent slowdown in the economies of the United States, the European Union and certain Asian countries may adversely

 

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affect economic growth in China. An economic downturn in China could adversely affect our financial condition and results of operations, as well as our future prospects.

 

We will rely on dividends paid by our subsidiary for our cash needs.

 

We will rely on dividends paid by our wholly-owned Chinese subsidiary, JZPTD, for our cash needs, including the funds necessary to pay dividends and other cash distributions, if any, to our shareholders, to service any debt we may incur outside of the PRC and to pay our offshore operating expenses. The payment of dividends by entities organized in China is subject to limitations. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. JZPTD is also required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends. JZPTD is also required to allocate a portion of its after-tax profit, as determined by its board of directors, to its staff welfare and bonus funds, which may not be distributed to equity owners. In addition, if JZPTD incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.

 

Pursuant to the new EIT Law and its Implementing Regulation, which became effective on January 1, 2008, dividends payable by a foreign-invested enterprise to its foreign investors are subject to a 10% withholding tax if the foreign investors are considered as non-resident enterprises without any establishment or place within China or if the dividends payable have no connection with the establishment or place of the foreign investors within China, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. As JZPTD is owned directly by our Hong Kong subsidiary, which is a non-resident enterprise, and as Hong Kong has an arrangement with the PRC under which the tax rate from dividend income is 5%, dividends paid by JZPTD would be subject to a 5% withholding tax.

 

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

 

The change in value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 13.5% appreciation of Renminbi against the U.S. dollar between July 21, 2005 and March 31, 2008. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar. Since substantially all of our costs and expenses are denominated in Renminbi, any appreciation or revaluation of the Renminbi could increase our costs in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars we receive from this offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

 

In addition, an appreciation in the value of the Renminbi against foreign currencies could make our polysilicon more expensive for our international customers as well as reduce the competitiveness of our PRC customers in the international market, thus potentially leading to a reduction in our sales and profitability. Furthermore, many of our competitors are foreign companies that could benefit from such a currency fluctuation, making it more difficult for us to compete with these companies.

 

 

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You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us, our management or the experts named in the prospectus.

 

We conduct all of our operations in China and substantially all of our assets are located in China. In addition, some of our directors and executive officers reside within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon some of our directors and senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable U.S. state securities laws. Moreover, our PRC legal counsel, Grandall Legal Group, has advised us that the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.

 

Our PRC legal counsel, Grandall Legal Group, has also advised us that PRC courts are unlikely to (a) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated on the civil liability provisions of the securities laws of the United States or (b) entertain original actions brought against us or our directors or officers predicated upon the securities laws of the United States as there is no treaty between United States and the PRC and the PRC courts will only recognize and enforce foreign judgments in accordance with PRC Civil Procedure Law.

 

An outbreak of the highly pathogenic avian influenza caused by the H5N1 virus, or avian flu or bird flu, Severe Acute Respiratory Syndrome, or SARS, or other contagious disease may have an adverse effect on the economies of certain Asian countries and may adversely affect our results of operations.

 

During 2004, large parts of Asia experienced unprecedented outbreaks of avian flu which, according to a report of the World Health Organization, or WHO, in 2004, placed the world at risk of an influenza pandemic with high mortality and social and economic disruption. Currently, no fully effective avian flu vaccines have been developed and there is evidence that the H5N1 virus is evolving so there can be no assurance that an effective vaccine can be discovered in time to protect against a potential avian flu pandemic. In the first half of 2003, certain countries in Asia experienced an outbreak of SARS, a highly contagious form of atypical pneumonia, which seriously interrupted economic activities and caused the demand for goods to plummet in the affected regions. An outbreak of avian flu, SARS or other contagious disease or the measures taken by the governments of affected countries against such potential outbreaks, could seriously interrupt our production, which could have a material adverse effect on our results of operations.

 

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

 

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We have received substantially all our revenue in Renminbi. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiary to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency-denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade related transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. However, approval from the SAFE or its local branch is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the purchase of equipment from foreign suppliers. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to expand our production facilities as planned or pay in dividends in foreign currencies to our shareholders, including holders of our ADSs.

 

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Risks Relating to Our ADSs and This Offering

 

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

 

Prior to this initial public offering, there has been no public market for our ADSs. We intend to apply to list our ADSs on the New York Stock Exchange. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected. The initial public offering price for our ADSs is determined by negotiations between us and the underwriters and may bear no relationship to the market price for our ADSs after this initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price.

 

The market price for our ADSs may be volatile.

 

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

 

   

announcements of technological or competitive developments;

 

   

regulatory developments in our target markets affecting us, our customers or our competitors;

 

   

actual or anticipated fluctuations in our quarterly operating results;

 

   

changes in financial estimates by securities research analysts;

 

   

changes in the economic performance or market valuations of other solar power technology companies;

 

   

addition or departure of our executive officers and key research personnel;

 

   

announcements of studies and reports relating to solar or electronics industry applications that do not require polysilicon;

 

   

announcements regarding patent litigation or the issuance of patents to us or our competitors;

 

   

fluctuations in the exchange rates between the U.S. dollar, the Euro and Renminbi;

 

   

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

 

   

sales or perceived actual or potential 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 have a material adverse effect on the market price of our ADSs.

 

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

 

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per share basis. As a result, you will experience immediate and substantial dilution of approximately $             per ADS (assuming no exercise by the underwriters of their over-allotment option), representing the difference between our net tangible book value per ADS as of March 31, 2008, after giving effect to this offering and the assumed initial public offering price of $             per ADS, the midpoint of the estimated range of the initial public offering price. See “Dilution.” In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of share options and upon conversion of the 2008 Convertible Bonds.

 

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We may need additional capital and may sell additional ADSs or other equity securities or incur indebtedness, which could result in additional dilution to our shareholders or increase our debt service obligations.

 

We will require borrowings of significant amounts to refinance Renminbi denominated bank debt and to fund our Phase III and additional facility expansions as well as wafer production facilities. We may, in addition, require additional cash resources due to changes in business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

 

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

 

Sales of our ordinary shares or ADSs in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have              ordinary shares outstanding, including              ordinary shares represented by              ADSs. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or the Securities Act. The remaining ordinary shares outstanding after this offering will be available for sale upon the expiration of the 180-day lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rule 144 and Rule 701 under the Securities Act. In addition, although persons who will receive our 2008 Convertible Bonds concurrently with the closing of this offering have agreed, subject to certain exceptions, to refrain from offering for sale or selling, directly or indirectly, 2008 Convertible Bonds or entering into certain hedging transactions for 130 days after the date of this prospectus, the permitted sales and hedging under such lock-up agreements and sales or hedging after such period could cause the market price of our ADSs to decline. Any or all of these shares may be released prior to expiration of these lock-up periods at the discretion of the representatives of the underwriters. See “Shares Eligible for Future Sale.” To the extent prior to the expiration of the lock-up periods, ordinary shares, ADSs or 2008 Convertible Bonds are sold into the market or hedging transactions are conducted by the holders of the 2008 Convertible Bonds, the market price of our ADSs could decline.

 

As a holder of our ADSs, you may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.

 

As a holder of ADSs, you will not be treated as one of our shareholders. Instead, the depositary will be treated as the holder of the shares underlying your ADSs. However, you may exercise some of the shareholders’ rights through the depositary, and you will have the right to withdraw the shares underlying your ADSs from the deposit facility as described in “Description of American Depositary Shares—Deposit, Withdrawal and Cancellation” and “Your Right to Receive the Shares Underlying Your ADRs.”

 

Except as described in this prospectus and provided in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs may instruct the depositary to exercise the voting rights attaching to the shares represented by the ADSs. If no instructions are received by the depositary on or before a date established by the depositary, the depositary shall deem the holders to have instructed it to give a discretionary proxy to a person designated by us to exercise their voting rights. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.

 

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The depositary of our ADSs will, except in limited circumstances, grant to us a discretionary proxy to vote the ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests and the ability of our shareholders as a group to influence the management of our company.

 

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

 

   

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

 

   

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

 

   

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

 

   

a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

 

   

voting at the meeting is made on a show of hands.

 

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

 

As a holder of our ADSs, you may not be able to participate in rights offerings that are made available to our shareholders, and you may not receive cash dividends if it is impractical to make them available to you.

 

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement, the depositary will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act, or exempted from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you, as a holder of our ADSs, may be unable to participate in our rights offerings and may experience dilution in your holdings.

 

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

 

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

 

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We are a Cayman Islands company and, because shareholders of Cayman Islands companies have more limited rights and judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than that under United States law, our shareholders may have less protection for their shareholder rights than they would under United States law.

 

Unlike many jurisdictions in the United States, Cayman Islands law does not specifically provide for shareholder appraisal rights on a merger or consolidation of a company. This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation or to require that the offeror give you additional consideration if you believe the consideration offered is insufficient.

 

Shareholders of Cayman Islands exempted companies such as ourselves have no general rights under Cayman Islands law to inspect corporate records (save for the register of mortgages) and accounts or to obtain copies of lists of shareholders of these companies. Save for the register of mortgages, our directors have discretion to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

 

Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law (2007 Revision) are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.

 

There is uncertainty as to whether the Cayman Islands courts will:

 

   

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

 

   

entertain original actions brought against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

 

There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the Cayman Islands will generally recognize as a valid judgment a final and conclusive judgment in person 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 generally, 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 (i) such courts were competent to hear the action in accordance with private international law principles as applied in the Cayman Islands; (ii) such courts did not contravene the rules of natural justice of the Cayman Islands; (iii) such judgment was not obtained by fraud; (iv) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; and (v) is not bound on an error in Cayman Islands law. You should also read “Description of Share Capital—Differences in Corporate Law” for some of the differences between the corporate and securities laws in the Cayman Islands and the United States.

 

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

 

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FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

 

The words “anticipate,” “believe,” “could,” “estimate,” “intend,” “may,” “plan,” “seek,” “would” and similar expressions, as they relate to us, are intended to identify a number of these forward-looking statements. 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 strategies and financial needs. These forward-looking statements includes, without limitation:

 

   

our business and operating strategies;

 

   

our expansion and capital expenditure plans;

 

   

our operations and business prospects;

 

   

our planned use of proceeds;

 

   

our financial condition and results of operations;

 

   

the industry regulatory environment as well as the industry outlook generally; and

 

   

future PRC or global developments in the polysilicon manufacturing and solar and electronics industries.

 

You should read this prospectus thoroughly and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

This prospectus also contains data related to the polysilicon and wafer markets in several countries, including China. This market data, including data from Solarbuzz and iSuppli Corporation, or iSuppli, includes projections that are based on a number of assumptions. Solarbuzz is an independent solar energy research company headquartered in San Francisco, California, U.S.A. iSuppli is an electronics research firm headquartered in El Segundo, California, U.S.A. The Solarbuzz data has been derived from MARKETBUZZ 2007 and MARKETBUZZ 2008. The forecast information is taken from Solarbuzz’s Balanced Energy Scenario, which assumes end-market demand through the period is based on existing and currently known emerging PV incentive programs. The Solarbuzz report includes two more aggressive growth scenarios which have not been discussed in this prospectus. The iSuppli data has been derived from the iSuppli Global IDM Market Tracker—H1 2007 and Regional Application Market Forecast Tool (AMFT) 2007—Q3 2007. The polysilicon and wafer markets 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 rapidly changing nature of the polysilicon and wafer markets 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. Because of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus might not occur in the way we expect, or at all. You should not place undue reliance on these forward-looking statements.

 

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Although we will become a reporting company after this offering and have ongoing disclosure obligations under U.S. federal securities laws, we do not intend to update or otherwise revise the forward-looking statements in this prospectus, whether as a result of new information, future events or otherwise.

 

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USE OF PROCEEDS

 

We estimate we will receive net proceeds from this offering of approximately $            million, after deducting the underwriting discounts and offering expenses payable by us in this offering. These estimates are based upon an assumed initial offering price of $            per ADS, the midpoint of the range shown on the cover page of this prospectus.

 

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

 

   

approximately $400 million for contribution to JZPTD;

 

   

$20.0 million to fully redeem the Tranche A Floating Rate Secured Redeemable Bonds due 2009 issued by us in September 2007;

 

   

$240.6 million to acquire Sun Wave and Greatest Joy in connection with our acquisition of 36% of JZPTD from our affiliates;

 

   

approximately $15.3 million to repay the principal of, and fees in connection with arranging a short-term loan, in June 2008, from Happy Genius, our controlling shareholder in June 2008; and

 

   

the remaining amount for general corporate purposes, including potential acquisitions or investments in downstream expansion such as wafer operations. We are currently in preliminary discussions with one of our tolling wafer manufacturers, Huasheng, with respect to a potential acquisition of such manufacturer.

 

We intend to cause JZPTD to use the proceeds from our contribution in the amount of approximately $400 million to fund the capital expenditures related to our Phase III production facilities expansion and our in-house wafer production facilities.

 

The floating rate bonds were issued to fund equity contributions to JZPTD to fund a portion of the cost of constructing our Phase II facility and to pay the balance of the purchase price of our initial 64% equity interest in JZPTD. The floating rate bonds bear interest at three month LIBOR plus 3.0% per annum.

 

The $240.6 million to be used as part of the consideration to acquire the remaining 36% of JZPTD, which will be payable to entities affiliated with Mr. Zhu Gongshan and Moonchu, will be used partially to redeem the exchangeable bonds issued by Happy Genius.

 

The foregoing represents our current intentions to use and allocate the net proceeds of this offering based upon our present plans and business conditions. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus.

 

To the extent that the net proceeds of this offering are not immediately applied for the above purposes, we intend to deposit the proceeds into interest bearing bank accounts or to invest in short-term investment grade debt securities.

 

A $1.00 increase (decrease) in the initial public offering price would increase (decrease) the net proceeds of this offering by $            million, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

 

We will not receive any of the proceeds from the sale of ADSs by the selling shareholders. See “Principal and Selling Shareholders.”

 

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DIVIDEND POLICY

 

We have never declared or paid any dividends on our ordinary shares. We have no present plan to declare and pay any dividends on our shares or ADSs in the near future. We currently intend to retain our available funds and any future earnings to operate and expand our business.

 

We are a holding company incorporated in the Cayman Islands. We rely on dividends from JZPTD, our subsidiary in China, for our cash needs. Current PRC regulations restrict the ability of our subsidiary to pay dividends to us. See “Risk Factors—Risks Relating to Doing Business in China—We will rely on dividends paid by our subsidiary for our cash needs.”

 

Subject to our Memorandum and Articles of Association and the applicable laws, our board of directors has complete discretion as to whether to recommend a distribution of dividends to shareholders, which distribution is then subject to the approval of our shareholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that our board of directors may deem relevant. If we pay dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ADSs and ordinary shares, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of March 31, 2008. Our capitalization is presented:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to (i) the automatic conversion of our outstanding convertible redeemable preferred shares into 16,667,000 of our ordinary shares upon completion of this offering and (ii) the automatic redemption of our Tranche A Floating Rate Secured Redeemable Bonds due 2009 and the conversion of all of our outstanding Tranche B Floating Rate Secured Convertible Bonds due 2009 into 27,183,400 of our ordinary shares, upon completion of this offering;

 

   

on an as adjusted basis to give effect to (i) the events listed in the preceding paragraph, (ii) the issuance of 268,537,970 ordinary shares in the form of ADSs by us to entities affiliated with Mr. Zhu Gongshan and Moonchu in connection with our acquisition of the remaining 36% of JZPTD assuming an initial public offering price of $             per ADS, the midpoint of the estimated range of the initial public offering price and (iii) the issuance and sale of $446.9 million principal amount of the 2008 Convertible Bonds to entities affiliated with Mr. Zhu Gongshan and Moonchu in connection with our acquisition of the remaining 36% of JZPTD which will be delivered to the holders of the exchangeable bonds issued by Happy Genius and (iv) the acquisition of 36% of JZPTD; and

 

   

on an as further adjusted basis to give effect to (i) the events listed in the preceding paragraphs and (ii) the issuance and sale of              ordinary shares in the form of ADSs by us in this offering at the initial public offering price of $              per ADS, the midpoint of the estimated range of the initial public offering price, after deducting underwriting discounts and estimated aggregate offering expenses payable by us.

 

You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements included elsewhere in this prospectus.

 

     As of March 31, 2008
     Actual    Pro
Forma
   As Adjusted(1)     As Further
Adjusted
     (in thousands, except share data)      

Long-term indebtedness:

          

Floating rate bonds

   $ 63,904    $    $      

Bank borrowings

     78,929      78,929      78,929       78,929

Convertible bonds

               446,875       446,875
                            

Series A convertible redeemable preferred shares, $0.00001 par value, 50,000,000 shares authorized; 16,667,000 shares outstanding

     21,944                

Shareholders’ equity:

          

Ordinary shares, $0.00001 par value, 100,000,000,000 ordinary shares authorized; 978,333,000 ordinary shares issued,              ordinary shares outstanding on a pro forma basis,              ordinary shares outstanding on an as adjusted basis(1)              ordinary shares outstanding on an as further adjusted basis

     10      10      13    

Additional paid-in capital

     8,009      73,857      [             ]  

Retained earnings (Accumulated deficit)

     11,570      9,749      [             ]  

Accumulated other comprehensive income

     6,303      6,303      6,303       6,303
                            

Total shareholders’ equity (deficit)

     25,892      89,919      [             ]  
                            

Total capitalization(1)

   $ 190,669    $ 168,848    $ [             ]   $  
                            

 

Note:

 

  (1)   A $1.00 increase (decrease) in the assumed initial public offering price of $             per ADS, the midpoint of the estimated range of the initial public offering price, would increase (decrease) each of (i) cash and cash equivalents, (ii) ordinary shares and additional paid-in capital in the aggregate and (iii) total capitalization by $             million, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DILUTION

 

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the conversion of our convertible redeemable preferred shares and floating rate bonds and the fact that the initial public offering price per ordinary share of our ADSs is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares. Our net tangible book value as of March 31, 2008 was approximately $47.8 million, or $0.05 per ordinary share and $            per ADS, giving effect to the conversions above. Net tangible book value per ADS represents our total tangible assets minus our total liabilities and minority interests, divided by the total number of ADS equivalents outstanding upon incorporation of our company. Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the conversion of all outstanding convertible redeemable preferred shares and the convertible portion of our floating rate bonds into ordinary shares upon the completion of this offering and the additional proceeds we will receive from this offering, from the initial public offering price per ordinary share.

 

Without taking into account any other changes in such tangible book value after March 31, 2008 other than giving effect to the sale of our ADSs offered in this offering at the assumed initial public offering price of $            per ADS, the midpoint of the estimated range of the initial public offering price, and after deducting underwriting discounts and commissions and other estimated expenses of this offering and the conversion of our convertible redeemable preferred shares and the convertible portion of our floating rate bonds into ordinary shares upon completion of this offering, our adjusted net tangible book value per ADS as of March 31, 2008 would have been $            million, or $            per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, and $            per ADS. This represents an immediate increase of $            in net tangible book value per ADS and an immediate dilution in net tangible book value of $            per ordinary share and $            per ADS, to investors purchasing ADSs in this offering.

 

The following table illustrates such dilution on a per ADS basis assuming the underwriters do not exercise the over-allotment option:

 

Assumed initial public offering price

   $             

Net tangible book value as of March 31, 2008

  

Increase in net tangible book value attributable to this offering

  

Adjusted net tangible book value after this offering after giving
effect to the conversion of all outstanding convertible
redeemable preferred shares

  

Adjusted net tangible book value after the offering after giving effect to the conversion of the convertible portion of our floating rate bonds into ordinary shares upon the completion of this offering

  

Adjusted net tangible book value after giving effect to the additional proceeds we will receive from this offering

  

Dilution in net tangible book value per ADS to new investors
in this offering

  

 

A $1.00 increase (decrease) in the assumed initial offering price of $             per ADS (the mid-point of the price range set forth on the cover page of this prospectus) would increase (decrease) the total consideration and the total average price per ordinary share and per ADS paid by new investors by $            , $            , and $            , assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same, and without deducting underwriting discounts and commissions and estimated expenses payable by us.

 

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The following table summarizes, on an as adjusted basis, as of March 31, 2008, the differences between the existing shareholders (including holders of the convertible redeemable preferred shares and the floating rate bonds) and the new investors with respect to the number of ordinary shares (in the form of ADSs or ordinary shares) purchased from us, the total consideration paid and the average price per ordinary share paid at the assumed initial public offering price of $            per ADS, the midpoint of the estimated range of the initial public offering price, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Ordinary Shares Purchased     Total Consideration     Average
Price Per
Ordinary
share
   Average
Price Per
ADS
     Number    Percent     Amount    Percent       

Existing shareholders

           %   $                  %   $             $         

New investors

           %   $           %   $      $  
                                     

Total

           %   $           %   $      $  
                                     

 

The discussion and tables above also assume no exercise of any outstanding stock options. As of March 31, 2008, we had outstanding options to purchase 50,000,000 ordinary shares at $0.5 per share. These options will vest in four equal amounts at the end of one year from the date of this offering and on the three succeeding anniversaries of such date. Upon exercise, we will issue ADSs representing such ordinary shares. If all of these options had been exercised on or prior to March 31, 2008, after giving effect to the conversion of the convertible redeemable preferred shares, floating rate bonds, and this offering, ordinary shares purchased would have been             , total consideration would have been             , our net tangible book value per ADS would have been approximately $              million, or $              per ADS, and the dilution in net tangible book value per ADS to new investors would have been $              per ADS.

 

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EXCHANGE RATE INFORMATION

 

Our business is conducted in China and we expect that substantially all of our revenues will be denominated in RMB. This prospectus contains translations of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. The conversion of RMB into U.S. dollars in this prospectus is based on the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars to RMB in this prospectus were made at a rate of RMB7.0120 to $1.00, the noon buying rate in effect as of March 31, 2008. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On July 17, 2008, the noon buying rate was RMB6.8189 to $1.00.

 

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve Bank of New York.

 

     Noon Buying Rate

Period

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

2006

   7.8041    7.9579    8.0702    7.8041

2007

   7.2946    7.5806    7.8127    7.2946

2008 (through July 17)

   6.8189    7.0382    7.2946    6.8104

January

   7.1818    7.2405    7.2946    7.1818

February

   7.1115    7.1644    7.1973    7.1100

March

   7.0120    7.0722    7.1110    7.0105

April

   6.9870    6.9997    7.0185    6.9840

May

   6.9400    6.9725    7.0000    6.9377

June

   6.8591    6.8993    6.9633    6.8591

July (through July 17)

   6.8189    6.8426    6.8632    6.8104

 

Source: Federal Reserve Bank of New York

 

  Note:  

 

  (1)   Averages for a period are calculated by averaging the noon buying rates on the last business day of each month or the elapsed portion thereof during the relevant period. Monthly averages are calculated using the average of the daily rates during the relevant period.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

 

We are incorporated in the Cayman Islands in order to enjoy the following benefits:

 

   

political and economic stability;

 

   

a relatively effective judicial system;

 

   

a favorable tax system;

 

   

the absence of exchange control or currency restrictions; and

 

   

the availability of professional and support services.

 

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

 

   

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

 

   

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

 

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

 

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

 

We have appointed CT Corporation System, located at 111 Eighth Avenue, 13th Floor, New York, New York 10011, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

 

Appleby, our Cayman Islands counsel, and Grandall Law Group, our PRC counsel, have advised us that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

 

   

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

 

   

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

 

Grandall Law Group has further advised us that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements for PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. If there are neither treaties nor the PRC Civil Procedures Law, matters relating to the recognition and enforcement of a foreign judgment in China may be resolved through diplomatic channels. China does not have any treaties or other arrangements that provide for reciprocal recognition and enforcement of foreign judgments with the United States or the Cayman Islands. As a result, it is generally difficult to recognize and enforce in China a judgment rendered by a court in either of these two jurisdictions.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The following tables present the selected consolidated financial information of us and our predecessor, JZPTD. You should read the following information in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The historic results are not necessarily indicative of results to be expected in any future period.

 

The following selected consolidated statement of operations data and consolidated statement of cash flow data for the period from March 7, 2006 to December 13, 2006 (predecessor), the period from November 13, 2006 to December 31, 2006 (successor) and for the year ended December 31, 2007 (successor) and the consolidated balance sheet data as of December 31, 2006 and December 31, 2007 have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. JZPTD is considered our predecessor because we acquired 64% of the equity interest in JZPTD on December 13, 2006 and our own operations prior to the succession were insignificant relative to the operations assumed or acquired.

 

The following summary consolidated statement of operations data and consolidated statement of cash flow data for the three months ended March 31, 2007 and 2008 and the summary consolidated balance sheet data as of March 31, 2008 have been derived from the unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited pro forma balance sheet information as of March 31, 2008, which is derived from information included in our unaudited condensed consolidated financial statements included elsewhere in this prospectus, assumes the redemption and conversion upon completion of this offering of our convertible redeemable preferred shares and the convertible portion of our floating rate bonds. We have prepared the unaudited condensed consolidated financial statements on the same basis as the audited consolidated financial statements. The unaudited financial information includes all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented. The unaudited results for the three months ended March 31, 2008 may not be indicative of our results for the full year ending December 31, 2008.

 

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Table of Contents

 

     March 7,
2006 to
December 13,
2006
(Predecessor)
    November 13,
2006 to
December 31,
2006
(Successor)
    Year Ended
December 31, 2007
(Successor)
    Three Months Ended
March 31,
 
           2007
(Successor)
    2008
(Successor)
 
    

(in thousands, except per share and per ADS data)

 

Consolidated Statement of Operations Data

          

Revenues

          

Third party sales

   $     $     $ 33,378     $     $ 72,947  

Related party sales

                 7,470             8,584  
                                        

Total

                 40,848             81,531  

Cost of revenues

                 (10,996 )           (18,483 )
                                        

Gross profit

                 29,852             63,048  

Operating expenses (general and administrative)

     (2,776 )     (239 )     (17,836 )     (1,179)       (3,561 )
                                        

Operating income (loss)

     (2,776 )     (239 )     12,016       (1,179)       59,487  

Non-operating income (expense)

          

Interest income

     58       54       376       32       195  

Interest expense

     (743 )     (147 )     (6,097 )     (821)       (3,419 )

Other income

     12       2       6              

Gain on disposal of JSJST

                 566              

Amortization of deferred income

                             115  
                                        

(Loss) income before income tax and minority interest

     (3,449 )     (330 )     6,867       (1,968)       56,378  

Income tax (expense) credit

                 (3,123 )     1       1,207  
                                        

(Loss) income before minority interest

     (3,449 )     (330 )     3,744       (1,967)       57,585  

Minority interest

           118       (5,540 )     663       (22,063 )
                                        

Net (loss) income

     (3,449 )     (212 )     (1,796 )     (1,304)       35,522  

Deemed distribution on convertible redeemable preferred shares-accretion of redemption premium

                 (1,111 )           (833 )
                                        

Net (loss) income attributable to holders of ordinary shares

   $ (3,449 )   $ (212 )   $ (2,907 )   $ (1,304)     $ 34,689  
                                        

Weighted average shares used in (loss) earnings per share calculation

          

Basic—ordinary share

       1,000,000       994,292       1,000,000       981,355  

Basic—convertible redeemable preferred share

                         16,667  

Diluted—ordinary share

       1,000,000       994,292       1,000,000       983,094  

(Loss) earnings per ordinary share and ADS

          

Basic—ordinary share

       (0.0002 )     (0.0029 )     (0.0013 )     0.0348  

Basic—convertible redeemable preferred share

                         0.0847  

Diluted—ordinary share

       (0.0002 )     (0.0029 )     (0.0013 )     0.0347  

Basic—ADS

          

Diluted—ADS

          

Weighted average shares used in proforma earnings per ordinary share

          

Basic

             [             ]

Diluted

             [             ]

Proforma earnings per ordinary share and ADS

          

Basic—ordinary share

             [             ]

Diluted—ordinary share

             [             ]

Basic—ADS

          

Diluted—ADS

          

 

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Table of Contents
     March 7,
2006 to
December 13,
2006
(Predecessor)
    November 13,
2006 to
December 31,
2006
(Successor)
    Year Ended
December 31, 2007
(Successor)
    Three Months Ended
March 31,
 
           2007
(Successor)
   2008
(Successor)
 
    

(in thousands)

 

Consolidated Statements of Cash Flow Data

           

Net cash (used in) provided by operating activities

   $ (2,782 )   $ (842 )   $ 15,515     $  (2,475)    $  84,136  

Net cash (used in) provided by investing activities

     (60,857 )     1,865       (96,716 )     (10,847)      (90,306 )

Net cash (used in) provided by financing activities

     87,670       4,010       116,120       30,006      (51 )

Capital expenditures(1)

     (40,928 )     (6,562 )     (96,025 )     (28,317)      (89,572 )

 

Note:

  (1)   Capital expenditures consist of payments for purchase of property, plant and equipment and deposits for purchase of plant and equipment.
     December 31,
2006
(Successor)
   December 31,
2007

(Successor)
    March 31,
2008

(Successor)
    March 31,
2008

Pro Forma
(Successor)
 
     (in thousands, except share data)  

Consolidated Balance Sheet Data

         

Cash and cash equivalents

   $ 5,033    $ 40,067     $ 35,205     $ 16,894  

Total current assets

     21,840      63,724       65,507       45,507  

Property, plant and equipment, net

     18,909      141,731       227,311    

Total assets

     94,291      232,970       339,449       317,628  

Distribution payable

                      240,625  

Total current liabilities

     49,258      60,948       83,745       324,370  

Floating rate bonds

          62,099       63,904        

Convertible bonds

                      446,875  

Total liabilities

     82,680      181,697      
233,006
 
    856,602  

Minority interest

     9,823      34,935       58,607       58,607  

Series A convertible redeemable preferred shares ($0.00001 par value; no shares authorized and issued as of December 31, 2006 and 50,000,000 shares authorized and 16,667,000 shares outstanding as of December 31, 2007 and March 31, 2008; no shares outstanding on a pro-forma basis as of March 31, 2008)

          21,111       21,944        

Total shareholders’ equity (deficit)

   $ 1,788    $ (4,773 )     25,892       (597,581 )

 

     March 7,
2006 to
December 13,
2006
(Predecessor)
   November 13,
2006 to
December 31,
2006
(Successor)
   Year Ended
December 31, 2007
(Successor)
   Three Months
Ended
March 31, 2008

(Successor)

Selected Operating Data

           

Polysilicon production (in MT)

               154      302

Polysilicon sold (in MT)

               153      256

Average polysilicon selling price (net of VAT) (per kg)

   $   —    $   —    $ 267    $ 318

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data” and the historical consolidated financial statements of our company for the period from November 13, 2006 to December 31, 2006, the year ended December 31, 2007 and unaudited condensed consolidated financial statements for the three months ended March 31, 2007 and 2008 and the historical predecessor financial statements of JZPTD for the period from March 7, 2006 to December 13, 2006, including the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

 

Overview

 

We supply polysilicon and wafers to companies operating in the solar industry. Polysilicon is the primary raw material for wafers used in the solar and electronics industries. We manufacture polysilicon at our production facility in Xuzhou, Jiangsu Province, China and intend to commence wafer manufacturing in the third quarter of 2009. Our business was founded in March 2006 and upon completion and ramp up of our planned expansion to 13,500 MT per year by March 2010, we believe we will be one of the leading polysilicon producers in terms of production capacity. We currently plan to build 1.9 GW of wafer production capacity by the end of 2010. We commenced construction of our first polysilicon production facility, which produces solar grade polysilicon, in July 2006 and produced our first batch of polysilicon in September 2007. We made our first commercial shipment of polysilicon in October 2007. In the three months ended March 31, 2008, we produced 302 MT of polysilicon and in the three months ended June 30, 2008, we produced 359 MT of polysilicon. We began selling wafers produced for us through tolling arrangements with third party manufacturers in the second quarter of 2008 and expect wafer sales to contribute a significant majority of our revenues in the future.

 

We have an extremely limited operating history to serve as the basis for evaluating our business. You should consider the risks and difficulties frequently encountered by companies such as us in new and rapidly evolving markets such as the polysilicon and wafer markets. We ramped up our Phase I production facility to its designed annual capacity of 1,500 MT in March 2008. We commenced pilot production at our Phase II production facility with an designed annual capacity of 1,500 MT in June 2008. We commenced commercial production of our Phase II production facility in July 2008 and expect to achieve its fully ramped up capacity by December 2008. In December 2007, we commenced preparation for construction of our Phase III production facility, which is expected to have an aggregate annual production capacity of 10,500 MT. The production lines at our Phase III production facility are expected to commence commercial production in January 2009. We intend to fully ramp up our Phase III production facility by March 2010. As we began selling wafers produced for us through tolling arrangements with third parties in April 2008, none of the financial statements included in this prospectus reflect the results of such sales. In addition, we intend to commence in-house wafer manufacturing in 2009, which will have an impact on our financial results. We may not be able to achieve significant revenues or revenues growth in the future. In addition, our limited operating history provides a limited basis to assess the impact that critical accounting policies may have on our business and our financial performance.

 

We have entered into long-term wafer supply agreements with JA Solar, AIDE and Solarcell and long-term polysilicon supply agreements with Trina Solar and Solarfun. These contracts extend from 2008 through 2015 and require customers to make advance payments or provide standby letters of credit to us, have pre-set prices which decline substantially over the length of the contract and have pre-set volumes that increase substantially in the early years of the contract. We agreed to supply approximately 6.0 GW of wafers at a total contract price of $6.3 billion (RMB44.2 billion) to JA Solar, approximately 0.9 GW of wafers at a total contract price of $1.0 billion (RMB7.3 billion) to AIDE and approximately 0.7 GW at a total contract price of $0.9 billion (RMB6.3 billion) to Solarcell, respectively, over the terms of their respective supply contracts. We also agreed to supply

 

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16,350 MT of polysilicon at a total contract price of $1.5 billion (RMB10.3 billion) to Trina Solar and 9,990 MT of polysilicon at a total contract price of $1.1 billion (RMB7.6 billion) to Solarfun, over the terms of their supply contracts. Prior to our entry into these long-term supply contracts, we sold all of our polysilicon on the spot market to major Chinese solar manufacturers. We intend to enter into additional long-term supply contracts with a goal of selling approximately 85% of our output under long-term supply agreements and the remaining non-contracted portion of our polysilicon and wafers on the spot market in the future. We will recognize the revenues from these and future long-term supply contracts on a weighted average basis. See “— Key Factors Affecting Our Results of Operations — Supply Contracts with Customers”.

 

We have operated and managed our business as a single segment since inception. Although we commenced sales of wafers in April 2008, we intend to continue to operate and manage our business as a single segment. We currently do not account for the results of our operations on a geographic or other basis.

 

Key Factors Affecting Our Results of Operations

 

The most significant factors that directly or indirectly affect and will affect our financial performance and results of operations are:

 

   

supply contracts with customers;

 

   

polysilicon production capacity and volume;

 

   

cost of producing polysilicon;

 

   

wafer production volume and cost;

 

   

market price of polysilicon and wafers; and

 

   

industry demand.

 

Supply Contracts with Customers

 

We began shipments of polysilicon and wafers under long-term supply contracts in April 2008 that require customers to make advance payments, have pre-set prices which decline over the length of the contract and have pre-set volumes that increase in the early years of the contract. Prior to these shipments we sold all of our polysilicon on the spot market. We expect to enter into additional long-term wafer supply agreements and expect wafer sales to contribute a significant majority of our revenues. We intend to enter into additional long-term supply contracts with a goal of selling approximately 85% of our output under long-term supply contracts and the remaining non-contracted portion of our products on the spot market. We will recognize the revenues from our current and future long-term supply contracts on a weighted average basis. The resulting per kilogram average selling price for polysilicon supply contracts and the per piece average selling price for wafer supply contracts are significantly lower than our historical spot market sales prices and lower than the initial set prices in the early years of our long-term contracts.

 

As a result of these long-term supply contracts, in the early years we will report substantial deferred tax benefits on the deferred income with respect to such contracts. The deferred tax benefits will be determined at enacted income tax rates in the periods in which the related deferred tax assets are expected to be utilized. These benefits will be expensed in the later years of the long-term supply contracts when the corresponding deferred income is recognized. Pursuant to preferential tax treatment in the PRC, we are exempt from income tax in 2008 and 2009 and will be exempt from 50% of the applicable income tax for each of 2010, 2011 and 2012. As a result, deferred tax benefits are expected to constitute a material portion of our reported net income in the next few years as the revenues attributed to these long-term supply contracts is significant and the temporary excess of the tax based contract revenues over the accounting based weighted average revenues is largest in the early years.

 

Polysilicon Production Capacity and Volume

 

We ramped up our Phase I production facility to its designed annual capacity of 1,500 MT in March 2008. We plan to double our annual manufacturing capacity from 1,500 MT to 3,000 MT by December 2008 when we

 

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complete ramp up of our Phase II production facility, and to further expand our total fully ramped-up polysilicon production capacity to 13,500 MT per year by March 2010 and to 24,000 MT per year by 2011. We believe anticipated increases in our production capacity will have a significant effect on our results of operations, both in allowing us to produce and sell more polysilicon and wafers and to achieve higher revenue, and in lowering our marginal manufacturing costs resulting from economies of scale.

 

New and existing polysilicon manufacturers have announced expansion plans that could add capacity by tens of thousands of MT per year. Such capacity additions could reduce polysilicon prices and result in increased competition for us. In the event that excess capacity results in reduced utilization of our facilities, our per unit cost of production will increase and our business will be less competitive.

 

Cost of Producing Polysilicon

 

We will need to significantly reduce our cost of polysilicon production. A significant portion of our future sales are subject to long-term contracts which have fixed prices that decline substantially over the contract term. Accordingly, in order to maintain or improve our margins, we will need to continuously reduce our cost of polysilicon production.

 

To date we have focused on ramping Phase I capacity and maximizing the output. We have only a limited production history to measure our cost of manufacturing polysilicon. With the completion of our production ramp-up and implementation of the hydrochlorination process, we have shifted our focus to process integration in order to improve efficiency and reduce production costs. We plan to reduce the costs of our key production inputs, such as TCS and electricity consumption. We have thus far been able to shorten our production cycles by adjusting reactor parameters as well as improving the efficiency of our electricity usage.

 

We use TCS to produce polysilicon. TCS is one of the main and most costly production inputs and to date, we have relied on third party suppliers for substantially all of our TCS requirements. To reduce our reliance on TCS from third party suppliers, we are increasingly incorporating TCS production into our production process. We integrated the hydrochlorination process for our Phase I production facility in February 2008 and expect to integrate hydrochlorination in our Phase II production facility in September 2008. Our Taixing joint venture is constructing a TCS production facility with an initial annual capacity of 20,000 MT in Taizhou, Jiangsu Province, China, which we expect to commence pilot production shortly after this offering. We intend to increase the Taixing joint venture annual TCS production capacity to up to 60,000 MT by 2010. We intend to commence construction of a hydrogenation facility and a TCS production facility in Xuzhou in August 2008 which we expect to have combined capacity to produce up to 90,000 MT of TCS per year by the third quarter of 2009. Upon ramp up of these facilities, we expect to substantially reduce our reliance on third parties for our TCS requirements.

 

Wafer Production Volume and Cost

 

We intend to use a portion of the proceeds from this offering to finance the construction of our monocrystalline and multicrystalline wafer production facilities. We intend to begin constructing our first monocrystalline and multicrystalline production facility in Xuzhou by the end of 2008 and to commence pilot production by the third quarter of 2009. We intend to ramp up these facilities to a combined 0.8 GW production capacity by the end of 2009 and to further expand our wafer production capacity to 1.9 GW by the end of 2010. Our financial condition and results of operations will be determined, to a large extent, on whether we can finish the construction of and operate our wafer production plant at the planned production capacity in a cost effective manner.

 

We have entered into tolling contracts with two wafer manufacturers and intend to enter into additional tolling contracts with other wafer manufacturers.

 

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Market Price of Polysilicon and Wafers

 

Companies in the solar industry have been paying increasingly higher prices in recent years for polysilicon as demand has exceeded supply. According to Solarbuzz, the average long-term contract price for polysilicon increased from $35-40/kg in 2005 to $60-65/kg in 2007. The spot market for polysilicon reached $250-400/kg by the end of 2007.

 

We believe the average selling price of polysilicon will remain high in the near term due to the continued strong demand for polysilicon resulting from the rapid growth of the solar industry, the significant lead time required for building additional capacity for polysilicon production and significant competing demand for polysilicon from the electronics industry. We believe that none of these factors can be predicted with reasonable certainty as of the date of this prospectus. We expect that as polysilicon production capacity expands and the market supply increases, the price of polysilicon will likely decline in the medium- to long-term.

 

Wafer prices are based on a variety of factors, including global market wafer prices, supply and demand conditions in China, and the terms of our customer contracts. We price our wafers on a per-piece basis. According to Solarbuzz, wafer prices on a per-watt basis are expected to decline in the next few years. We expect this will be due to increased production efficiencies, expected increases in global polysilicon supplies and declines in polysilicon prices, and increased wafer production capacity in our industry, and we expect the average spot selling price of our wafers to decline in 2009 and thereafter.

 

Industry Demand

 

As we currently only sell polysilicon and wafers to the solar industry, our business and revenue growth depends significantly on the growth of the solar energy industry and associated demand for polysilicon and wafers. According to Solarbuzz, polysilicon-based technologies accounted for approximately 88.4% of global solar production in 2007. This market includes thin-film and other forms of solar production. Although solar power technology has been used for several decades, the solar market has only grown significantly in the past several years as solar power became an increasingly cost competitive alternative source of energy. We believe that the near-term demand growth for polysilicon and wafers depends largely on the availability and size of government subsidies and economic incentives for solar products and the current shortage of polysilicon supply. Today, the cost of solar power substantially exceeds the cost of electrical power generated from conventional fossil fuels such as coal and natural gas. As a result, governments in many countries, including Germany, Spain, Italy, the United States, Japan and China, have provided subsidies and economic incentives for the use of renewable energy such as solar power to reduce dependency on conventional fossil fuels as a source of energy. The demand for our polysilicon and wafers in our current, targeted or potential markets is affected significantly by these government subsidies and economic incentives.

 

China has also seen a recent increase in demand for electronic grade polysilicon for use in the manufacture of semiconductors. We believe the production of semiconductors in China will increase in the future and expect the demand for electronic grade polysilicon will also increase. We intend to improve our manufacturing process so that we have the flexibility to sell into both the solar and electronics industries.

 

Components of Results of Operations

 

Revenues

 

Our polysilicon revenues are determined by the metric tonnes of polysilicon that we are able to sell as well as the average selling prices of our polysilicon. Our wafer revenues are determined by the number of wafers that we are able to sell as well as the average selling prices of our wafers. Through September 30, 2007, we had no revenue. Our production prior to that date was very small. In the three months ended December 31, 2007, we sold 153 MT of polysilicon and recorded $40.8 million in revenues. In the three months ended March 31, 2008, we sold 256 MT of polysilicon and recorded $81.5 million in revenues.

 

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To date, we have reported our revenues separated into third party and related party revenues. All related party revenues reflect sales to Jiangsu Yangguang Jingyuan Science and Technology Co., Ltd., or JSJST, an entity affiliated with minority shareholders of JZPTD and Hebei Jinglong, a minority shareholder of JZPTD. JSJST and Hebei Jinglong ceased to be related parties on June 10, 2008 upon the completion of the acquisition by Happy Genius and Mandra Silicon of the 36% of JZPTD that we currently do not own. As a result, sales to JSJST and Hebei Jinglong will no longer be related party sales.

 

Our initial sales have consisted of solar grade polysilicon sold at spot market prices, where prices of our products are subject to greater price volatility than prices under negotiated contract agreements. We began selling wafers produced for us through tolling arrangements with third party manufacturers in April 2008. We have entered into long-term wafer supply agreements with JA Solar, AIDE and Solarcell and long-term polysilicon supply agreements with Trina Solar and Solarfun. These contracts extend from 2008 through 2015 and require customers to make advance payments, have pre-set prices which decline substantially over the length of the contract and have pre-set volumes that increase substantially in the early years of the contract. We intend to enter into additional long-term supply contracts with a goal of selling approximately 85% of our output under long-term supply agreements, and the remaining non-contracted portion of our polysilicon and wafers on the spot market in the future. We will recognize the revenues from our current and future long-term supply contracts on a weighted average basis.

 

Any dramatic decline in spot prices of polysilicon would cause us to incur losses later than some of our competitors with similar costs of production but who sell at lower spot market prices. On the other hand, participants in the spot market would benefit more quickly from continued high spot prices and face lower accounts receivable risks as spot market sales are generally not made on credit terms.

 

Cost of Revenues

 

Our cost of revenues related to polysilicon sales is affected primarily by our ability to control raw material costs, to achieve economies of scale in our operations and to efficiently manage our supply chain.

 

We expect to incur cost of revenues in our polysilicon operations primarily consisting of:

 

   

TCS. TCS is a key component of producing polysilicon, the costs of which accounted for a majority of our total cost of sales for the year ended December 31, 2007 and the three months ended March 31, 2008. We currently purchase TCS pursuant to short term agreements with a number of TCS suppliers. We have a 70% controlling interest in the Taixing joint venture from which we expect to source a portion of our TCS needed once its TCS production facility commences production. In the future we expect the costs associated with the purchase of TCS from third parties will decrease as we are now able to implement the hydrochlorination process, we expect to source TCS from our Taixing joint venture and we are developing an in-house TCS production facility in conjunction with the hydrogenation process. We expect our initiatives at process integration will decrease TCS costs in the future. See “Business—Manufacturing Process—Materials and Inputs used in Polysilicon Production—Trichlorosilane”.

 

   

Electricity. The cost of electricity is a substantial component of our total cost of revenue. We source our electricity from the Xuzhou Electricity Company at market prices which could vary.

 

   

Other materials and inputs. The production of polysilicon requires water, steam, metallurgical silicon, or MG-Si, sulphuric acid and sodium hydroxide as its most significant inputs. Of these, we purchase water on long-term contracts and the other products on the spot market.

 

   

Direct labor. Direct labor costs include salaries and benefits for personnel directly involved in production activities.

 

   

Depreciation of property, plant and equipment. Depreciation of property, plant and equipment is provided on a straight-line basis over the estimated useful life, which is 50 years for land use rights,

 

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generally 20 years for buildings, 15 years for equipment and machinery and five years for motor vehicles and electronic equipment and furniture and fixtures, taking into account their estimated residual value. Due to our capacity expansion, depreciation in absolute terms has increased significantly. We expect this trend to continue as we expand our production capacity.

 

Our cost of revenues related to wafer sales, until our in-house wafer manufacturing facility is operational, is primarily affected by the tolling fees we pay, which will depend on market demand for such capacity and the amount of available capacity. We expect to have an increased portion of international wafer sales as our production increases. Current export VAT refund rate is 5% for wafer products. The remaining VAT after such refund of 12% due to the difference between the VAT rate and the export VAT refund will be recorded as our cost of revenues. As polysilicon supplies become more readily available, to the extent wafer manufacturing capacity has not similarly increased, we would expect wafer processing capacity for third party processing will become less available and hence such capacity would be more expensive. We intend to build our own wafer manufacturing capacity in order to control our production costs. At such time, our cost of revenues related to wafer sales will be affected primarily by the same factors as the cost of revenues for polysilicon above, as well as the cost of other consumables used in the production of wafers.

 

General and Administrative Expenses

 

Our general and administrative expenses consist primarily of salaries and benefits for our administrative and finance personnel, other travel and other corporate expenses, bank charges and depreciation of equipment used for administrative purposes. We expect our general and administrative expenses will increase in the near term as a percentage of revenue as we hire additional personnel and incur professional expenses to support our operations as a listed company in the United States as well as additional employees in connection with the start-up of our Phase III production facilities and future production facilities. However, we expect that our general and administrative expenses will decrease as a percentage of our revenues over time as we achieve greater economies of scale. In addition, before we commence commercial production of a new manufacturing facility, we account for all production-related costs, including direct labor costs and overhead costs, as administrative expenses. After the commencement of commercial production at a production facility, these expenses are accounted for as our cost of revenues. We expect our administrative expenses to grow as we expect to hire additional supporting staff in conjunction with our growth.

 

Research and Development Expenses

 

To date, our research and development expenses have been minimal as we have focused on initial production. Research and development expenses have been included in general and administrative expenses. Our research and development expenses will consist primarily of costs of raw materials used in research and development activities, salaries and employee benefits for research and development personnel, and equipment costs relating to the design, development, testing and enhancement of our production process. We will conduct our research and development, design and manufacturing operations primarily in China, where the costs of skilled labor, engineering and technical resources, as well as land, facilities and utilities, tend to be lower than those in more developed countries. We expect our research and development expenses to increase significantly as a percentage of our revenues in the future as we continue to hire additional research and development personnel and focus on continuous innovation of process technologies for our products, including improving our technical know-how to produce higher purity polysilicon and wafers.

 

Selling and Marketing Expenses

 

We incurred no material selling and marketing expenses through March 31, 2008. To date, our selling expenses were included in general and administrative expenses. Our selling and marketing expenses consist primarily of advertising costs, packaging and shipping costs, salaries and employee benefits of sales personnel, sales-related travel and entertainment expenses and other selling and marketing expenses including sales

 

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commissions paid to our sales agents. We expect that our selling and marketing expenses will increase in the near term as we increase our sales efforts, hire additional sales personnel and expand into the electronic grade polysilicon and international markets. However, we expect that the growth in revenues will outpace the growth in selling and marketing expenses over time.

 

Taxation

 

We expect our net income to be derived primarily from JZPTD, our operating subsidiary in China. Prior to January 1, 2008, JZPTD was subject to PRC enterprise income tax of 33.0%, which included a 30.0% state income tax and a 3.0% local income tax. For the year ended December 31, 2007, JZPTD was exempt from the local income tax. As of January 1, 2008, we became subject to the new EIT Law, which provides for a national 25% rate applicable to most enterprises and replaces the prior 30.0% state income tax subject to the benefits that had been previously granted.

 

We have received approval for a two-year tax exemption from the enterprise income tax for the years ended December 31, 2008 and 2009 and will be taxed at 50.0% of the new EIT tax rate for the years ending December 31, 2010, 2011 and 2012, providing a tax rate of 12.5%.

 

In addition, under the new EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within the PRC may be considered a resident enterprise and will normally be subject to the enterprise income tax at the rate of 25% on its global income. The rule implementing the EIT Law provides that the term “de facto management bodies” refers to management bodies which have material management and control over all aspects of the business, including without limitation, the production, operation, personnel, finance, and assets of the enterprise. However, it is still unclear if the PRC tax authorities would subsequently determine that, notwithstanding our status as the Cayman Islands holding company of our operating business in the PRC, with administrative headquarters and personnel in Hong Kong, we should be classified as a resident enterprise, whereby our global income will be subject to PRC income tax at a tax rate of 25%. In any event, we do not expect to derive substantial earnings outside the PRC in the foreseeable future. A foreign investor would be subject to a 10% tax for dividends received from its PRC enterprise, provided that such foreign investor does not set up any entity in China. However, as JZPTD is owned directly by our Hong Kong subsidiary, which is a non-resident enterprise, and as Hong Kong has an arrangement with the PRC under which the tax rate from dividend income is 5%, dividends paid by JZPTD would be subject to a 5% withholding tax.

 

Pursuant to the Interim Regulations on Value Added Tax and its Implementation Rules issued in 1993, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay value-added tax, or VAT, at a rate of 17% of the gross sales proceeds received. We anticipate that most of our initial sales will be made domestically. We have received VAT rebates from the purchase of certain domestically manufactured equipment. As of December 31, 2007, we received VAT rebates of RMB10.0 million.

 

We expect to have minimal taxable income in jurisdictions other than China. Under current laws of the Cayman Islands, we are not subject to income or capital gains tax. Additionally, dividend payments made by us are not subject to withholding tax in the Cayman Islands.

 

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 (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenue and expenses during each reporting period. We continually evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, expectations regarding the future based on available information and reasonable assumptions, which together form a basis for

 

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making judgments about matters not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We consider the policies discussed below to be critical to an understanding of our financial statements as their application places the most significant demands on the judgment of our management.

 

Revenue Recognition

 

We manufacture and sell polysilicon and wafers. We recognize revenue when all of the following conditions are met: price to the buyer is fixed and determinable, products are delivered and title has passed to customers and collectability is reasonably assured. Sales agreements typically do not contain customary product warranties except for return and replacement of defective products within period of 30 days from delivery. Sales agreements do not contain post-shipment obligations or any other return or credit provisions.

 

A majority of the sales contracts provide that customers must arrange for the shipping of the goods and bear all the costs of such shipping and the risks associated with loss or damage of the goods from our manufacturing premises. Thus, we fulfill our obligation of delivery when the goods are shipped. We required and received cash (or bank note of equivalent value) on or before delivery for a majority of our sales transactions. We extended a credit term to only one customer since commencement of operations and have assessed a number of factors to determine whether collection was reasonably assured including the customer’s credit worthiness.

 

Long-lived Assets

 

We depreciate and amortize our property, plant and equipment using the straight-line method of accounting over the estimated useful lives of the assets. We make estimates of the useful lives of plant and equipment in order to determine the amount of depreciation expense to be recorded during each reporting period. We estimate the useful lives at the time the assets are acquired based on historical experience with similar assets as well as anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, we might shorten the useful lives assigned to these assets, which would result in the recognition of increased depreciation and amortization expense in future periods. There has been no change to the estimated useful lives during the period presented.

 

We evaluate long-lived assets, including property, plant and equipment, which are subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We assess recoverability by comparing the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, we recognize an impairment charge based on the amount by which the carrying amount of the asset exceeds the fair value of the asset. We estimate the fair value of the asset based on the best information available, including prices for similar assets and in the absence of an observable market price, the results of using a present value technique to estimate the fair value of the asset.

 

Share-based Compensation

 

As further described in Note 12 to our Consolidated Financial Statements, we account for share-based compensation under Statement of Financial Accounting Standards No. 123-R, “Share-Based Payment”, or SFAS No. 123R. Under SFAS No. 123R, the cost of all share-based payment transactions must be recognized in our consolidated financial statements based on their grant-date fair value over the required period, which is generally the period from the date of grant to the date when the share compensation is no longer contingent upon additional service from the employee, or the vesting period. This statement also requires us to adopt a fair value-

 

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based method of measuring the compensation expense related to share-based compensation. For options granted to employees, we record share-based compensation expenses for the fair value of the options at the grant date. We categorize these share-based compensation expenses in our (i) cost of revenues; (ii) general and administrative expenses; and (iii) research and development expenses, depending on the job functions of the grantees of our restricted shares.

 

The determination of fair value of equity awards such as options requires making complex and subjective judgments about the projected financial and operating results of the subject company. It also requires making 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 on our consolidated financial statements.

 

We had 5,000,000 options to acquire 50,000,000 shares outstanding as of March 31, 2008. The fair value of the options at February 29, 2008, the grant date, was $13.89 per option.

 

We are responsible for estimating the fair value of the options granted by us. When estimating the fair value of such options, our management has considered a number of factors, including the result of a third-party appraisal and an equity transaction of our company, while taking into account standard valuation methods and the achievement of certain events. We engaged Jones Lang Lasalle Sallmans Limited, an independent third party valuation firm, to assess the fair value of our share options as of February 29, 2008 on a contemporaneous basis.

 

Changes in our estimates and assumptions regarding the expected volatility of our ordinary shares could significantly impact the estimated fair values of our share options and, as a result, our net income and the net income available to our ordinary shareholders.

 

We determined the fair value of the options on the date of grant by using the binomial option-pricing method under the following assumptions: risk free interest rate of 3.71%, 60.65% volatility, no dividends, zero forfeiture rate and a suboptimal exercise factor of 1.5. If different assumptions were used, our share-based compensation expenses, net income and income available to our shareholders could have been significantly different. The total compensation expenses in connection with our option grants that will be recognized for the vesting period of the options granted on February 29, 2008 will be approximately $69.4 million.

 

The 5,000,000 options granted on February 29, 2008 had an exercise price of $5 per option. At the grant date, the underlying ordinary shares had a fair value of $1.71 per share; providing an intrinsic value of $12.14 per option.

 

Determining the fair value of our ordinary shares requires making complex and subjective judgments regarding projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of grant. The assumptions used in deriving the fair value of our ordinary shares include: i) there will be no material change in the existing political, legal, technological, fiscal or economic condition of China that may adversely affect our business; ii) the contracts and agreements we entered into will be honored; and iii) our competitive advantages and disadvantages do not change significantly during the period under consideration. These assumptions are inherently uncertain. If different assumptions were used, our share-based compensation expenses, net income and income per share could have been significantly different.

 

The independent appraiser used solely the income approach to determine the fair value of our ordinary shares. In the income approach, the value depends on the present worth of future economic benefits to be derived from our projected sales income. Indications of value are developed by discounting projected future net cash flows available for payment of shareholders’ interest to their present worth at a discount rate that reflects a number of factors, including the current cost of financing and the risk considered inherent in the business. A discount rate represents an estimate of the rate of return required by a third party investor for an investment of

 

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this type. The rate of return expected from an investment by an investor relates to the perceived risk of the investment. The calculation of the discount rate is based on the Capital Asset Pricing Model, which takes into account the risk free rates, beta of selected comparable solar cell companies, market returns in comparative markets and our company specific risks, including business risk, small size risk and country risk. For this method, the independent appraiser used a discount rate of 13.25%.

 

Because the interest in the equity value of our company includes both preferred shares and ordinary shares, the fair value of the equity interest is allocated to preferred shares and ordinary shares using the option-pricing method. Under the option-pricing method, the independent appraiser treats ordinary shares and preferred shares as call options on our company’s value, with exercise prices based on the value of the liquidation preference of the preferred shares. Because a call option is used, the Black-Scholes model, which is commonly adopted in the option-pricing method, is applied to price the call option. The independent appraiser considered various terms of the preferred shares and ordinary shares, including the level of seniority, dividend policy, conversion ratios, and cash allocation upon liquidation of the enterprise in the option-pricing method.

 

Internal Control Over Financial Reporting

 

Prior to this offering, we have been a private company with limited accounting personnel and other resources to address our internal controls and procedures. During the course of the preparation and external audit of our consolidated financial statements as of December 31, 2006 and December 31, 2007 and for the period from March 7, 2006 to December 13, 2006 (predecessor), the period from November 13, 2006 to December 31, 2006 (successor) and the year ended December 31, 2007 (successor), we and our independent registered accounting firm identified a number of deficiencies in our internal control over financial reporting, including a number of material weaknesses and significant deficiencies as defined in the standards established by the U.S. Public Company Accounting Oversight Board. Material weaknesses and significant deficiencies in our internal control over financial reporting could result in a material misstatement of our financial statements that will not be prevented or detected. The material weaknesses identified were: (1) lack of an accounting policies and procedures manual; and (2) a lack of dedicated financial reporting and accounting resources necessary to comply with U.S. GAAP. In addition, we and our independent registered public accounting firm identified certain significant deficiencies in our internal control over financial reporting. These significant deficiencies were: (1) lack of a risk assessment process; and (2) related party transactions were not accounted for separately from non-related party transactions.

 

In order to remedy the material weaknesses and significant deficiencies, we are undertaking several measures to further improve our internal control over financial reporting. We hired Mr. Zou Jun as our chief financial officer who commenced his employment with us in May 2008. We have hired an outside consulting firm to review our internal control processes, policies and procedures in order to assist us in identifying weaknesses in our internal control over financial reporting. We plan to provide further training to our financial and accounting staff to enhance their knowledge of U.S. GAAP. We are also adopting and implementing additional policies and procedures, including an enterprise resource planning system, to strengthen our internal controls over financial reporting. We plan to continue to take additional steps to remedy these material weaknesses and significant deficiencies in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. These steps include (i) performing management testing on internal controls, (ii) hiring additional experienced internal auditors and (iii) conducting dry-run testing for compliance with Section 404. If, however, we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. Moreover, effective internal controls over financial reporting is necessary for us to produce reliable financial reports and is 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 anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

 

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Recent Quarterly Results of Operations

 

The following table presents our consolidated quarterly results of operations for the three months ended December 31, 2007 and March 31, 2008 and as a percentage of total revenues for our respective periods. You should read the following table in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this prospectus. We have prepared the consolidated quarterly financial information on the same basis as our audited consolidated financial statements. This unaudited consolidated financial information includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair representation of our financial position and operating results for the quarters presented. Our operating results for any particular quarter are not necessarily indicative of our future results.

 

    Three Months Ended  
    December 31,
2007
(unaudited)
    March 31,
2008
(unaudited)
 
    (in thousands, except percentages)  

Consolidated Statement of Operations Data

       

Revenues:

       

Third party sales

  $ 33,378     81.7 %   $ 72,947     89.5 %

Related party sales

    7,470     18.3       8,584     10.5  
                           

Total revenues

    40,848     100.0       81,531     100.0  
                           

Cost of revenues

    (10,996 )   (26.9 )     (18,483 )   (22.7 )
                           

Gross profit

    29,852     73.1       63,048     77.3  

Operating expenses (general and administrative)

    (4,458 )   (10.9 )     (3,561 )   (4.4 )

Non-operating income (expenses):

       

Interest income

    239     0.6       195     0.2  

Interest expense

    (3,949 )   (9.7 )     (3,419 )   (4.2 )

Other income

    1     0.0            

Amortization of deferred income

              115     0.1  
                           

Income before income tax and minority interest

    21,685     53.1       56,378     69.1  

Income tax expense

    (3,290 )   (8.1 )     1,207     1.5  
                           

Income before minority interest

    18,395     45.0       57,585     70.6  

Minority interest

    (8,010 )   (19.6 )     (22,063 )   (27.0 )
                           

Net income

    10,385     25.4       35,522     43.6  

Deemed distribution on convertible redeemable preferred shares-accretion of redemption premium

    (833 )   (2.0 )     (833 )   (1.0 )
                           

Net income attributable to holders of ordinary shares

  $ 9,552     23.4 %   $  34,689     42.6 %
                           

 

Revenues, cost of revenues and gross profit. Revenues increased 99.6% from $40.8 million in the three months ended December 31, 2007 to $81.5 million in the three months ended March 31, 2008. This increase was primarily due to increased sales volume from 153 MT of polysilicon in the three months ended December 31, 2007 to 256 MT in the three months ended March 31, 2008 with an increase in the average selling price of polysilicon, excluding VAT, from $267 per kg to $318 per kg. All these sales were made on the spot market. Cost of revenues increased 68.1% from $11.0 million in the three months ended December 31, 2007 to $18.5 million in the three months ended March 31, 2008. This increase was primarily due to increased sales volumes and an increase in TCS purchase prices. As a result of the foregoing, our gross profit increased 111.2% from $29.9 million in the three months ended December 31, 2007 to $63.0 million in the three months ended March 31, 2008, representing gross margins of 73.1% in the three months ended December 31, 2007 and 77.3% in the three months ended March 31, 2008.

 

Operating expenses. Operating expenses decreased 20.1% from $4.5 million in the three months ended December 31, 2007 to $3.6 million in the three months ended March 31, 2008. This decrease was primarily due to an exchange loss of $0.5 million in the three months ended December 31, 2007 and an exchange gain of $0.2 million in the three months ended March 31, 2008 and a decrease in management fees which were partially offset by an increase in entertainment expenses, legal and professional fees, consultancy fees and sundry expenses.

 

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Non-operating income (expenses). We had non-operating expenses of $3.7 million in the three months ended December 31, 2007 and non-operating expense of $3.0 million in the three months ended March 31, 2008. Non-operating expense in the three months ended December 31, 2007 was primarily due to interest on our floating rate bonds, onshore loans and the amortization of deferred financing costs aggregating $3.9 million. Non-operating expenses in the three months ended March 31, 2008 was primarily due to interest expenses on our floating rate bonds, onshore loans and amortization of deferred financing cost aggregating $3.4 million.

 

Net income attributable to holders of ordinary shares. Net income attributable to holders of ordinary shares increased 263.2% from $9.6 million in the three months ended December 31, 2007 to $34.7 million in the three months ended March 31, 2008, representing a net margin of 23.4% in the three months ended December 31, 2007 and 42.6% in the three months ended March 31, 2008.

 

Comparative Results of Operations

 

We have only been in existence for a limited period of time and only began to generate revenues in the three months ended December 31, 2007. We have no comparable annual periods for a year to year comparison. We have set forth below a discussion of our results of operations comparing the three months ended March 31, 2007 to the three months ended March 31, 2008 and discussing each of the periods covered by our consolidated financial statements included elsewhere in this prospectus. In addition, we received our first revenues from wafer sales in April 2008. None of the periods covered by our consolidated financial statements reflect wafer revenues or wafer related cost of revenues.

 

Three months ended March 31, 2007 and 2008

 

Revenues, cost of revenues and gross profit. We had no revenues, cost of revenues or gross profit for the three months ended March 31, 2007, as we were constructing our Phase I production facility. For the three months ended March 31, 2008 we had $81.5 million in revenues and $18.5 in cost of revenues, reflecting the factors outlined in the previous section, which resulted in gross profit of $63.0 million.

 

Operating expenses and non-operating expenses. We had operating expenses of $1.2 million, consisting of administrative expenses related to our construction activities and start-up expenses, and non-operating expenses primarily consisting of interest expense of $0.8 million related to domestic Renminbi borrowing to support construction of our Phase I production facility, in the three months ended March 31, 2007. For the three months ended March 31, 2008, we had $3.6 million of operating expenses due primarily to the increase in staffing to support our operations and an increase to non-operating expenses primarily consisting of interest expense of $3.4 million related to our increased domestic Renminbi borrowing and the addition of our floating rate bonds.

 

Net (loss) income attributable to holders of ordinary shares. We had a net loss attributable to holders of ordinary shares for the three months ended March 31, 2007 resulting from the expenses discussed above and the absence of any revenues. We had net income attributable to holders of ordinary shares of $34.7 million in the three months ended March 31, 2008.

 

Year ended December 31, 2007

 

Revenues, cost of revenues and gross profit. We had revenues of $40.8 million in the year ended December 31, 2007, all of which was recorded in the final three months of that period. We sold 153 MT of polysilicon in the final three months of 2007, which was substantially all we manufactured. Our cost of revenues in the year ended December 31, 2007, which related entirely to the final three months of the period, was $11.0 million. As this period reflected initial ramping up of production and did not include any benefit from the hydrochlorination process, we do not believe our gross profit of $29.9 million on sale of 153 MT and revenues of $40.8 million is necessarily representative of results to be expected in future periods.

 

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Operating expenses. Our operating expenses consisted of both general and administrative and of selling and marketing expenses in the year ended December 31, 2007. Operating expenses for the year ended December 31, 2007 were $17.8 million, including consulting fees of $5.1 million paid to Triple A Investments Limited and Goldfinch Consultants Limited, which are both non-affiliates, for consulting services, salaries for employees of $2.5 million, a discretionary bonus paid to our employees for meeting construction targets of $0.7 million, handling fees paid to Shanghai Creative Energy Company Limited, an affiliate, for the acquisition of property, plant and equipment of $0.4 million and a foreign exchange loss of $1.5 million. The consulting services related to assistance in setting up our business, sourcing equipment, human resources and regulatory matters. The exchange loss in the year ended December 31, 2007 primarily related to the delayed payment of the RMB-denominated purchase price of JZPTD. The payment, which was made in December 2007, was made in U.S. dollars to Guotai Energy Investments Ltd. and Beijing Zhongneng Renewable Energy Investments Ltd., which are both non-affiliate equity investors in JZPTD. Other operating expenses in the year ended December 31, 2007 included travel expenses and other professional expenses.

 

Non-operating income (expenses). Our non-operating expenses for the year ended December 31, 2007 were $5.2 million. This was primarily due to interest expenses on our loan facilities and our floating rate bonds of $5.7 million and amortization of deferred financing costs of $0.4 million which was partially offset by a gain on the disposal of JSJST of approximately $0.6 million and interest income of approximately $0.4 million earned from our bank deposits.

 

Net loss attributable to holders of ordinary shares. As a result of the factors described above, we had a net loss attributable to holders of ordinary shares of $2.9 million for the year ended December 31, 2007.

 

Period from November 13, 2006 to December 31, 2006 (successor)

 

Revenues, cost of revenues and gross profit. No revenues, cost of revenues and gross profit were recorded by us in the period from November 13, 2006 to December 31, 2006 (successor).

 

Operating expenses. Operating expenses for the period from November 13, 2006 to December 31, 2006 (successor) were $0.2 million. Our operating expenses consisted only of general and administrative expenses. These expenses consisted of initial business start up costs to fund the commencement of construction of our Phase I production facility.

 

Non-operating income (expenses). Non-operating expenses for the period from November 13, 2006 to December 31, 2006 (successor) were $0.1 million. These expenses consisted primarily of net interest expenses related to borrowings incurred to fund our initial operations.

 

Net loss attributable to holders of ordinary shares. As a result of the factors described above, we had a net loss attributable to holders of ordinary shares of $0.2 million for the period from November 13, 2006 to December 31, 2006 (successor).

 

Period from March 7, 2006 to December 13, 2006 (predecessor)

 

Revenues, cost of revenues and gross profit. No revenues, cost of revenues and gross profit were recorded by our predecessor in the period from March 7, 2006 to December 13, 2006 (predecessor).

 

Operating expenses. Operating expenses for the period from March 7, 2006 to December 14, 2006 (predecessor) were $2.8 million. These expenses consisted of initial business start up costs to fund the commencement of construction of our Phase I production facility in June 2006, and included $1.5 million in consultancy fees paid to an affiliate under a technical consultancy agreement for the procurement of polysilicon production technology including the sourcing and import of equipment.

 

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Non-operating income (expenses). Non-operating expenses for the period from March 7, 2006 to December 13, 2006 (predecessor) were $0.7 million. These expenses consisted primarily of net interest expenses related to borrowings incurred to fund our initial operations.

 

Net loss attributable to holders of ordinary shares. As a result of the factors described above, we had a net loss attributable to holders of ordinary shares of $3.4 million for the period from March 7, 2006 to December 13, 2006 (predecessor).

 

Plan of Operations for 2008

 

We have received a number of the approvals needed for our 1,500 MT per year Phase II production facility, which is designed to produce both solar and electronic grade polysilicon. We have completed installation of all 18 reactors, five imported and 13 domestically produced, and in June 2008, we commenced pilot production. We commenced commercial production of our Phase II production facility in July 2008 and expect to achieve its fully ramped up capacity by December 2008. We anticipate 2008 capital expenditures, excluding capitalized interest during construction, to be approximately $140.0 million for our Phase II production facility. We recently incurred RMB767.4 million in onshore borrowings which will be used to finance our intended expansion of polysilicon production facilities and in-house wafer production facility.

 

Our Taixing joint venture is constructing a TCS production facility with an initial annual capacity of 20,000 MT which we expect to commence pilot production shortly after this offering. We intend to increase the Taixing joint venture annual TCS production capacity to up to 60,000 MT by 2010. We intend to commence construction of a hydrogenation and a TCS production facility in Xuzhou in August 2008 which we expect to have capacity to produce up to 90,000 MT of TCS per year by the third quarter of 2009. Subsequent to March 31, 2008, we have spent approximately $3.0 million related to the Taixing joint venture. We expect the capital expenditures related to the hydrogenation and in-house TCS production facility, excluding capitalized interest during construction, will be approximately RMB260.0 million and RMB60.0 million, respectively, the majority of which we expect to incur in 2008.

 

We have received PRC government environmental and NDRC approvals for 6,000 MT per year of our 10,500 MT per year Phase III production facilities and have commenced negotiations for equipment purchase contracts. We intend to apply for NDRC approvals for the remaining capacity of Phase III production facility after our Phase II production facility has commenced commercial production. We will source a greater portion of our equipment for the Phase III production facilities from domestic manufacturers and have entered into equipment supply contracts for reactors and certain other equipment for our Phase III production facility. See “Business—Equipment”. We expect the capital expenditures related to the Phase III production facilities, excluding capitalized interest during construction, will be approximately $830.0 million, the majority of which we expect to incur in 2008. We expect to finance this expenditure with part of the $400.0 million proceeds from this offering and the balance from domestic RMB-denominated borrowings. For initial equipment purchases, we may fund a portion of the equipment deposits or purchase price from advance payments we receive on long-term wafer and polysilicon supply contracts discussed below. Phase III is expected to consist of three production lines with annual capacities of 3,500 MT each, each of which is expected to be able to produce both solar and electronic grade polysilicon. The first production line at our Phase III production facilities is expected to commence commercial production in January 2009. We intend to fully ramp up our Phase III production facilities by March 2010.

 

We have entered into equipment supply contracts for wire saws and squarers for our in-house production of wafers. We will also enter into additional equipment purchase contracts for our wafer capacity expansion. Committed capital expenditures related to these equipment purchase contracts are approximately $238.7 million. Although deposits will be made in 2008, we expect the majority of such capital expenditures to be incurred in 2009.

 

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We have entered into five long-term supply contracts for the sale of polysilicon and wafers. The average selling price for the polysilicon supply contracts and for the wafer supply contracts are significantly lower than our historical spot market sales prices and lower than the initial set prices in the early years of our long-term contracts. We recognize revenues from the contracts on a weighted average basis. For the three months ended June 30, 2008, we continued to derive a substantial majority of our revenues from spot market sales, but we expect that for the three months ending September 30, 2008, less than 50% of our revenues will be derived from spot market sales. As a result of the foregoing, we expect our short-term profitability to be adversely effected and we may not maintain profitability in the near term. See “Risk Factors — Risks Relating to Our Business —We did not achieve profitability until the three months ended December 31, 2007 and we may not maintain profitability.” We intend to enter into additional long-term supply contracts with a goal of selling approximately 85% of our output under long-term supply agreements and selling the remaining non-contracted portion of our polysilicon and wafers on the spot market. We also intend, especially as Phase III production begins, to seek a greater proportion of international sales.

 

We expect to finance the expenditure to be incurred in connection with our expansion plans described above in this section with the portion of the proceeds of the offering that will be contributed to JZPTD, existing onshore borrowings and cash generated by our operating activities.

 

We expect to significantly increase the number of our employees, but less than proportionally to our increased capacity, as Phase II and Phase III production facilities come on line. Our Phase I production facility was fully ramped up in March 2008 with the hydrochlorination process fully operational. Initial Phase II and Phase III manufacturing will commence prior to the hydrochlorination or hydrogenation processes being fully operational at such facilities, so their production initially will need to be integrated with the hydrochlorination or hydrogenation processes after commencing initial operations.

 

Liquidity and Capital Resources

 

Cash Flows and Working Capital

 

To date, we have financed our operations primarily through the issuance of ordinary shares and bonds, bank loans and contributions from a shareholder. We received $60.0 million in proceeds from the issuance and sale of our floating rate bonds. We obtained RMB-denominated bank loans which aggregated $101.0 million as of March 31, 2008. We also received net contributions from shareholders in the total amount of $8.0 million as of March 31, 2008.

 

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

 

     March 7,
2006 to
December 13,
2006
(Predecessor)
     November 13,
2006 to
December 31,
2006
(Successor)
    Year Ended
December 31,
2007
(Successor)
    Three Months Ended
March 31,
 
                        2007
(Successor)
    2008
(Successor)
 
     (in thousands)  

Net cash (used in) provided by operating activities

   $ (2,782 )    $ (842 )   $ 15,515     $ (2,475 )   $ 84,136  

Net cash (used in) provided by investing activities

     (60,857 )      1,865       (96,716 )     (10,847 )     (90,306 )

Net cash (used in) provided by financing activities

     87,670        4,010       116,120       30,006       (51 )
                                         

Net increase (decrease) in cash and cash equivalents

     24,031        5,033       34,919       16,684       (6,221 )

Cash and cash equivalents at beginning of period

                  5,033       5,033       40,067  

Effect of foreign exchange on cash and cash equivalents

     453              115       50       1,359  
                                         

Cash and cash equivalents at end of period

   $ 24,484      $ 5,033     $ 40,067     $ 21,767     $ 35,205  
                                         

 

In addition to our past sources of liquidity, we expect in the future to enter into additional medium- and long-term polysilicon and wafer supply contracts that will include interest-free advance payments against future polysilicon or wafer deliveries. Under each of the long-term polysilicon and wafer supply contracts we have executed, we have received such advances. We will recognize the revenues from these future long-term supply contracts on a weighted average basis. As the prices paid in the early years on the supply agreements exceed the prices paid in later years, this will have the effect of deferring revenues, and as a result the cash flows from sales under these contracts will exceed recorded revenues from these contracts in the early years. We believe the ability to enter into such agreements will add to our ability to fund both capital expenditures and working capital. Subsequent to March 31, 2008, we incurred an additional RMB767.4 million in onshore borrowings which may be used to finance our intended expansion of polysilicon production facilities and in-house wafer production facility. We believe the proceeds of this offering, our existing onshore borrowings and the cash generated from our operations should provide us with sufficient funds for our intended capacity expansion plans.

 

Operating Activities

 

Net cash provided by operating activities for the three months ended March 31, 2008 was $84.1 million compared to cash used in operating activities for the three months ended March 31, 2007 of $2.5 million. Net cash provided by operating activities for the three months ended March 31, 2008 primarily resulted from net income of $35.5 million, advances from customers of $33.2 million, decrease in accounts receivable of $6.6 million and non-cash adjustments of $24.9 million mainly including the depreciation of property, plant and equipment of $2.0 million, amortization of discount and deferred financing costs on the floating rate bonds of $2.1 million and minority interests of $22.1 million, partially offset by a decrease in accrued expenses and other current liabilities of $7.3 million, a decrease in income tax payables of $4.5 million and an increase in inventories of $3.8 million. Net cash used in operating activities for the three months ended March 31, 2007 primarily resulted from a net loss of $1.3 million and a decrease in accrued expenses and other current liabilities of $1.3 million.

 

Net cash provided by operating activities for the year ended December 31, 2007 was $15.5 million compared to cash used in operating activities for the period from November 13, 2006 to December 31, 2006 and

 

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the period from March 7, 2006 to December 13, 2006 (predecessor) of $0.8 million and $2.8 million, respectively. Net cash provided by operating activities for the year ended December 31, 2007 primarily resulted from an increase in accrued expenses and other current liabilities of $11.0 million, an increase in minority interest of $5.5 million and an increase in income tax payable of $4.3 million, depreciation of $2.4 million and amortization of discount and deferred financing costs on floating rate bonds of $2.5 million, partially offset by an increase in accounts receivable of $6.2 million, an increase in prepaid expenses of $2.5 million and our net loss of $1.8 million. Net cash used in operating activities from November 13, 2006 to December 31, 2006 primarily resulted from a net loss of $0.2 million and a decrease in accrued expenses and other current liabilities of $0.6 million. Net cash used in operating activities from March 7, 2006 to December 13, 2006 primarily results from a net loss of $3.4 million which was partially offset by an increase in accrued expenses and other current liabilities of $0.7 million. The improvement in operating cash flows in 2007 as compared to the 2006 periods reflects the commencement of polysilicon sales in October 2007. Prior to March 31, 2008, substantially all of our product sales were made on a spot basis, for which we generally have not taken any credit risk of our buyers. As we make more sales under long-term contracts, we will take more of such risk, which we have not had to analyze in the past. Although medium- to long-term supply contracts offer assurance of future sales, pricing of such sales are commonly at a discount to sales on the spot market. Although through December 31, 2007 we only made spot sales, we had $6.3 million of accounts receivable as of December 31, 2007 from an extension of credit on one sale to a large public solar company.

 

Investing Activities

 

Net cash used in investing activities for the three months ended March 31, 2007 and 2008 was $10.8 million and $90.3 million, respectively. Net cash used in investing activities for the three months ended March 31, 2008 primarily resulted from payments for the purchase of property, plant and equipment of $55.1 million and deposits for the purchase of property and equipment of $34.5 million. Net cash used in investing activities for the three months ended March 31, 2007 primarily resulted from deposits for the purchase of property and equipment of $17.5 million and payments for the purchase of property, plant and equipment of $10.8 million, partially offset by a full repayment of a $17.5 million (RMB130 million) short-term advance to Shanghai Creative, an affiliated company.

 

Net cash used in investing activities totaled $96.7 million in the year ended December 31, 2007. Net cash provided by investing activities totaled $1.9 million in the period from November 13, 2006 to December 31, 2006. Net cash used in investing activities totaled $60.9 million in the period from March 7, 2006 to December 13, 2006 (predecessor). Net cash used in investing activities in the year ended December 31, 2007 primarily resulted from payments for the purchase of property, plant and equipment of $80.5 million, deposits for purchase of property, plant and equipment of $15.5 million, an increase in restricted cash related to our convertible bonds and deposits for short-term letters of credit for the purchase of property, plant and equipment of $13.8 million and a net payment for the acquisition of JZPTD of $16.4 million, which was partially offset by a full repayment of a $17.5 million (RMB130 million) short-term advance to Shanghai Creative and net proceeds from the disposal of JSJST of $12.0 million. We acquired JSJST from onshore parties on December 6, 2006 and sold it to two minority shareholders of JZPTD on June 20, 2007. Net cash provided by investing activities in the period from November 13, 2006 to December 31, 2006 was primarily due to the cash balances of JZPTD of $24.5 million that we acquired on December 13, 2006 which was partially offset by a RMB130 million short-term advance to Shanghai Creative of $16.8 million and a deposit for the purchase of property, plant and equipment of $5.1 million. Cash balances of JZPTD on December 13, 2006 included cash balances of JSJST which was a subsidiary of JZPTD on such date. Net cash used in investing activities in the period from March 7, 2006 to December 13, 2006 was primarily due to deposits for the purchase of property, plant and equipment of $34.5 million, payment for the purchase of land use rights of $6.9 million, payment for the purchase of property, plant and equipment of $6.4 million and consideration paid for the acquisition of JSJST of $12.2 million. See “Related Party Transactions—Share Transfer Agreement with Prior Onshore Shareholders Regarding JSJST”.

 

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Financing Activities

 

Net cash used in financing activities for the three months ended March 31, 2008 was $51,000 as compared to net cash provided by financing activities in the amount of $30.0 million for the three months ended March 31, 2007. Net cash used in financing activities for the three months ended March 31, 2008 primarily resulted from our repayment of loans from Taicang Harbour Golden Concord Electric-Power Generation Co., Ltd., an affiliated company, of $14.3 million, our repayment of bank borrowings of $9.8 million and the repurchase of shares amounting to $3.0 million, partially offset by proceeds from bank borrowings of $27.0 million. Net cash provided by financing activities for the three months ended March 31, 2007 was primarily due to proceeds from bank borrowings of $16.3 million and contributions from shareholders and minority shareholders of JZPTD of $13.1 million.

 

Net cash provided by financing activities in the year ended December 31, 2007, the period from November 13, 2006 to December 31, 2006 and the period from March 7, 2006 to December 13, 2006 was $116.1 million, $4.0 million and $87.7 million, respectively. Net cash provided by financing activities in the year ended December 31, 2007 primarily resulted from the issuance of floating rate bonds of $60.0 million, bank borrowings of $46.8 million, capital contributions to JZPTD by its minority shareholders of $18.1 million and equity contributions from shareholders of $13.0 million, which was partially offset by repayments of other borrowings of $19.2 million, which included repayments of loans received from Guotai for the acquisition of JSJST of $12.2 million, and financing costs for the floating rate bonds of $2.5 million. See “Related Party Transactions—Share Transfer Agreement with Prior Onshore Shareholders Regarding JSJST”. Net cash provided by financing activities in the period from November 13, 2006 to December 31, 2006 primarily resulted from contribution by shareholders of $2.0 million and capital contributed to JZPTD by its minority shareholders of $2.0 million. Net cash provided by financing activities in the period from March 7, 2006 to December 13, 2006 primarily resulted from bank borrowings of $31.5 million, our initial capital contribution of $25.0 million and other borrowings of $31.2 million.

 

Capital Expenditures

 

We made capital expenditures for construction of our Phase I and II production facilities of $40.9 million, $6.6 million, $96.0 million and $89.6 million in the period from March 7, 2006 to December 13, 2006 (predecessor), the period from November 13, 2006 to December 31, 2006, the year ended December 31, 2007 and the three months end March 31, 2008, respectively. Our capital expenditures have historically been used primarily to purchase polysilicon production equipment but we anticipate approximately $117.0 million will be spent on wafer production facilities in 2008 including but not limited to costs associated with land, construction and additional equipment. We expect that purchases of equipment for our polysilicon and wafer capacity expansion will continue to constitute a significant portion of our capital expenditures.

 

We believe that our current cash and cash equivalents, anticipated cash flow from operations and the net proceeds from this offering, will be sufficient to meet our anticipated cash needs, including our cash need for working capital and our anticipated capital expenditures for our Phase III, wafer production facilities and further expansion. As part of the anticipated cash need for the year ending December 31, 2008, we have, after March 31, 2008, incurred additional RMB 767.4 million onshore borrowings for our intended expansion of polysilicon production facilities and in-house wafer production facility. We expect our capital expenditures in connection with our current expansion plans will be approximately $558.0 million and approximately $1.3 billion for the years ending December 31, 2008 and 2009, respectively. We may require additional cash due to changes in business conditions or other future developments, including any additional investments or acquisitions we may decide to pursue and in the event we cannot extend indebtedness that is maturing in 2008. If our existing cash and cash flows from operations are insufficient to meet our requirements, we may seek to sell additional equity or debt securities or borrow from lending institutions. See “Risk Factors — Risks Relating to Our Business — We have significant outstanding bank borrowings and may not be able to arrange adequate financing to repay these borrowings when the mature.”

 

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Contractual Obligations and Commercial Commitments

 

The following table sets forth our contractual obligations and commercial commitments as of March 31, 2008:

 

     Payments Due by Period
     Total    Within 1
Year
   1-3 Years    3-5
Years
   Thereafter
    

(in thousands)

Contractual Obligations:

              

Short-term debt(1)

   $ 10,228    $ 10,228    $    $    $     —

Long-term debt(2)

     101,348      18,868      82,480          

Floating rate bonds(3)

     75,000           75,000      

Capital commitments(4)

     214,437      214,437               

Operating lease obligations

     242      156      86          
                                  

Total obligations

   $ 401,255    $ 243,689    $ 157,566    $     —    $
                                  

 

Notes:

 

  (1)   Includes fixed rate interest payments at the interest rate in effect as of March 31, 2008.
  (2)   Includes fixed rate interest payments at the interest rate in effect as of March 31, 2008. Our fixed interest rate debt is all RMB-denominated and the interest rate can be adjusted annually by the People’s Bank of China. Does not include interest on our floating rate bonds which will be redeemed and converted in connection with the closing of this offering.
  (3)   Represents payments that would be due at maturity if we have not effected a qualified public offering. The floating rate bonds mature on September 10, 2009. At the closing of this offering, we will redeem $20 million principal amount of such bonds and the remaining $40 million principal amount will be converted into our shares.
  (4)   Represents commitments related to construction of our Phase II and Phase III production facilities and purchase of plant and machinery related to such facilities.

 

In addition to the contractual obligations discussed above, we are party to three long-term wafer supply agreements and two long-term polysilicon supply agreements that extend from 2008 to 2015. In addition, we have entered into a medium-term and a short-term tolling agreement with respect to the manufacture of wafers for us using our polysilicon. Those agreements obligate us to manufacture polysilicon and to manufacture wafers in-house or produce wafers through tolling arrangements for our customers. After March 31, 2008, we entered into several equipment purchase contracts relating to our wafer production equipment for which we have committed $238.7 million. See “Business—Customers and Markets.”

 

Off Balance Sheet Commitments and Arrangements

 

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of third parties. We have not entered into any derivative contracts that are indexed to our equity interests and classified as owners’ equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.

 

Inflation

 

Since our inception, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, the change in the consumer price index in China was 1.5% and 4.8% for 2006 and 2007, respectively. Since the beginning of 2008, the rate of change in the consumer price index in China has accelerated, and inflation may have effects on our business in the future.

 

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Market Risks

 

Foreign Exchange Risk

 

Most of our sales are currently denominated in Renminbi, with a small portion in U.S. dollars. Substantially all of our operating costs are denominated in Renminbi. Our material non-Renminbi expenses consist of U.S. dollar interest expenses for interest on our debt outside of the PRC and employee compensation expenses for employees based in Hong Kong who are paid in Hong Kong dollars. Immediately after this offering our only U.S. dollar interest expense will be related to the 2008 Convertible Bonds. We also have U.S. dollar obligations for equipment purchases for our Phase II facility we are contractually obligated to buy and expect to have U.S. dollar and Euro obligations for equipment we expect to order for our Phase III facilities expansion. We expect in the future to have a greater portion of our revenue generated from export sales. As a result of these factors, we do not believe our operations are exposed to a significant amount of currency risk.

 

JZPTD maintains its books in its functional currency, which is Renminbi. Monetary assets and liabilities of JZPTD denominated in other currencies, such as U.S. dollar bank balances are recorded at the prevailing exchange rate at the date of the transaction. Changes in relative exchange rates are recorded as gains and losses in the JZPTD statements of operations, which can result in gains or losses in our statements of operations. As the functional currency of our Cayman Islands holding company is U.S. dollars, in the event we maintained monetary assets and liabilities denominated in currencies other than U.S. dollars, we would translate their value at the rates of exchange in effect at each balance sheet date. We would record these exchange gains and losses in the statements of operations. We recorded net foreign currency gain of $0.2 million for the three months ended March 31, 2008 related to U.S. dollar monetary assets at JZPTD. As of March 31, 2008, we had no outstanding foreign exchange hedge contracts. We have not used any other forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future. If our sales denominated in foreign currencies, continue to grow, we will consider using derivate instruments to hedge our exposure to foreign currency exchange risk.

 

As a result, the value of your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars and Renminbi. To the extent we hold assets denominated in U.S. dollars, including the net proceeds to us from this offering, any appreciation of the Renminbi against the U.S. dollar could result in a change to our statement of operations and a reduction in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of Renminbi against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our company and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the prices of ADSs.

 

Interest Rate Risk

 

Our exposure to interest rate risk primarily relates to interest expenses incurred by our short-term and long-term borrowings, as well as interest income generated by excess cash invested in demand deposits and liquid investments with original maturities of three months or less. Such interest-earning instruments carry a degree of interest rate risk. As of March 31, 2008, our total outstanding interest-bearing RMB-denominated borrowings were $101.0 million with varying interest rates of 6.75% to 8.32%. An increase of 1.0% in the applicable interest rate would have added $0.3 million to our interest expense for the three months ended March 31, 2008. We have not used any derivative financial instruments to manage our interest rate risk exposure. However, our future interest expense may increase due to changes in market interest rates. Our fixed interest rate debt is all RMB-denominated and the interest rate can be adjusted annually by the People’s Bank of China.

 

Recent Accounting Pronouncements

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement, or SFAS No. 157. SFAS No. 157 addresses standardizing the measurement of fair value for companies that are required to use a fair

 

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value measure for recognition or disclosure purposes. The FASB defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” SFAS No. 157 is effective and applicable to us on and after January 1, 2008. The adoption of this statement did not have a material effect on our consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities, or SFAS No. 159. SFAS No. 159 permits companies to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did not have a material effect on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141R, Business Combination, or SFAS No. 141R, to improve reporting creating greater consistency in the accounting and financial reporting of business combinations. The standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We do not expect the adoption of SFAS 141R to have a material impact on our financial statements.

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, or SFAS No. 160, to improve the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way as required in the consolidated financial statements. Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transaction. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are currently evaluating whether the adoption of SFAS No. 160 will have a significant effect on our consolidated financial position, results of operations or cash flows.

 

In March 2008, the FASB issued SFAS No. 161, or SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. The new standard requires enhanced disclosures to help investors better understand the effect of an entity’s derivative instruments and related hedging activities on its financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We will apply SFAS No. 161 effective January 1, 2009.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

 

The following unaudited pro forma condensed consolidated financial information is derived from our historical consolidated financial statements included elsewhere in this prospectus. It should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this prospectus.

 

In early May and early June 2008, respectively, Sun Wave and Greatest Joy, companies owned by entities affiliated with Mr. Zhu Gongshan and Moonchu, acquired 20% and 16% equity interest of JZPTD, respectively, from the remaining minority shareholders for a cash consideration of $430.5 million. Concurrent to this offering, entities owned by Mr. Zhu Gongshan and Moonchu, will transfer 36% of JZPTD through 100% purchase of Sun Wave and Greatest Joy by our Company for a consideration consisting of (i) $240.6 million in cash using a portion of the proceeds from this offering, (ii) the 2008 Convertible Bonds, to be issued concurrently with this offering, with principal value of $446.9 million convertible into our Company’s ordinary shares and (iii) 268,537,970 ordinary shares of our Company to be issued concurrently with this offering. Sun Wave and Greatest Joy are under the common control of Mr. Zhu Gongshan, our chairman and majority shareholder, which have been created for the sole purpose of holding their respective ownership interests in JZPTD.

 

The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2007 and for the three months ended March 31, 2008 and the unaudited pro forma condensed consolidated balance sheet as of March 31, 2008 have been prepared by our management based on our historical consolidated statement of operations for the year ended December 31, 2007 and for the three months ended March 31, 2008, and our historical unaudited condensed consolidated balance sheet as of March 31, 2008. These pro forma adjustments were made to give effect to the following events (1) redemption and conversion of the convertible redeemable preferred shares and floating rate bonds into ordinary shares upon completion of the initial public offering, (2) the acquisition of 36% equity interest in JZPTD by Sun Wave and Greatest Joy for a cash consideration of $430.5 million, (3) transfer by entities owned by Mr. Zhu Gongshan and Moonchu of 36% interest in JZPTD through contribution of Sun Wave and Greatest Joy and elimination of minority interest upon completion of the initial public offering, and (4) distribution to the shareholders by (i) payment of cash of $240.6 million, (ii) issuance of 2008 Convertible Bonds with principal value of $446.9 million, and (iii) issuance of 268,537,970 ordinary shares to entities owned by Mr. Zhu Gongshan and Moonchu. The pro forma consolidated statements of operations were prepared as if the above pro forma adjustments had occurred on January 1, 2007 for the year ended December 31, 2007 and the three months ended March 31, 2008. The pro forma condensed consolidated balance sheet has been prepared as if the event had occurred on March 31, 2008.

 

The unaudited pro forma condensed consolidated financial information reflects pro forma adjustments that are described in the accompanying notes and is based on currently available information and assumptions that we believe provide a reasonable basis for presenting the significant effects of the acquisition of 36% equity interest in JZPTD. We have made, in our opinion, adjustments that are necessary to present fairly the pro forma condensed consolidated financial information. The unaudited pro forma condensed consolidated financial information is presented for informational purposes only and does not purport to represent what our actual results of operations or financial position would have been had the transaction been consummated on the dates indicated and does not purport to be indicative of our financial position as of any future data or our results of operations for any future period.

 

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UNAUDITED PRO FORMA CONDENSED BALANCE SHEET

AS OF MARCH 31, 2008

(in thousands, except share and per share data)

 

     March 31,
2008
   Pro forma
Adjustments
    Notes    Pro
forma
Results
 

ASSETS

          

CURRENT ASSETS

          

Cash and cash equivalents

   $ 35,205    $ (20,000 )   A    $ [     ]
        1,689     A   
        [             ]   C   
        (240,625 )   E   

Restricted cash

     21,220      (1,689 )   A      19,531  

Inventories

     4,763           4,763  

Prepaid expenses and other current assets

     2,894           2,894  

Amount due from an affiliated company

     1,425           1,425  
                          

Total current assets

     65,507      [             ]        [             ]

Property, plant and equipments, net

     227,311           227,311  

Deposits for purchase of plant and equipment

     35,228           35,228  

Deposit for purchase of land use right

     404           404  

Land use right

     7,799           7,799  

Intangible assets

        397,198     D      397,198  

Goodwill

        73,952     D      73,952  

Deferred financing cost

     1,821      (1,821 )   B       

Deferred tax assets

     1,379      (1,379 )   D       
                          

TOTAL ASSETS

   $ 339,449    $ [             ]      $ [             ]
                          

LIABILITIES

          

CURRENT LIABILITIES

          

Accounts payable

   $ 1,672         $ 1,672  

Accrued expenses and other current liabilities

     22,259           22,259  

Advances from customers

     36,257           36,257  

Deferred income

     468           468  

Bank borrowings

     22,083           22,083  

Loans from and other amounts due to affiliated companies

     1,006           1,006  
                          

Total current liabilities

     83,745           83,745  

Floating rate bond

     63,904      (20,000 )   A       
        (43,904 )   B   

Deferred tax liabilities

        97,921     D      97,921  

Convertible bond

          446,875     E      446,875  

Deferred income

     6,428           6,428  

Bank borrowings

     78,929           78,929  
                          

TOTAL LIABILITIES

     233,006      480,892          713,898  
                          

MINORITY INTEREST

     58,607      (58,607 )   F       

Series A convertible redeemable preferred shares ($0.00001 par value; 50,000,000 shares authorized and 16,667,000 shares issued and outstanding as of December 31, 2007 and March 31, 2008; no shares outstanding on a pro-forma basis as of March 31, 2008)

     21,944      (21,944 )   G       

SHAREHOLDERS’ EQUITY

          

Ordinary shares ($0.00001 par value; 100,000,000,000 shares authorized and 978,333,000 shares issued as of March 31,2008; [            ] shares outstanding on a pro-forma basis as of March 31, 2008)

     10      3     E      [     ]
        [             ]   C   

Additional paid-in capital

     8,009      43,904     B      [     ]
        21,944     G   
        [             ]   C   
        [             ]   E   

Retained earnings

     11,570      (1,821 )   B      [     ]
        [             ]   E   

Accumulated other comprehensive income

     6,303           6,303  
                          

Total shareholders’ equity

     25,892      [     ]        [     ]
                          

TOTAL LIABILITIES, MINORITY INTEREST, CONVERTIBLE REDEEMABLE PREFERRED SHARES AND SHAREHOLDERS’ EQUITY

   $ 339,449    $ [     ]      $ [     ]
                          

 

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UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2007

(in thousands, except share and per share data)

 

     For the
year ended
December 31,
2007
    Pro forma
Adjustments
    Notes    Pro forma
Results
 

REVENUES

         

Third party sales

   33,378          33,378  

Related party sales

   7,470          7,470  
                     

Total revenues

   40,848          40,848  

Cost of revenues

   (10,996 )        (10,996 )
                     

Gross profit

   29,852          29,852  

OPERATING EXPENSES

         

General and administrative

   (17,836 )        (17,836 )

Amortization of intangible assets

       (52,960 )   H    (52,960 )
                     

OPERATING INCOME (LOSS)

   12,016     (52,960 )      (40,944 )
                     

NON-OPERATING INCOME (EXPENSE)

         

Interest income

   376          376  

Interest expense

   (6,097 )   3,167     I    (18,476 )
     (2,528 )   J   
     388     O   
     (13,406 )   K   

Other income

   6          6  

Gain on disposal of JSJST

   566          566  
                     

Total non-operating expenses

   (5,149 )   (12,379 )      (17,528 )
                     

INCOME (LOSS) BEFORE INCOME TAX AND MINORITY INTEREST

   6,867     (65,339 )      (58,472 )

Income tax expense

   (3,123 )   13,240     N    10,117  
                     

INCOME (LOSS) BEFORE MINORITY INTEREST

   3,744     (52,099 )      (48,355 )

Minority interest

   (5,540 )   5,540     L     
                     

NET LOSS

   (1,796 )   (46,559 )      (48,355 )

Deemed distribution on convertible redeemable preferred shares—accretion of redemption premium

   (1,111 )   1,111     M     
                     

NET LOSS ATTRIBUTABLE TO HOLDERS OF ORDINARY SHARES

   (2,907 )   (45,448 )      (48,355 )
                     

ORDINARY SHARES USED IN LOSS PER ORDINARY SHARE CALCULATION

         

Basic and diluted—ordinary share

   994,292,123          [1,276,995,942 ]
                 

LOSS PER ORDINARY SHARE

         

Basic and diluted—ordinary share

   (0.0029 )        [(0.0379 )]
                 

 

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UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2008

(in thousands, except share and per share data)

 

     For the period
ended March
31, 2008
    Pro forma
Adjustments
    Notes    Pro forma Results  

REVENUES

         

Third party sales

   $ 72,947     $                 $ 72,947  

Related party sales

     8,584            8,584  
                           

Total revenues

     81,531            81,531  

Cost of revenues

     (18,483 )          (18,483 )
                           

Gross profit

     63,048            63,048  

OPERATING EXPENSES

         

General and administrative

     (3,561 )          (3,561 )

Amortization of intangible assets

           (13,240 )   H      (13,240 )
                           

OPERATING INCOME (LOSS)

     59,487       (13,240 )        46,247  
                           

NON-OPERATING INCOME (EXPENSE)

         

Interest income

     195            195  

Interest expense

     (3,419 )     2,442     I      (4,010 )
       (3,352 )   K   
       319     O   

Amortization of deferred income

     115            115  
                           

Total non-operating expenses

     (3,109 )     (591 )        (3,700 )
                           

INCOME BEFORE INCOME TAX AND MINORITY INTEREST

     56,378       (13,831 )        42,547  

Income tax expense

     1,207       3,310     N      4,517  
                           

INCOME BEFORE MINORITY INTEREST

     57,585       (10,521 )        47,064  

Minority interest

     (22,063 )     22,063     L       
                           

NET INCOME

     35,522       11,542          47,064  

Deemed distribution on convertible redeemable preferred shares—accretion of redemption premium

     (833 )     833     M       
                           

NET INCOME ATTRIBUTABLE TO HOLDERS OF ORDINARY SHARES

   $ 34,689     $ 12,375        $ 47,064  
                           

ORDINARY SHARES USED IN INCOME PER ORDINARY SHARE CALCULATION

         

Basic—ordinary share

     981,354,978            [1,293,879,948 ]

Diluted—ordinary shares

     983,094,050            [     ]
                     

EARNINGS PER ORDINARY SHARE

         

Basic—ordinary share

     0.0348            [0.0364 ]

Diluted—ordinary shares

     0.0347            [     ]
                     

 

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Notes to Unaudited Pro Forma Condensed Consolidated Financial Information

(in thousands, except shares and per share information)

 

  1.   Basis of Presentation

 

In early May and early June 2008, respectively, Sun Wave and Greatest Joy acquired 20% and 16% equity interest in JZPTD, respectively from the remaining minority shareholders for a total cash consideration of $430,457. Sun Wave and Greatest Joy are under the common control of Mr. Zhu Gongshan, majority shareholder of our company.

 

On July 18, 2008, the Company signed a definitive agreement to acquire the remaining 36% equity interest in JZPTD through 100% acquisition of Sun Wave and Greatest Joy. The total distribution to our majority shareholders consists of (i) cash payment of $240,625, (ii) issuance of 2008 Convertible Bonds with principal value of $446,875 which is convertible into the Company’s ordinary shares at initial public offering price and (iii) issuance of 268,537,970 ordinary shares of the Company. The number of ordinary shares will be reduced in the event the initial public offering price is below $             per ADS. See “Related Party Transactions—Acquisition of 36% of JZPTD Onshore Equity Interests”). The contribution of 36% of JZPTD to the Company by Mr. Zhu Gongshan and Mr. Zhang Songyi through 100% contribution of Sun Wave and Greatest Joy has been accounted for as a common control transaction as prescribed by Statement of Financial Accounting Standards, or SFAS, No. 141, “Business Combinations”. The assets will be transferred into the Company at Sun Wave and Greatest Joy’s carrying value and the difference between the total consideration described above and the carrying value of Sun Wave and Greatest Joy will be recorded as a distribution to shareholders.

 

Sun Wave and Greatest Joy accounted for the 36% equity interest acquisition of JZPTD under the purchase method. Sun Wave and Greatest Joy performed a preliminary allocation of the total purchase price of JZPTD’s net tangible and identifiable intangible assets based on their estimated fair values as of May 6, 2008 and June 10, 2008. These estimations are based on Sun Wave and Greatest Joy’s preliminary analysis and subject to change for up to twelve months from the date of acquisition. Sun Wave and Greatest Joy are arranging an independent professional appraisal firm to conduct a formal valuation on the assets acquired.

 

The purchase price has been preliminarily allocated by Sun Wave and Greatest Joy in May and June 2008 as follows:

 

     Amount     Amortization
Period

Intangible assets acquired:

    

—Long term sales contracts

   $ 397,198     7.5 years

Goodwill

     73,952    

Other assets and liabilities acquired

     58,607    

Deferred tax liabilities

     (99,300 )  
          
   $ 430,457    
          

 

The pro forma adjustments were made to give effect to the following events (1) redemption and conversion of the convertible redeemable preferred shares and floating rate bonds into ordinary shares upon completion of the initial public offering, (2) the acquisition of 36% equity interest in JZPTD by Sun Wave and Greatest Joy for a cash consideration of $430,457, (3) transfer by shareholders of 36% interest in JZPTD through contribution of Sun Wave and Greatest Joy and elimination of minority interest upon completion of the initial public offering, and (4) distributions to the Shareholders by (i) payment of cash of $240,625, (ii) issuance of 2008 Convertible Bonds with principal value of $446,875, and (iii) issuance of 268,537,970 ordinary shares to Mr. Zhu Gongshan and Moonchu.

 

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  2.   Pro Forma Adjustments

 

  A   Repayment of $20,000 for Tranche A of the floating rate bonds redeemed upon the initial public offering. Upon redemption and conversion of the floating rate bonds, cash deposit of $1,689 is no longer restricted and is reclassified to cash and cash equivalents.

 

  B   Conversion of Tranche B floating rate bonds of $43,904 into 27,183,400 ordinary shares and write-off of related deferred financing costs of $1,821 as a result of automatic redemption and conversion upon the initial public offering.

 

  C   To record proceeds received from issuance of [    ] ordinary shares in the form of ADSs at an initial public offering price of [    ] per share, the midpoint of the estimated range of the initial public offering price.

 

  D   The Company recorded the assets of Sun Wave and Greatest Joy at their carrying value upon contribution of Sun Wave and Greatest Joy to the Company as follows:

 

     Amount     Amortization
Period

Intangible assets acquired:

    

—Long term sales contracts

   $  397,198     7.5 years

Acquired goodwill

     73,952    

Other assets and liabilities acquired, net

     58,607    

Deferred tax liabilities

     (99,300 )  
          
   $ 430,457    
          

 

  E   Distributions to the shareholders consisting of cash payment of $240,625 from the initial public offering proceeds, issuance of convertible bonds with principal value of $446,875 which is convertible into ordinary shares of the Company at the initial public offering price of [        ] per share (“2008 Convertible Bonds”) and issuance of 268,537,970 ordinary shares of the Company at the initial public offering price, assuming that the initial public offering price is $             per ADS, the midpoint of the estimated range of the initial public offering price. The 2008 Convertible Bonds mature one and a half years after issuance and are convertible as follows: 50% of outstanding principal six months after issuance, 25% of outstanding principal nine months after issuance, and the remaining 25% outstanding principal twelve months after issuance.

 

  F   Reduction of 36% minority interests in JZPTD upon the contribution of Sun Wave and Greatest Joy.

 

  G   Reduction of Series A redeemable preferred shares as a result of automatic conversion into 16,667,000 ordinary shares upon the initial public offering.

 

  H   Recognition of amortization of intangible assets acquired as if the contribution had occurred on January 1, 2007. The intangible assets are amortized over the contractual term of the long term sales contracts.

 

  I   Reduction of the floating rate bonds interest as if floating rate bonds were redeemed and converted at January 1, 2007.

 

  J   Write-off of deferred financing costs related to the floating rate bonds as if the floating rate bonds were redeemed and converted on January 1, 2007.

 

  K   Recognition of 3% interest of the 2008 Convertible Bonds issued for the contribution of Sun Wave and Greatest Joy as if the 2008 Convertible Bonds were issued on January 1, 2007.

 

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  L   Reduction of 36% minority interests of JZPTD as if the acquisition of Sun Wave and Greatest Joy had occurred on January 1, 2007.

 

  M   Reduction of deemed distribution of convertible redeemable preferred shares as if the conversion occurred on January 1, 2007.

 

  N   Deferred tax effect related to the pro forma amortization of the non-goodwill intangible assets, which was based on the effective enterprise income tax rate of 25%.

 

  O   To reverse the deferred financing charges amortized for the year ended December 31, 2007 and the period ended March 31, 2008 as if the floating rate bonds were redeemed and converted on January 1, 2007.

 

  3.   Pro Forma Shares

 

The pro forma basic and diluted earnings per share are based on the weighted average number of shares of the Company’s ordinary shares outstanding for the year ended December 31, 2007 and period ended March 31, 2008 plus the (i) ordinary shares as a result of the conversion of preferred redeemable shares and floating rate bonds (ii) ordinary shares issued for the JZPTD acquisition assuming the initial public offering price is $             per ADS or above and (iii) the [dilutive effect of the 2008 Convertible Bonds] on March 31, 2008 shares [(antidilutive for year ended December 31, 2007)] as shown in the following tables:

 

      December 31,
2007

Shares used in calculating basic and diluted loss per share on a pro forma basis:

  

Weighted average shares outstanding used in computing basic and diluted loss per share for the Company

   994,292,123

Ordinary shares as a result of redeemable preferred shares and floating rate bonds conversion

   14,165,849

Issuance of ordinary shares for the acquisition of 36% of JZPTD

   268,537,970
    
   1,276,995,942
    

 

      March 31, 2008  

Shares used in calculating basic earnings per share on a pro forma basis:

  

Weighted average shares outstanding used in computing basic earnings per share for the Company

   981,354,978  

Ordinary shares as a result of redeemable preferred shares and floating rate bonds conversion

   43,987,000  

Issuance of ordinary shares for the acquisition of 36% of JZPTD

   268,537,970  
      
   1,293,879,948  
      

Shares used in calculating diluted earnings per share on a pro forma basis:

  

Weighted average shares outstanding used in computing diluted earnings per share for the Company

   983,094,050  

Ordinary shares as a result of redeemable preferred shares and floating rate bonds conversion

   43,987,000  

Dilution of 2008 Convertible Bonds

   [     ]

Issuance of ordinary shares for the acquisition of 36% of JZPTD

   268,537,970  
      
   [     ]
      

 

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BUSINESS

 

Overview

 

We supply polysilicon and wafers to companies operating in the solar industry. Polysilicon is the primary raw material for wafers used in the solar and the electronics industries. We manufacture polysilicon at our production facility in Xuzhou, Jiangsu Province, China and intend to commence wafer manufacturing in the third quarter of 2009. Our business was founded in March 2006 and upon completion and full ramp-up of our planned expansion to 13,500 MT per year by March 2010, we believe we will be one of the leading polysilicon producers in terms of production capacity. We currently plan to build 1.9 GW of wafer production capacity by the end of 2010. We commenced construction of our first polysilicon production facility, which produces solar grade polysilicon, in July 2006 and produced our first batch of polysilicon in September 2007. We made our first commercial shipment of polysilicon in October 2007. In the three months ended March 31, 2008, we produced 302 MT of polysilicon and in the three months ended June 30, 2008, we produced 359 MT of polysilicon. We began selling wafers produced for us through tolling arrangements with third party manufacturers in the second quarter of 2008 and expect wafer sales to contribute a significant majority of our revenues in the future.

 

We ramped up our Phase I production facility to its designed annual capacity of 1,500 MT in March 2008. We commenced pilot production at our Phase II production facility with an annual production capacity of 1,500 MT in June 2008. We commenced commercial production of our Phase II production facility in July 2008 and expect it to achieve its fully ramped up capacity by December 2008. In December 2007, we commenced preparation for construction of our Phase III production facility, which is expected to have an aggregate annual production capacity of 10,500 MT. We expect our Phase III production facility to commence commercial production in January 2009. We intend to determine the location for our expansion to 24,000 MT by the end of 2008, and will then begin to apply for necessary permits and commence equipment orders. We intend to look for a location outside of Xuzhou, Jiangsu Province, China for our polysilicon production expansion beyond Phase III. We have implemented proven technologies in our polysilicon production facilities. We utilize a modified Siemens process to produce polysilicon and starting from Phase II onwards, our production facilities are designed to produce both solar and electronic grade polysilicon.

 

We use TCS to produce polysilicon. TCS is one of the main and most costly production inputs and to date, we have relied on third party suppliers for substantially all of our TCS requirements. To reduce our reliance on TCS from third party suppliers, we are increasingly incorporating TCS production into our production process. We integrated the hydrochlorination process for our Phase I production facility in February 2008 and expect to integrate the hydrochlorination process in our Phase II production facility in September 2008. Our Taixing joint venture is constructing a TCS production facility with an initial capacity of 20,000 MT in Taizhou, Jiangsu Province, China which we expect to commence pilot production shortly after this offering. We intend to increase the Taixing joint venture annual TCS production capacity to up to 60,000 MT by 2010. We intend to commence construction of a hydrogenation and a TCS production facility in Xuzhou in August 2008 which we expect to have combined capacity to produce up to 90,000 MT of TCS per year by the third quarter of 2009. Upon ramp up of these facilities, we expect to substantially reduce our reliance on third parties for our TCS requirements.

 

We intend to begin construction of our first multicrystalline and monocrystalline wafer production facility in Xuzhou by the end of 2008 to commence pilot production by the third quarter of 2009. We intend to ramp up these facilities to a combined 0.8 GW production capacity by the end of 2009 and to further expand our wafer production capacity to 1.9 GW by the end of 2010. We have entered into equipment supply contracts to purchase over half of the wire saws and squarers for our expansion to 1.9 GW with the first deliveries expected to commence in late 2008. We also intend to explore opportunities to further expand our wafer production capacity through strategic acquisitions and partnerships. Until we have sufficient in-house wafer production capacity, we will continue to rely on medium- to short-term wafer tolling arrangements to support our wafer sales. We are currently in preliminary discussions with one of our wafer tolling producers, Huasheng, with respect to a potential acquisition of such producer to increase our in-house manufacturing capacity.

 

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We have entered into long-term wafer supply agreements with JA Solar, AIDE and Solarcell and long-term polysilicon supply agreements with Trina Solar and Solarfun. These contracts extend from 2008 through 2015 and require customers to make advance payments, have pre-set prices which decline significantly over the length of the contract and have volumes that increase significantly in the early years of the contract. We agreed to supply approximately 6.0 GW of wafers at a total contract price of $6.3 billion (RMB44.2 billion) to JA Solar, 0.9 GW of wafers at a total contract price of $1.0 billion (RMB7.3 billion) to AIDE and 0.675 GW of wafers at a total contract price of $0.9 billion (RMB6.3 billion) to Solarcell, respectively, over the terms of their respective supply contracts. We also agreed to supply 16,350 MT of polysilicon at a total contract price of $1.5 billion (RMB10.3 billion) to Trina Solar and 9,990 MT of polysilicon at a total contract price of $1.1 billion (RMB7.6 billion) to Solarfun, over the terms of their supply contracts. Prior to our entry into these long-term supply contracts, we sold all of our polysilicon on the spot market to major Chinese solar manufacturers. We intend to enter into additional long-term supply contracts with a goal of selling approximately 85% of our output under long-term supply agreements and the remaining non-contracted portion of our polysilicon and wafers on the spot market in the future.

 

For the year ended December 31, 2007, we sold 153 MT of polysilicon, all in the three months ended December 31, 2007. For the three months ended March 31, 2008, we sold 256 MT of polysilicon. Our revenues for the year ended December 31, 2007 and the three months ended March 31, 2008 were $40.8 million and $81.5 million, respectively. Net loss attributable to holders of ordinary shares was $2.9 million in the year ended December 31, 2007 and net profit attributable to holders of ordinary shares was $34.7 million in the three months ended March 31, 2008.

 

Our Industry

 

Solar Market

 

Solar power is one of the most rapidly growing renewable energy sources in the world today. Solar power systems generally comprise a multitude of solar modules, which are made of multiple solar cells. There are two main categories of solar cell technology entailing different production processes:

 

   

polysilicon-based production technology; and

 

   

thin-film technology.

 

Polysilicon-based technologies accounted for approximately 88.4% of total solar production in 2007, according to Solarbuzz. There are alternatives to using silicon in photovoltaic applications that may gain marketwide acceptance. Thin-film cells use little to no amounts of silicon. Although currently thin-film cells exhibit lower conversion efficiencies, improvements in such production technology could have a significant negative impact on the demand for polysilicon.

 

The manufacturing value chain of polysilicon-based photovoltaic products starts with the processing of quartz sands to produce metallurgical-grade silicon. This material is further purified to become solar grade or electronic grade virgin polysilicon feedstock. Recyclable polysilicon raw materials, which include tops and tails of discarded portions of polysilicon ingots, pot scraps and broken polysilicon wafers acquired from the solar and electronics industries, may also be used as feedstock when combined with high purity polysilicon.

 

For multicrystalline wafers, polysilicon is cast into ingots through a crystallization process and subsequently cut into blocks, whereas monocrystalline wafers are produced from a single seed crystal which is dipped in molten polysilicon and pulled into a cylindrical ingot. These ingot blocks, or ingots, are first squared into bricks and then sliced into wafers.

 

Wafers are then manufactured into solar cells through a multi-step manufacturing process that entails etching, doping, coating and applying electrical contacts. Solar cells are then interconnected and packaged to form solar modules, which together with system components such as batteries and inverters, are distributed to

 

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installers, systems integrators, service providers or directly to end-users, for installation onto on-grid or off-grid systems.

 

We believe the following factors will continue to affect the global demand in the solar industry:

 

Rising Prices of Conventional Energy Sources. We believe more sustainable energy sources are needed given the limited nature and increasing price of fossil fuel supply as well as escalating electricity consumption.

 

Government Incentives for Renewable Energy Sources. Governments around the world have implemented renewable energy policies and incentives to encourage the use of clean and sustainable energy sources, such as solar energy. Countries including Australia, China, Germany, Japan, Korea, Spain and the United States have offered or announced plans to offer substantial incentives in the form of direct subsidies for solar power system installations or rebates for electricity produced from solar power.

 

Tightening of Environmental Regulations. Solar power is capable of generating electricity without producing pollution such as gaseous or water emissions or noise during operation. Many governments around the world have adopted initiatives aimed at addressing worldwide environmental concerns and climate change risks associated with the use of fossil fuels.

 

Increasing Cost Competitiveness of Solar Energy. The average prices of solar cells and modules are expected to decrease over the next few years as a result of improved production technologies and manufacturers attaining economies of scale. In addition, solar power systems are also more cost-effective for use in remote rural applications, where grid-connection costs are prohibitive.

 

Some of the key challenges faced by the solar industry include the following:

 

Possible Reduction or Elimination of Government Subsidies and Incentives. Solar energy may be more expensive than traditional fossil fuel generated electricity if the cost of installing a solar power system were a consideration. Relatively high product costs remain one of the impediments to growth in solar power usage. Therefore, the current growth of the solar power industry substantially relies on the availability and size of government subsidies and economic incentives, such as capital cost rebates, reduced tariffs, tax credits, net metering and other incentives. There have been significant government efforts to reduce or eliminate these subsidies and economic incentives. It remains a challenge for the solar power industry to reach sufficient scale to be cost-effective in a non-subsidized marketplace.

 

Need to Broaden Awareness and Acceptance of Solar Power Usage. Growth in solar power usage has been mostly limited to on-grid applications. Solar energy product sales consist substantially of standard solar modules and systems. Broader market awareness will be required in order to tap the potential of the off-grid market.

 

Electronics Market

 

Semiconductors are essential to all electronic products and have wide ranging end applications including computing, telecommunications, consumer electronics, automotive, industrial and medical applications. According to iSuppli, total worldwide semiconductor industry revenue was $261 billion in 2006 and is expected to grow to $365 billion by 2011.

 

Over the last few years, China has emerged as the global center for the manufacture of electronic systems. According to iSuppli, the share of semiconductor industry revenues in the Asia Pacific region (excluding Japan) was expected to increase from 27% to 53% from 2000 to 2007. This was a result of many original equipment manufacturers and original design manufacturers migrating their manufacturing operations to China to leverage the cost-effective facilities and the available pool of talent. We believe the production of semiconductors in China will increase in the future and thus demand for electronic grade polysilicon will also increase.

 

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Polysilicon Market

 

Polysilicon is the primary raw material for the solar and electronics industries. The solar industry produces solar wafers, cells, modules and systems that convert energy from sunlight into electricity. The electronics industry produces semiconductors for use in electronic applications. Historically, the electronics industry has been the dominant user of polysilicon. Recent rapid growth of the solar industry has put it on equal footing with the electronics industry in polysilicon consumption. In 2007, for the first time the solar industry consumed more than half, or 54%, of the polysilicon production while the electronics industry consumed the remaining 46%, according to Solarbuzz. As a result of this rapid expansion, sales to the solar industry are now the key factor affecting the price, profit and growth of the polysilicon market.

 

Polysilicon is produced by refining metallurgical silicon in a highly technical and energy-intensive process. Metallurgical silicon, or MG-Si, has a purity level of 95% to 99% and is widely available. To be qualified for use in the solar industry, MG-Si needs to be refined to reach a purity level of 99.9999% (often referred to as “six nines” or 6N pure), and to be qualified to be used in the electronics industry, MG-Si needs to be refined to reach a purity level of 99.9999999% (often referred to as “nine nines” or 9N pure).

 

There are several ways in which MG-Si can be refined. The three main technologies used in the production of polysilicon are the Siemens reactor process, which is the dominant technology, the FBR process and the upgraded metallurgical grade silicon process.

 

Siemens Reactor Process. The substantial majority of polysilicon used by the solar and electronics industries is produced via a process of chemical vapor deposition, whereby a chlorosilane gas is deposited onto a heated rod. By 2007, according to Solarbuzz, most new entrants have chosen Siemens technology for manufacturing. The technology in the Siemens reactor is mature, widely implemented and produces high quality material. The process of producing polysilicon begins with MG-Si. MG-Si is purified by various chemical processes to produce solar grade or electronic grade polysilicon.

 

At temperatures between 1,000-1,100°C, TCS is split into its constituents, hyper-pure silicon, which grows onto a polysilicon seed rod, and hydrogen chloride. After the polysilicon rods have grown to the desired thickness, ordinarily taking 5-12 days, the reactor must then be shut down, and the batch of polysilicon rods needs to be cooled and crushed into chunks. TCS has a high deposition rate and high volatility (which makes it easier to remove boron and phosphorous, the two compounds which cause low performance in solar cells). Using the Siemens reactor process has the disadvantage of requiring high electricity usage to maintain process temperatures.

 

A variation of the Siemens process further refines TCS to produce monosilane. This gaseous monosilane is then deposited on heated silicon rods. Monosilane is a higher purity starting material which leads to purer polysilicon. This higher purity polysilicon has historically been more expensive to produce.

 

Fluidized Bed Reactor (FBR). An alternative process for polysilicon production uses a FBR which results in granular silicon. Silicon fluoride is used instead of metallurgical silicon, which is converted into monosilane. Then polysilicon seeds are dropped into the reactor while monosilane and hydrogen gases continually pass through the reactor. This is a continuous process and the reactor does not need to be shut down to obtain the polysilicon, and the rods do not need to be crushed into chunks. The theoretical advantages of this process are lower capital and electricity costs than those required in the Siemens process. To date, however, only a few producers have established production using FBR technology on a commercial scale.

 

Others. In addition to the Siemens reactor process and the FBR process, some manufacturers have sought to commercialize other methods dedicated specifically to solar grade polysilicon. These methods seek to lower silicon production costs and to produce feedstock meeting the lower standards for use in the solar industry cost effectively.

 

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Polysilicon Supply

 

The considerable growth in the solar industry over the past several years has resulted in greater demand for polysilicon and there is currently insufficient production capacity to meet the requirements of the solar and electronics industries. Although the raw material, MG-Si, is plentiful, there are significant barriers to enter the market to produce high-purity polysilicon. Polysilicon plants involve highly complex processes and technological know-how. Secondly, significant scale of at least 3,000-5,000 MT is required to achieve a competitive cost position.

 

According to Solarbuzz, at the end of 2007, total global polysilicon production capacity serving the solar and electronics industries exceeded 52,000 MT. Seven companies — Hemlock, MEMC, Mitsubishi, Osaka Titanium, REC, Tokuyama and Wacker— accounted for 82% of total polysilicon production capacity. More recently, the major incumbent polysilicon suppliers worldwide have announced new capacity expansion plans in response to the growing demand from the solar industry. In addition, many new entrants have either commenced or announced plans to produce polysilicon. Several downstream producers, such as LDK and ReneSola, have also expressed the intention to expand upstream to include polysilicon production. In China, polysilicon production capacity has lagged behind solar wafer and cell production capacity. The following table indicates market share in 2007:

 

      Polysilicon    Wafer    Cell(1)

China

   18%    54%    41%

Rest of World

   82%    46%    59%

Total capacity

   52,007MT    5,834MW    6,980MW

 

Source: Solarbuzz 2008

Note:

 

  (1)   Includes cells produced using thin-film technology.

 

Companies in the solar industry have been paying increasingly higher prices in recent years for polysilicon as demand has exceeded the supply. According to Solarbuzz, the average long-term contract price for polysilicon has increased from $35-40/kg in 2005 to $60-65/kg in 2007. The spot market for polysilicon reached $250-$400/kg by the end of 2007.

 

Some of the key challenges faced by the polysilicon market include the following:

 

Shortage of Polysilicon Supply. The current market shortage for polysilicon may hinder the development and usage of polysilicon in the solar industry. Further, the shortage of polysilicon provides incentives to develop non-silicon based photovoltaic technologies.

 

Potential Overcapacity. In 2001 and 2002, the polysilicon market experienced a period of excess capacity. Many existing manufacturers and new manufacturers have announced plans to add additional polysilicon capacity. If all of such additional capacity is built, there may be overcapacity, with resultant pressures on pricing and market share.

 

Solar Wafer Industry

 

Multicrystalline wafers generally contain more impurities and crystal defects which impede the flow of electrons as compared to monocrystalline wafers, which are made from one single crystal. Compared to monocrystalline wafers, multicrystalline wafers are cheaper to produce and offer greater scope for further technological development, such as increasing the size of the ingot and reducing silicon waste and crystal defects. According to Solarbuzz, multicrystalline wafer-based cell production represented approximately 48.6% while monocrystalline wafer-based cell production constituted approximately 39.8% of the total photovoltaic market in 2007.

 

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Many companies compete in the solar wafer market. Some of the major wafer producers, such as Kyocera, REC, Solar World, Trina Solar and Yingli, use a part or all of their wafer output for the in-house production of solar cells. In additional, various existing and new wafer manufacturers are expanding their production capacity to meet growing market demand. The main barriers to entry for wafer manufacturing currently include significant capital expenditures, access to high performance manufacturing equipment, availability of polysilicon, solid customer relationships with leading solar cell producers worldwide and significant manufacturing experience required to achieve optimal manufacturing efficiency. While current polysilicon feedstock shortages enable wafer manufacturers reliably to sell their output, relationships with the leading established solar cell producers are critical to gaining feedback on wafer performance and fine-tuning wafer production to ensure a sustainable technological lead.

 

The key competitive attributes of solar wafers are conversion efficiency, certain physical properties and the production cost. These three factors ultimately contribute to a solar cell’s cost per watt of electricity generation. The photovoltaic industry’s main goal is to reduce the cost per watt of solar electricity generation in order to increase solar energy’s competitiveness. Often there exists a trade-off between achieving high technical efficiency, or a high conversion efficiency, and a high manufacturing efficiency, or low production costs. Companies in the industry are striving to improve the quality and efficiency of solar wafers through improvements to their production processes.

 

Production costs of monocrystalline or multicrystalline wafers can be reduced through the creation of larger ingots and thinner wafers, as well as the reduction of operational costs. Larger ingots reduce the amount of consumables and electricity used per watt of product manufactured and increase production yield. Additionally, larger ingots have less surface area per unit volume of monocrystalline or multicrystalline silicon produced, thus reducing the potential for contamination with impurities. The wafer area is the key factor in determining how much incident light can be absorbed and converted into electricity. By manufacturing thinner wafers, less polysilicon is required to capture the same area of incident light.

 

Competitive Strengths

 

We believe that the following competitive strengths enable us to compete effectively and to capitalize on the rapid growth in the market for polysilicon and wafers for the solar industry:

 

Proven capability in constructing and ramping up polysilicon production capacity

 

We have proven our capability to construct and ramp up polysilicon production capacity. Within 15 months, we completed construction of our Phase I production facility and shipped our first batch of polysilicon. In the three months ended December 31, 2007, March 31, 2008 and June 30, 2008, we produced 154 MT, 302 MT and 359 MT of polysilicon, respectively, and are now able to consistently produce 100 MT per month of polysilicon at our Phase I production facility. We believe we are one of the few manufacturers of polysilicon in China to have reached commercial production of at least 100 MT per month.

 

We commenced pilot production at our Phase II production facility in June 2008. On completion of our Phase II and Phase III production facilities, we will have a designed annual polysilicon capacity of 13,500 MT. Our in-house production of polysilicon protects us from the risk of insufficient polysilicon supply encountered by many of our wafer sales competitors.

 

We believe that we achieved these milestones by leveraging our management’s execution and coordination capability, our technical and engineering resources and our supply chain management to overcome the substantial difficulty accompanying the design, installation and operation of our production facilities.

 

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Contracted long-term customer revenues

 

We have entered into long-term wafer supply agreements with JA Solar, AIDE and Solarcell and long-term polysilicon supply agreements with Trina Solar and Solarfun. These contracts have pre-set prices which decline substantially over the length of the contract and have pre-set volumes that increase substantially in the early years of the contract. In the aggregate, these contracts provide for payments to us of $10.8 billion (RMB75.7 billion) over their terms. Through these contracts we have effectively contracted a substantial portion of our total polysilicon production for the years ended December 31, 2008 and 2009. These contracts provide us with stable revenues in the near- and medium-term and protection against spot price volatility.

 

Cost effective production process, facilities and operations

 

We believe our advanced production processes and equipment we are installing as well as China-based production provide us with a cost structure that will be competitive with the leading polysilicon producers. We believe we will be able to maximize production efficiency by leveraging our competitive costs for skilled workforce, engineering and technical resources and production equipment and facilities. In addition, the close proximity of our Phase I, Phase II and Phase III production facilities to both solar and electronics product manufacturers located in Jiangsu Province, the center for the solar and electronics manufacturing industries in China, enables us to have a high level of communication with our customers and efficiently manage our inventory and allows our customers to source polysilicon and wafers locally.

 

Experienced management team

 

Our management team consists of an experienced and diversified group of entrepreneurs and professionals who have positioned our company to take advantage of the increased demand for polysilicon. Members of our senior management team have a track record of founding and successfully managing enterprises as well as constructing and operating large power and chemical plants. For example, Mr. Zhu Guoming, the general manager of JZPTD, was responsible for the construction of power plants owned and operated by the Golden Concord Group and Mr. Jiang Wenwu, the deputy general manager of JZPTD, was responsible for the operation of large petrochemical projects in China.

 

Our Strategies

 

Our goal is to become a leading global supplier of polysilicon and wafers for the solar industry. We intend to achieve this goal by pursuing the following strategies:

 

Significantly expand polysilicon production capacity

 

We plan to significantly increase our production capacity in order to meet growing demand for our polysilicon and to improve economies of scale. We ramped up our Phase I production facility to its designed annual capacity of 1,500 MT in March 2008. We commenced pilot production at our Phase II production facility with an annual production capacity of 1,500 MT in June 2008. We commerced commercial production of our Phase II production facility in July 2008 and expect to achieve its full ramp up by December 2008. We have secured a sufficient supply of hydrochlorination synthesizers, distillation chambers, reactors, hydroelectrolysis devices, vent gas recovery mechanisms and vent gas washing towers from our equipment suppliers to increase our annual production capacity to 3,000 MT and have obtained the necessary approvals to construct and operate such additional production capacity. We commenced preparation for construction of Phase III facilities in December 2007 which are expected to increase our aggregate polysilicon production capacity to 13,500 MT per year by March 2010. In addition, we intend to determine the location and secure necessary land, seek the approvals and begin the construction of additional polysilicon production facilities to reach an aggregate capacity of 24,000 MT per year by 2011.

 

Establishing wafer production capacity to meet most of our requirements

 

We expect wafer sales to contribute a significant majority of our revenues in the future. We have plans to manufacture wafers at our facility by 2009 and intend to commence the construction of our multicrystalline and

 

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monocrystalline wafer production facilities by the end of 2008. As we currently do not have wafer manufacturing capabilities, we are entirely dependent on tolling arrangements for wafer manufacturing. We must ensure that our tolling partners are able to dedicate a sufficient amount of wafering capacity to support our obligations to deliver wafers pursuant to our long-term wafer supply contracts. We will utilize tolling manufacturers to fulfill our contractual obligations until substantially all our wafers are produced in-house.

 

Entering into additional long-term wafer and polysilicon supply contracts

 

We intend to enter into additional long-term supply contracts with a goal of selling approximately 85% of our output under long-term supply agreements and the remaining non-contracted portion of our polysilicon and wafers on the spot market. We also intend to increase our international sales and, depending on market conditions, consider sales of polysilicon to the semiconductor industry.

 

Reducing our production costs

 

We aspire to be one of the most cost-efficient polysilicon producers globally. We intend to do so by investing in technological advancements and applying prudent manufacturing principles. We plan to devote substantial resources to enhance the efficiency of our production processes and in particular, reducing our polysilicon production cycle times, electricity consumption and the use of raw materials. We have thus far been able to shorten our production cycles by adjusting reactor parameters as well as optimizing electricity usage. To support our capacity expansion plans, we have sourced a portion of our production equipment from cost-competitive domestic suppliers provided that the quality is similar to that of imported equipment from our current suppliers.

 

We use TCS to produce polysilicon. TCS is one of the main and most costly production inputs and to date, we have relied on third party suppliers for substantially all of our TCS requirements. To reduce our reliance on TCS from third party suppliers, we are increasingly incorporating TCS production into our production process. We integrated the hydrochlorination process for our Phase I production facility in February 2008 and expect to integrate hydrochlorination in our Phase II production facility in September 2008. Our Taixing joint venture is constructing a TCS production facility with an initial annual capacity of 20,000 MT in Taizhou Jiangsu Province, which we expect to commence pilot production shortly after this offering. All of the Taixing joint venture’s TCS output is expected to be supplied to us at market price. We intend to commence construction of a hydrogenation and a TCS production facility in Xuzhou in August 2008 which we expect to have a combined capacity to produce up to 90,000 MT of TCS per year by the third quarter of 2009. Upon ramp-up of these facilities, we expect to substantially reduce our reliance on third parties for our TCS requirements.

 

Selectively pursuing strategic acquisitions and alliances to expand our business

 

We will consider suitable opportunities to pursue strategic acquisitions and alliances to expand our business. We are currently in preliminary discussions with one of our tolling wafer manufacturers, Huasheng, with respect to a potential acquisition of such manufacturer. Such discussions are in their early stages and there can be no assurance we will complete any acquisition. We believe that there is significant third party wafer manufacturing capacity in place and we will continue to evaluate other acquisition opportunities. In exploring future expansion opportunities, we intend to carefully consider and balance some or all of the following criteria with a view to further growing our business: (i) the synergies between us and our potential targets; (ii) geographic proximity to our existing operations; and (iii) whether the acquisition can enhance the overall sustainability of our existing and future business. We believe our relationship with industry participants and our knowledge of, and experience in, the solar industry allow us to understand industry trends, technological developments and applications of solar technologies, which will assist us in making decisions regarding such acquisitions and alliances.

 

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Our Products

 

We sell polysilicon and wafers to companies operating in the solar industry. We currently produce only polysilicon and intend to produce monocrystalline and multicrystalline wafers by the end of 2009. We currently rely on third party tolling arrangements to produce the wafers we sell.

 

Polysilicon Production

 

Production Capacity

 

The following table shows our major installed annual production capacity objectives as of the dates indicated and includes the expected date of initial commercial operation and fully-ramped production of each expansion phase:

 

     Planning/
construction
commencement
   Start Commercial
Production
   Fully-ramped
Capacity Production

Phase I – 1,500 MT facility

   July 2006    October 2007    March 2008

Phase II – 1,500 MT facility(1)

   August 2007    July 2008    December 2008

Phase III – 10,500 MT facility(2)

   December 2007    January 2009    March 2010

 

Notes:  

 

  (1)   All approvals received and construction substantially complete or underway.
  (2)   PRC national government environmental and NDRC approvals have been received for 6,000 MT per year of the intended Phase III expansion. We began preparing for construction of our Phase III facilities in December 2007. We received approval to construct 6,000 MT per year of Phase III in April 2008 and intend to apply for the NDRC approval over the remaining capacity for our Phase III expansion shortly after this offering. We are in the process of obtaining the land use certificates for our Phase III production facility, See “—Facilities”.

 

As a result of these capacity installations, we expect to have 3,000 MT of fully-ramped annual polysilicon production capacity at December 31, 2008, 10,000 MT of fully-ramped annual production capacity at December 31, 2009 and 13,500 MT of fully-ramped annual production capacity at March 31, 2010.

 

In addition to the above, we intend to expand our annual capacity to 24,000 MT by 2011 through our additional production facilities. We may look for a location outside of Xuzhou, Jiangsu Province, China for such expansion. We intend to determine the location for our expansion by the end of 2008, and will then begin to apply for the necessary permits and commence equipment orders. See “Risk Factors—Risks Relating to Our Business—Our future success depends substantially on our ability to significantly expand both our polysilicon production capacity and output, which exposes us to a number of risks and uncertainties. Our announced intention to increase polysilicon capacity to 24,000 MT per year is preliminary and may not be implemented.”

 

We use a modified Siemens process to produce polysilicon. The modified Siemens process results in a higher utilization of silicon TCS, requires less electricity and is also more environmentally friendly as less pollutants are produced than the original Siemens reactor process. The process includes four distinct steps: (1) hydrochlorination/hydrogenation; (2) distillation; (3) poly deposition; and (4) vent gas recovery. The reactor in which polysilicon is formed is a key production component.

 

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Manufacturing Process

 

LOGO

 

Hydrochlorination. This process is used to recycle the STC produced as by-product from the poly deposition process, combining the STC with hydrogen gas to produce TCS. HCl, a by-product from this reaction, will be mixed with MG-Si simultaneously, to further produce TCS.

 

Hydrogenation. This process involves combining the STC produced in the poly deposition process with hydrogen under high temperatures to produce TCS and HCl. The TCS can be immediately redirected to the distillation process after which it will be used in the poly deposition process. The resulting HCl can then be combined with MG-Si to also produce TCS in our in-house TCS production facility.

 

Distillation. This process involves separating the unused HCl and STC from the TCS through distillation and condensation, that is, pressure and temperature separation. The TCS will then undergo further distillation and results in high purity TCS feedstock to be used in poly deposition process.

 

Deposition. The resulting purified TCS is mixed with hydrogen and vaporized into a gas. The resulting gas is then released into the reactor with heated silicon rods inside the cooled bell jar of the reactor. The silicon contained in the gas is deposited on the heated rods, which gradually grow until the desire