Form 6-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER

THE SECURITIES EXCHANGE ACT OF 1934

For the month of August 2012

Commission File Number: 001-33464

 

 

LDK SOLAR CO., LTD.

(Translation of registrant’s name into English)

 

 

Hi-Tech Industrial Park

Xinyu City

Jiangxi Province 338032

People’s Republic of China

(Address of principal executive offices)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F  x            Form 40-F  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ¨

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes  ¨             No  x

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-             

 

 

 


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LDK

LIGHT OUR FUTURE

LDK Solar Co., Ltd.

2011 Annual Report

2011 Annual Report

LDK Solar Co., Ltd.

LDK

To Embrace

A Brighter & Smarter Future

A vertically integrated leader covering the entire photovoltaic (PV) supply chain


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TABLE OF CONTENTS

FINANCIAL REVIEW 02

CORPORATE STATEMENT 03

EMBRACING A SMARTER & BRIGHTER FUTURE 06

MESSAGE FROM THE CEO 08

BOARD OF DIRECTORS 12

EXECUTIVE OFFICERS 13

ANNUAL REPORT ON FORM 20-F 15

CORPORATE INFORMATION (inside back cover)


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EMBRACING A SMARTER AND BRIGHTER FUTURE


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2011 FINANCIAL REVIEW

$2,157 MM 4.3 GW 1.7 GW

Revenues

Wafer Manufacturing Capacity

Module Manufacturing Capacity

17,000 MT

1.7 GW

In-house Polysilicon Production Capacity

In-house Cell Production Capacity

LARGEST US-Listed Solar Company Globally By Assets

as of 12/31/2011

$6,854 (US$ MM)

$5,778

$4,537

$4,367

$3,275

$2,877

$2,341

$1,949

$1,653

$1,458

LDK

First Solar

Suntech

Yingli

SunPower

Trina Solar

JA Solar

Renesola

Hanwha Solar One

Jinko Solar

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CORPORATE STATEMENT

LDK Solar – A vertically integrated leader covering the entire photovoltaic (PV) supply chain

LDK Solar Co., Ltd. (NYSE: LDK) is a leading vertically integrated manufacturer of photovoltaic (PV) products. LDK Solar manufactures polysilicon, mono and multicrystalline ingots, wafers, cells, modules, systems, power projects and solutions. LDK Solar’s headquarters and principal manufacturing facilities are located in Hi-Tech Industrial Park, Xinyu City, Jiangxi Province in the People’s Republic of China. LDK Solar’s office in the United States is located in Sunnyvale, California. For more information on LDK Solar and its products, please visit www.ldksolar.com.

Mono Ingot

Mono Wafer

Mono Cell

Mono Module

Silicon

PV system

Multi Ingot

Multi Wafer

Multi Cell

Multi Module

2011 LDK ANNUAL REPORT 03


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CORPORATE STATEMENT

Mission

• To be a PV industry leader focused on large-scale, cost-effective manufacturing and customer services that provide cost-competitive, environmentally friendly, superior-quality, highly reliable and innovative solar energy materials, products and systems to our customers worldwide

Vision

• To be recognized as a top PV brand and preferred partner in the solar energy industry

Motto

• “Light Our Future”

• We utilize advance PV technology to bring the sky’s most abundant resource, the energy of the sun, to people around the world.

BENEFITS OF VERTICAL INTEGRATION

From Silicon to Module less than 300 Miles

CAPTURE HIGHER MARGIN ACROSS VALUE CHAIN

ECONOMIES OF SCALE

EXPAND ADDRESSABLE MARKET

REDUCE VOLATILITY OF BUSINESS

INCREASE DEMAND VISIBILITY

QUALITY CONTROL

CUSTOMER DIVERSIFICATION

LDK LIGHT OUR FUTURE

KEY GROWTH STRATEGIES

1. Capitalize Vertical Integration Across Solar Value Chain

2. Continue Cost Reductions to Achieve Grid Parity

3. Maintain Premium-to-Market ASPS by Offering High Quality Products, Services and Brand

4. Penetrate & Expand PV Projects Business with Financing Solutions from China-Based Banks

5. Diversify and Grow Customer Base

LDK LIGHT OUR FUTURE

A Long-Term Winner in Solar Industry

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WE ARE A LONG-TERM WINNER IN THE SOLAR INDUSTRY

2011 LDK ANNUAL REPORT 05


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EMBRACING A BRIGHTER FUTURE

Continuing Cost Reduction – Polysilicon

Measures

A. De-bottlenecking

B. Scale up to reduce depreciation and power consumption

C. Yield improvement

D. Localize consumables

E. Co-gen to supply steam

F. Others

Polysilicon Production Cost

(approximate % from 2011)

$30/kg

$22/kg

<$20/kg

2011

A

B

C

D

E

F

2012

2013E

Target: Cost < $1.20/w in China 2012

($/Watt)

2.50

60%

40%

4Q 2010

1.70

50%

50%

4Q 2011

1.20

42%

58%

4Q 2012 E

P V System

Module

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Module Plant In Hefei

Module Plant In Nanchang

Cell Plant In Xinyu

Moudle Plant In Suzhou

2011 Suzhou LDK ANNUAL REPORT 07


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CHAIRMAN’S STATEMENT

Surpassing Challenges Encountered In 2011

To Our Shareholders:

By any measure 2011 was a challenging year for the solar industry. The entire photovoltaic (PV) value chain experienced a tremendous supply imbalance throughout 2011. Policy changes to industry incentives and austerity measures in Europe weakened demand and exacerbated excess capacity in the market. We were not immune to the impact to our business from the industry oversupply. The global capacity and high inventory levels significantly lowered the market price for solar products. Despite our ongoing cost reduction efforts, lower pricing across the global supply chain led to average selling price (ASP) erosion, and together with the impact of inventory write-downs, reduced our revenue and margins for the year.

For the year, sales declined 14% to $2.2 billion and we recorded a net loss, which was partially attributable to inventory write-downs and a loss on firm purchase commitments of polysilicon materials.

Continuing Diversification and Vertical Integration Strategy

As we navigated the difficult macro environment, we remained focused on our operating strategy and we accomplished a number of goals, including further diversifying our business and increasing our vertical integration.

In March 2011, we acquired 72% of U.S.-listed Solar Power Incorporated (SPI) in Roseville, California. SPI engages in building solar projects in the U.S. as well as developing projects in Europe and Central America. In 2011, SPI grew its revenue by 195% to slightly over $100 million. LDK Solar benefits from SPI’s expanding development portfolio and pipeline by supplying modules to their large scale PV projects.

Acquired 72% SPI in California

In April 2011 we began plans to establish a new manufacturing plant in Nanchang City, Jiangxi Province. The facility has capacity to supply two million, two-inch equivalent pieces of sapphire wafers per year and is positioned to capture the growing opportunities in the LED industry. We believe this investment in manufacturing sapphire wafers has a great synergy with LDK Solar’s crystallization and wafer engineering as well as manufacturing expertise, and will enhance LDK Solar’s product offerings.

Established LED MFG in Jiangxi

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During 2011 we continued to expand the scale and geographical reach of our polysilicon, wafer, module and cell businesses, while remaining focused on further vertical integration at each step of our PV product value chain.

In April 2012, we acquired 71% of Frankfurt-listed Sunways AG of Germany. By acquiring a controlling stake in this leading solar technology company, we further strengthened our vertical integration strategy and expanded our product offering with a line of inverters and enhanced our cell and module technology capabilities. The transaction also provided a premium Europe-based brand which we believe creates a great platform for LDK Solar’s global sales and marketing team.

Acquired 71% Sunways AG of Germany

Continuing Capacity and Production Scale-Up and Cost Reduction

During 2011 we continued to expand the scale and geographical reach of our polysilicon, wafer, module and cell businesses, while remaining focused on further vertical integration at each step of our PV product value chain.

Xiaofeng Peng

Chairman of the Board of Directors and

Chief Executive

Polysilicon Production Capacity (MT)

17,000

25,000

4Q11

4Q12E

2011 LDK ANNUAL REPORT 09


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CHAIRMAN’S STATEMENT

Polysilicon – Our polysilicon plants reached total manufacturing capacity of 17,000MT in 2011. We successfully ramped production in the three trains in our Mahong Plant and continued production in our Xiacun Plant. As part of our strategy to reduce wafer production costs, we consume a significant portion of our polysilicon output in our wafer production. In 2011 LDK Solar consumed approximately 82.8% of our total polysilicon production, with the rest sold to independent third-party customers.

During the year, we continued our technology upgrades and developments to improve production efficiency and product quality with a focus on improving the throughput of the purification and conversion rates. These initiatives have contributed to the continued reduction of the polysilicon production cost.

Wafer Manufacturing Capacity (GW)

4.3GW

4.5GW

2011

2012E

Solar Wafers – Our wafer manufacturing facilities reached a total annual capacity of 4.3 gigawatts (GW) at the end of 2011. In order to manage capital expenditure requirements, we focused on achieving our capacity expansion efforts through equipment upgrades and debottlenecking. We also continued to seek opportunities to improve wafer quality and implement high-efficiency wafer technology. As such, late in the fourth quarter of 2011, we began mass production of the new generation M2 wafers; an innovation based on LDK know-how for high efficiency multi-crystalline wafers, offering customers higher solar cell conversion efficiency. The increase of efficiency is achieved with insignificant input of production cost, but it provides our customers with much higher added value. We are increasing the manufacturing capacity of M2 wafers through minor upgrades to our existing production equipment and targeting full capacity production by the second half of 2012.

During this highly competitive time in the industry, we believe our focus on delivering higher quality wafers to our customers will help retain our long-term loyal customer base.

Cell Efficiency

Both mono and multi-cell efficiencies higher than average

Average Efficiency

Higher Efficiency

Mono 18.55% 19.2%

Multi 17.15% 17.3%

GBL 18.00% 18.79%

Solar Cells – We reached a manufacturing capacity of 1.7 GW in our solar cell facility at the end of 2011. In our solar cell production line, the implementation of our fine line technology has led to an increase of cell conversion efficiency. Our high efficiency R&D pilot cell line has achieved an average efficiency of over 19.0%, with a potential to reach 19.5% in the near future.

Cell Manufacturing Capacity (MW)

180

1,700

2,200

4Q10

4Q11

4Q12E

We remain focused on developing better cell design and processes to improve conversion efficiency and to lower manufacturing costs. We have built up a technology service team to help our solar cell customers to improve

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their solar cell line productivity and solar cell efficiency. We are also delivering our solar cell process know-how to our customers for the use of our M2 wafers with only minor change to their production organization and equipment.

Solar Modules – We scaled our module operations in anticipation of higher shipment volumes in the second half of 2011. By the end of 2011, we had an annualized solar module production capacity of approximately 1.7GW. In addition to providing a steady supply of cells for our modules, we expect that our integration of R&D efforts for polysilicon, wafers, cells and modules, will continue to drive down the total cost of modules. All of our production lines have implemented our fine line technology and the average cell efficiency has reached 16.9-17.0% with normal wafers, and over 17.3% with our M2 wafers.

Solar Farm Projects – Our vertically integrated strategy to enter solar project installations has been a rewarding direction, and we plan to continue using our global project platform in China, Europe and the U.S. to explore more utility-scale project opportunities.

Current Strength & Future Outlook

2011 actual demand more than forecast (GW)

Forecast

Actual

Forecast Range

5.0 5.9

6.4 7.5

13.1 18.2

26.3 27.4

31.2

15.7

38.2

18.2

42.7

21.9

2008

2009

2010

2011

2012E

2013E

2014E

Source: Market Buzz 2Q2011 To maintain and extend our competitive strengths, LDK Solar focuses its R&D programs on developing technologies and processes to increase cost efficiencies, maximize equipment utilization and continue quality enhancement. The Company has dedicated corporate R&D centers, joint laboratories and projects with several universities, as well as the only national research center for photovoltaic technology in China.

In summary, while we expect challenging conditions in the global solar market to persist in 2012, we are optimistic that as the cost decreases, we will see an increase in PV applications globally. We believe that the lower pricing levels for modules have made the IRR more attractive and that will help the sector recover over time. We believe that the industry consolidation brings opportunities to companies with technology and cost leadership, and scale. We are confident that our continual focus on improving our cost structure, reducing our debt, and building market share, will position us to capitalize on the long-term growth opportunities stemming from more affordable solar power. During the course of 2012, we expect to gradually increase our revenue with a greater portion coming from downstream modules and PV projects.

I would like to thank our shareholders, employees and customers for their continued support of LDK Solar. I look forward to updating you on new company developments in the coming year.

Sincerely,

Xiaofeng Peng

Chairman of the Board of Directors and

Chief Executive Officer

LDK Solar Co., Ltd.

2011 LDK ANNUAL REPORT 11


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BOARD OF DIRECTORS

Our Board of Directors is responsible to our shareholders for the oversight of the company and for the implementation and operation of an effective and sound corporate governance environment.

Liangbao Zhu Director

Bing Xiang Independent Director

Xiaofeng Peng Chairman

Maurice Ngai Independent Director

Junwu Liang Independent Director

Xingxue Tong Director

Jack Lai Secretary

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KEY MANAGEMENT

Professional Management Team

Xingxue Tong President and Chief Operating Officer

Qiqiang Yao Senior Vice President

Jack Lai Executive Vice President and Chief Financial Officer

Rongqiang Cui Head of Research and Development Laboratory

Xiaofeng Peng Chief Executive Officer

Yuepeng Wan Chief Technology Officer and Senior Vice President

Liangbao Zhu Executive Vice President

2011 LDK ANNUAL REPORT 13


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2011 Annual Report

and

Notice of Annual General Meeting

of

LDK Solar Co., Ltd.

August 1, 2012

 

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You should note the following with respect to our 2011 annual report and our notice of annual general meeting included in this document:

 

 

Our 2011 annual report for the annual general meeting consists of our annual report on Form 20-F for the fiscal year ended December 31, 2011 filed with the Securities and Exchange Commission, or SEC, on May 15, 2012, as amended on May 30, 2012 (each available at www.sec.gov), without the exhibits thereto under Item 19.

 

 

Our notice of the annual general meeting (beginning on page A-1) also includes the proposed resolutions to be considered and, if thought fit, adopted at the annual general meeting to be held on September 17, 2012, as well as a form proxy card for our ordinary shareholders.

This document is also available on our website www.ldksolar.com. We have also submitted a report on Form 6-K to the SEC that contains this document available on the SEC’s website www.sec.gov.

If you require a hard copy of our 2011 annual report and our notice of annual general meeting, we will mail a copy to you free of charge. Please send your request by mail, email or telephone to the following address:

LDK Solar USA, Inc.

1290 Oakmead Parkway

Suite 306

Sunnyvale, CA 94085

Attn: Jack Lai, CFO

Email: judy@ldksolar.com

Tel: (408) 245-0858

Because our annual general meeting will be held on September 17, 2012 in our office in Hong Kong, if you require a hard copy of our annual report and our notice of the forthcoming annual general meeting, we recommend that you submit your request by August 15, 2012 to ensure timely delivery and to allow yourself sufficient time to review our annual report and proposed resolutions and to complete and mail your proxy card.

NOTICE TO HOLDERS OF AMERICAN DEPOSITARY SHARES

If you are a holder of our American depositary shares, or ADSs, the depositary, JPMorgan Chase Bank, N.A., will set a record date to establish the holders of our ADSs entitled to provide the depositary with voting instructions with respect to the annual general meeting. If you are such a registered holder of our ADSs on such record date, the depositary will forward to you information regarding this forthcoming annual general meeting and ask you to provide it with your voting instructions with respect to the shares that underlie your ADSs. For your voting instructions to be valid, you must comply with the instructions provided by or on behalf of the depositary, and the depositary must receive your voting instructions in the manner and on or before the date specified. The depositary will try, as far as practical, subject to the provisions of or governing the underlying shares, to vote or to have its agents vote the shares as you instruct. The depositary will only vote or attempt to vote as you instruct. The depositary will not itself exercise any voting discretion. Furthermore, neither the depositary nor its agents are responsible for any failure to carry out any voting instructions, for the manner in which any vote is cast or for the effect of any vote.

 

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 20-F/A

(Amendment No. 1)

 

 

(Mark One)

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

OR

 

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

For the fiscal year ended December 31, 2011

OR

 

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

For the transition period from              to 

OR

 

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

Date of event requiring this shell company report                     

Commission file number 001-33464

 

 

LDK Solar Co., Ltd.

(Exact name of Registrant as specified in its charter)

 

 

N/A

(Translation of Registrant’s name into English)

Cayman Islands

(Jurisdiction of incorporation or organization)

Hi-Tech Industrial Park

Xinyu City

Jiangxi Province 338032

People’s Republic of China

(Address of principal executive offices)

Jack Lai

Chief Financial Officer

+1 (408) 245-0858 (Telephone)

+1 (408) 245-8802 (Facsimile)

1290 Oakmead Parkway, Suite 306

Sunnyvale, California 94085

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

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

 

Title of Each Class

 

Name of Each Exchange on which Registered

American depositary shares, each representing

one ordinary share of par value $0.10 per share

  New York Stock Exchange, Inc.

Securities registered or to be registered pursuant to Section 12(g) of the Securities Exchange Act. None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Securities Exchange Act. None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 133,518,800 ordinary shares, par value $0.10 per share.

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

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

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

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

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

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

 

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

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

 

U.S. GAAP  x  

International Financial Reporting Standards as issued by the

International Accounting Standards Board

   ¨   Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:    Item 17  ¨    Item 18  ¨

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

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ¨    No  ¨

 

 

 


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EXPLANATORY NOTE

We are filing this Amendment No. 1 to our Annual Report on Form 20-F for the fiscal year ended December 31, 2011, or our 2011 Annual Report, which we filed with the Securities and Exchange Commission, or the SEC, on May 15, 2012, for the sole purpose of (i) furnishing the Interactive Data File as Exhibit 101 to our 2011 Annual Report in accordance with Rule 405 of Regulation S-T of the SEC, and (ii) making the corrections to our 2011 Annual Report described in the following paragraph.

In our preparation of the Interactive Data File disclosure in Exhibit 101 to our 2011 Annual Report, we have noted and corrected an inadvertent error in our 2011 Annual Report relating to the gross loss for our other PV products segment for the year ended December 31, 2011. Such gross loss should be $81,179,000, or $81.2 million, rather than $2,238,992,000, or $2,239.0 million, appearing respectively on page 93 of our 2011 Annual Report under “Item 5. Operating and Financial Review and Prospects — A. Operating Results — Results of Operations” in our discussion of “Gross profit (loss)” and on page F-49 of our 2011 Annual Report under “Item 18. Financial Statements” in the table for the year ended December 31, 2011 for the “Gross profit (loss)” relating to “Other PV products segment.” The total amount of such “Gross profit (loss)” in the table on page F-49 of our 2011 Annual Report should also reflect the corrected amount accordingly, being negative $39,661 in thousands, rather than negative $2,197,474 in thousands. The corrected numbers are reflected in this Amendment No. 1 and the Interactive Data File disclosure that appears in Exhibit 101 to our 2011 Annual Report.

Other than as expressly set forth above, this Amendment No. 1 does not, and does not purport to, amend, update or restate the information in any other item of our 2011 Annual Report; nor does it reflect any other events that have occurred after the May 15, 2012 filing date of our 2011 Annual Report.


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          Page  

Certain Terms and Conventions

     1   

Exchange Rate Information

     2   

Forward-Looking Statements

     3   
  

PART I

  

ITEM 1.

   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS      4   

ITEM 2.

   OFFER STATISTICS AND EXPECTED TIMETABLE      4   

ITEM 3.

   KEY INFORMATION      4   
   A. Selected Financial and Operating Data      4   
   B. Capitalization and Indebtedness      7   
   C. Reasons for the Offer and Use of Proceeds      7   
   D. Risk Factors      7   

ITEM 4.

   INFORMATION ON THE COMPANY      52   
   A. History and Development      52   
   B. Business Overview      53   
   C. Organizational Structure      76   
   D. Property, Plants and Equipment      77   

ITEM 4A.

   UNRESOLVED STAFF COMMENTS      77   

ITEM 5.

   OPERATING AND FINANCIAL REVIEW AND PROSPECTS      77   
   A. Operating Results      77   
   B. Liquidity and Capital Resources      100   
   C. Research and Development, Patents and Licenses, Etc.      106   
   D. Trend Information      107   
   E. Off-Balance Sheet Arrangements      111   
   F. Tabular Disclosure of Contractual Obligations      111   
   G. Safe Harbor      112   

ITEM 6.

   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES      112   
   A. Directors and Senior Management      112   
   B. Compensation of Directors and Officers      114   
   C. Board Practices      115   
   D. Employees      117   
   E. Share Ownership      118   

ITEM 7.

   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      121   
   A. Major Shareholders      121   
   B. Related Party Transactions      122   
   C. Interests of Experts and Counsel      124   

ITEM 8.

   FINANCIAL INFORMATION      124   
   A. Consolidated Statements and Other Financial Information      124   
   B. Significant Changes      125   

ITEM 9.

   THE OFFER AND LISTING      125   

ITEM 10.

   ADDITIONAL INFORMATION      126   
   A. Share Capital      126   
   B. Memorandum and Articles of Association      126   
   C. Material Contracts      135   
   D. Exchange Controls      135   
   E. Taxation      135   
   F. Dividends and Paying Agents      142   
   G. Statement by Experts      142   
   H. Documents on Display      142   
   I. Subsidiary Information      142   

ITEM 11.

   QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK      142   


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ITEM 12.

   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      144   
   A. Debt Securities      144   
   B. Warrants and Rights      144   
   C. Other Securities      144   
   D. American Depositary Shares      144   
   PART II   

ITEM 13.

   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES      155   

ITEM 14.

   MATERIAL MODIFICATIONS TO RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      155   
  

A.  Material Modification to Instruments Defining Rights of Security Holders

     156   
  

B.   Material Modification to Rights of Registered Securities by Issuing or Modifying any Other Class of Securities

     156   
  

C.   Withdrawal or Substitution of a Material Amount of the Assets Securing any Registered Securities

     156   
  

D.  Change of Trustees or Paying Agents for any Registered Securities

     156   
  

E.  Use of Proceeds

     156   

ITEM 15.

   CONTROLS AND PROCEDURES      156   

ITEM 16.

   RESERVED      158   

ITEM 16A.

   AUDIT COMMITTEE FINANCIAL EXPERT      158   

ITEM 16B.

   CODE OF ETHICS      158   

ITEM 16C.

   PRINCIPAL ACCOUNTANT FEES AND SERVICES      159   

ITEM 16D.

   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      159   

ITEM 16E.

   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      160   

ITEM 16F.

   CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT      160   

ITEM 16G.

   CORPORATE GOVERNANCE      160   

ITEM 16H.

   MINE SAFETY DISCLOSURE      161   
   PART III   

ITEM 17.

   FINANCIAL STATEMENTS      161   

ITEM 18.

   FINANCIAL STATEMENTS      161   

ITEM 19.

   EXHIBITS      162   

Index to Consolidated Financial Statements

     F-1   


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CERTAIN TERMS AND CONVENTIONS

We measure our wafer production capacity in megawatts, or MW, representing 1,000,000 watts, or in gigawatts, or GW, representing 1,000 MW, each a unit of power-generating capacity. For purposes of this annual report, we have assumed an average photovoltaic, or PV, conversion efficiency rate of 15.3% for our multicrystalline wafers and cells and modules using our multicrystalline wafers prior to December 31, 2010, and 16.5% for our multicrystalline wafers and cells and modules using our multicrystalline wafers since January 1, 2011. The conversion efficiency rate of a PV cell is the percentage of light energy from the sun that the cell converts into electrical energy. This conversion efficiency rate is estimated based on feedback from our selected customers and is highly dependent on the solar cell and module production processes of these customers. Based on this conversion efficiency rate, we have further assumed that, with respect to our wafers, each 125 by 125 millimeters, or mm, wafer we produce generates approximately 2.4 watts of power prior to January 1, 2011 and 2.6 watts of power since that date; each 150 by 150 mm wafer we produce generates approximately 3.4 watts of power prior to January 1, 2011 and 3.7 watts of power since that date; and each 156 by 156 mm wafer we produce generates approximately 3.8 watts of power prior to January 1, 2011 and 4.1 watts of power since that date.

We calculate our wafer production capacity as of any specific date based on the ingot production capacity and wafer slicing, or wafering, capacity of our equipment in operation as of that date on an annualized basis. We calculate our estimated aggregate installed annualized polysilicon production capacity by the end of any period based on the capacity of our polysilicon reactors planned to be in operation by the end of such period on an annualized basis.

For the purpose of this annual report, geographical references to “China” and the “PRC” are to the People’s Republic of China and do not include the Hong Kong Special Administrative Region, or Hong Kong, the Macau Special Administrative Region, or Macau, and Taiwan. References to “provinces” of China are to provinces or municipalities under direct administration of the PRC central government and provincial-level autonomous regions of China.

“We,” “us,” “our company” or “LDK Solar” refers to LDK Solar Co., Ltd., a Cayman Islands company, and its subsidiaries.

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

We have sourced various solar industry data used in this annual report from Solarbuzz LLC, or Solarbuzz, an independent solar energy industry research company. We have assumed the correctness and truthfulness of such data, including projections and estimates, when we use them in this annual report.

We have rounded all the numbers in this annual report to their closest round numbers. Figures shown as totals in tables may not be arithmetic aggregations of the figures preceding them due to rounding.

 

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EXCHANGE RATE INFORMATION

We conduct substantially all of our business operations in China with a substantial portion of our sales denominated in Renminbi, while a significant portion of our costs and expenses is denominated in U.S. dollars. We make periodic reports to our shareholders in U.S. dollars. For our operations whose functional currency is not the U.S. dollar, we translate assets and liabilities using exchange rates in effect at each period end and we use the average exchange rates of the period for the statement of operations. We make no representation that any amounts in Renminbi or U.S. dollars could be or could have been converted into each other at any particular rate or at all. The PRC government imposes controls over its foreign exchange in part through regulation of the conversion between Renminbi and foreign currencies as we have disclosed in “Item 3. Key Information — D. Risk Factors — Risks Relating to Our Company and Our Industry — Fluctuations in exchange rates could adversely affect our business” and “— Risks Relating to Business Operations in China — Changes in foreign exchange and foreign investment regulations in China may affect our ability to invest in China and the ability of our PRC subsidiaries to pay dividends and service debts in foreign currencies” in this annual report.

The following table sets forth, for the periods indicated, noon buying rates for U.S. dollars in New York City for cable transfers in Renminbi as certified for customs purposes by the Federal Reserve Bank of New York, which are published weekly by the Federal Reserve Board:

 

     Noon Buying Rate  

Period

   Period End      Average      High      Low  
     (Renminbi per $1.00)  

2007

     7.2946         7.6058         7.8127         7.2946   

2008

     6.8225         6.9477         7.2946         6.7800   

2009

     6.8259         6.8307         6.8470         6.8176   

2010

     6.6000         6.7603         6.8330         6.0000   

2011

     6.2939         6.4496         6.6017         6.3187   

November

     6.3765         6.3564         6.3839         6.3400   

December

     6.2939         6.3482         6.3733         6.2939   

2012

           

January

     6.3080         6.3119         6.3330         6.2940   

February

     6.2989         6.3000         6.3120         6.2940   

March

     6.2975         6.3125         6.3315         6.2975   

April

     6.2790         6.3043         6.3123         6.2790   

Annual averages in the above table are calculated by averaging the noon buying rates on the last business day of each month during the year. Monthly averages are calculated by averaging the noon buying rates for all days during the month or the elapsed portion thereof.

On May 11, 2012, the noon buying rate for U.S. dollars in effect in New York City for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York was $1.00 = Rmb 6.3097.

 

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FORWARD-LOOKING STATEMENTS

This annual report includes “forward-looking statements” within the meaning of, and intended to qualify for the safe harbor from liability established by, the United States Private Securities Litigation Reform Act of 1995. These statements, which are not statements of historical fact, may contain estimates, assumptions, projections and/or expectations regarding future events, which may or may not occur. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Some of the risks are listed under “Item 3. Key Information — D. Risk Factors” and elsewhere in this annual report. In some cases, you can identify these forward-looking statements by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,”, “would,” or similar expressions, including their negatives. These forward-looking statements include, without limitation, statements relating to:

 

   

our goals and strategies;

 

   

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

 

   

our plans to expand our production capacity of PV products;

 

   

expected growth of and changes in the PV industry, solar power industry and renewable energy industry;

 

   

our ability to maintain and strengthen our position as a leading vertically integrated manufacturer of PV products;

 

   

our ability to maintain a strong relationship with any particular supplier or customer;

 

   

effect of competition on demand for and price of our products;

 

   

determination of the fair value of our ordinary shares and American depositary shares, or ADSs;

 

   

any government subsidies and economic incentives to us or to the PV industry;

 

   

PRC governmental policies regarding foreign investments;

 

   

our contemplated equity offerings and debt re-financings; and

 

   

risks identified under “Item 3. Key Information — D. Risk Factors” in this annual report.

This annual report also contains data related to the solar power market in several countries, including China. This market data, including data from Solarbuzz, includes projections that are based on a number of assumptions. The solar power market may not grow at the rates projected by the market data, or at all. The failure of the market to grow at the projected rates may materially and adversely affect our business and the market price of our American depositary shares, or ADSs. In addition, the rapidly changing nature of the solar power market subjects any projections or estimates relating to the growth prospects or future condition of our market to significant uncertainties. If any one or more of the assumptions underlying the market data proves to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

We do not guarantee that the transactions and events described in the forward-looking statements will happen as described or that they will happen at all. You should read this annual report completely and with the understanding that actual future results may be materially different from what we expect. The forward-looking statements made in this annual report relate only to events as of the date on which the statements are made or, if obtained from third-party studies or reports, the date of the corresponding study or report. Since we operate in an emerging and evolving environment and new risk factors emerge from time to time, you should not rely upon forward-looking statements as predictions of future events. We undertake no obligation, beyond that required by law, to update any forward-looking statement, whether as a result of new information, future events or otherwise, to reflect events or circumstances after the date on which the statement is made, even though our situation will

 

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change in the future. Whether actual results will conform with our expectations and predictions is subject to a number of risks and uncertainties, many of which are beyond our control, and reflect future business decisions that are subject to change. All forward-looking statements contained in this annual report are qualified by reference to this cautionary statement.

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable, but see “Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management” in this annual report.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A. SELECTED FINANCIAL AND OPERATING DATA

The following selected consolidated statement of operations data (other than ADS data) and selected consolidated statement of cash flows data for the years ended December 31, 2009, 2010 and 2011 and the selected consolidated balance sheet data as of December 31, 2010 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statement of operations data (other than ADS data) and selected consolidated statements of cash flows data for the years ended December 31, 2007 and 2008 and the selected consolidated balance sheet data as of December 31, 2007, 2008 and 2009 are derived from our audited consolidated financial statements not included in this annual report. You should read the following selected consolidated financial data in conjunction with our consolidated financial statements and related notes and the information under “Item 5. Operating and Financial Review and Prospects” in this annual report. We have prepared our consolidated financial statements in accordance with generally accepted accounting principles, or GAAP, in the United States, or U.S. GAAP. Our historical results for any period are not necessarily indicative of results to be expected for any future period.

We were incorporated in the Cayman Islands on May 1, 2006 as the holding company for, and currently conduct our operations mainly through, subsidiaries in China, including Jiangxi LDK Solar Hi-Tech Co., Ltd., or Jiangxi LDK Solar, Jiangxi LDK PV Silicon Technology Co., Ltd., or Jiangxi LDK Silicon, Jiangxi LDK Solar Polysilicon Co., Ltd., or Jiangxi LDK Polysilicon, LDK Solar Hi-Tech (Nanchang) Co., Ltd., or LDK Nanchang, LDK Solar Hi-Tech (Suzhou) Co., Ltd., or LDK Suzhou, LDK Solar Hi-Tech (Xinyu) Co., Ltd., or LDK Xinyu and LDK Solar Hi-Tech (Hefei) Co., Ltd., or LDK Hefei. We have restructured our polysilicon business so that LDK Silicon & Chemical Technology Co., Ltd., our wholly owned subsidiary incorporated under the laws of the Cayman Islands, or LDK Silicon, holds indirectly all of our polysilicon businesses operated by Jiangxi LDK Silicon and Jiangxi LDK Polysilicon in China.

 

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The following table presents our selected consolidated statement of operations data for the periods specified.

 

     Year Ended December 31,  
     2007     2008     2009     2010     2011  
     (In thousands, except per share and per ADS data)  

Consolidated Statement of Operations Data

          

Net sales

   $ 523,946      $ 1,643,495      $ 1,098,038      $ 2,509,347      $ 2,157,813   

Inventory write-downs

     (4,170     (311,999     (180,213     (6,113     (305,175

Gross profit (loss) (1)

     170,237        88,356        (113,583     557,835        (39,661

Provision for doubtful recoveries of prepayments to suppliers and trade accounts receivable

     —          (20,582     (22,425     (3,872     (174,315

Income (loss) from operations (2)

     146,802        8,990        (230,132     434,917        (460,246

Interest expense and amortization of debt issuance costs and debt discount (3)

     (9,419     (38,162     (50,068     (95,012     (189,938

Government subsidy

     3,461        19,665        26,927        5,625        33,698   

Change in fair value of prepaid forward contracts

     —          60,028        —          —          —     

Earnings (loss) before income taxes

     143,301        71,547        (254,908     362,677        (604,813
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) (4)

   $ 144,059      $ 66,408      $ (233,996   $ 296,467      $ (608,954
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings attributable to non-controlling interests

     —          —          (229     (5,670     (393

Earnings attributable to redeemable non-controlling interests

     —          —          —          —          (11,522
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to our shareholders

     144,059        66,408        (234,225     290,797        (620,869

Accretion to redemption value of redeemable non-controlling interests

     —          —          —          —          (34,590

Accretion of Series A, Series B and Series C preferred shares to redemption values

     (4,937     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to our shareholders (4)

     139,122        66,408        (234,225     290,797        (655,459
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per ordinary share (4)

          

Basic

   $ 1.50      $ 0.63      $ (2.18   $ 2.32      $ (4.90

Diluted

   $ 1.37      $ 0.61      $ (2.18   $ 2.27      $ (4.90

Earnings (loss) per ADS(5)

          

Basic

   $ 1.50      $ 0.63      $ (2.18   $ 2.32      $ (4.90

Diluted

   $ 1.37      $ 0.61      $ (2.18   $ 2.27      $ (4.90

Ordinary shares used in computation

          

Basic

     92,674        104,994        107,238        125,581        133,807   

Diluted

     104,859        109,240        107,238        136,568        133,807   

 

(1) Gross profit (loss) for the years ended December 31, 2007, 2008, 2009, 2010 and 2011 reflected $1,772,000, $3,667,000, $3,381,000, $2,783,000 and $1,881,000 of share-based compensation expense allocated to cost of goods sold, respectively.
(2) Income (loss) from operations for the years ended December 31, 2007, 2008, 2009, 2010 and 2011 reflected $9,390,000, $16,614,000, $14,212,000, $11,044,000 and $9,927,000 of share-based compensation expense, respectively.
(3) Interest expense for the years ended December 31, 2007, 2008, 2009, 2010 and 2011 included nil, $14,019,000, $14,574,000, $19,278,000 and $7,690,000, respectively, related to interest and the amortization of issuance costs and debt discount of our 2013 convertible notes issued in April 2008.

 

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(4) Our PRC subsidiary, Jiangxi LDK Solar, is entitled to a tax holiday of 2-year full tax exemption followed by 3-year 50% reduction in the income tax rate starting from 2006 under the then effective tax rules and regulations. Such tax holiday is grandfathered by the PRC Enterprise Income Tax Law effective since January 1, 2008 and its relevant regulations. Without this tax holiday, our income tax expense would have increased and our net income and net income available to our shareholders would have been reduced by approximately $53,316,000, $5,897,000 and $44,561,000 for the years ended December 31, 2007, 2008 and 2010, respectively. Our basic earnings per share would have been reduced by $0.58, $0.06 and $0.35 for the years ended December 31, 2007, 2008 and 2010, respectively, and our diluted earnings per share would have been reduced by $0.51, $0.05 and $0.33 for the years ended December 31, 2007, 2008 and 2010, respectively. As Jiangxi LDK Solar incurred loss for the years ended December 31, 2009 and 2011, the above mentioned tax holiday had no impact on our income tax expense, net loss, net loss available to our shareholders, basic loss per share and diluted loss per share for the years ended December 31, 2009 and 2011.
(5) “ADS” refers to any of our American depository shares, each representing one ordinary share.

The following table presents our selected consolidated balance sheet data as of the dates specified.

 

     As of December 31,  
     2007      2008      2009      2010      2011  
     (In thousands)  

Consolidated Balance Sheet Data

              

Cash and cash equivalents

   $ 83,470       $ 255,523       $ 384,761       $ 202,127       $ 244,072   

Pledged bank deposits

     135,950         83,383         68,913         503,721         565,062   

Inventories

     349,997         616,901         432,193         474,612         654,947   

Trade accounts and bills receivable, net

     3,767         97,808         217,892         384,265         491,407   

Prepayments to suppliers, net

     138,193         71,214         40,784         112,448         28,178   

Total current assets

     741,748         1,237,642         1,386,445         1,975,421         2,350,922   

Property, plant and equipment, net

     336,763         1,697,203         2,608,725         2,993,213         3,872,361   

Deposits for purchases of property, plant and equipment and land use right

     151,233         233,296         32,529         144,298         151,701   

Inventories to be processed beyond one year

     29,981         —           10,947         13,024         —     

Prepayments to suppliers expected to be utilized beyond one year

     18,994         33,617         26,482         14,318         11,153   

Total assets

     1,309,986         3,373,372         4,384,209         5,492,157         6,853,861   

Short-term borrowings and current installments of long-term borrowings

     264,101         666,200         980,359         1,501,588         2,032,023   

Advance payments from customers, current installments

     141,223         256,411         199,075         196,812         210,412   

Convertible senior notes, less debt discount

     —           —           —           355,445         —     

Total current liabilities

     522,014         1,510,955         2,220,026         3,577,822         4,450,317   

Long-term borrowings, excluding current installments

     25,125         154,252         408,062         604,495         890,432   

Advance payments from customers — non-current

     67,554         487,577         177,773         148,022         121,740   

Other payable due to customers

     —           —           172,848         752         —     

Convertible senior notes, less debt discount

     —           385,685         391,642         34,658         23,733   

Rmb-denominated US$-settled senior notes, less debt discount

     —           —           —           —           258,827   

Total liabilities

     616,915         2,583,505         3,507,273         4,472,419         6,009,243   

Redeemable non-controlling interests

     —           —           —           —           219,694   

Ordinary shares

     10,604         11,311         12,977         13,295         13,352   

Non-controlling interests

     —           —           37,511         498         15,008   

Total equity

   $ 693,071       $ 789,867       $ 876,936       $ 1,019,738       $ 624,924   

 

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The following table sets forth our selected consolidated statement of cash flows data for the periods specified:

 

     Year Ended December 31,  
     2007     2008     2009     2010     2011  
     (In thousands)  

Consolidated Statement of Cash Flows Data

          

Net cash (used in) provided by operating activities

   $ (80,663   $ 333,061      $ 18,614      $ 559,993      $ (286,968

Net cash used in investing activities

     (328,623     (1,247,174     (797,315     (929,118     (816,044

Net cash provided by financing activities

   $ 462,324      $ 1,087,698      $ 907,315      $ 180,388      $ 1,138,499   

The following table sets forth our other selected financial and operating data for the periods specified.

 

     Year Ended December 31,  
     2007     2008     2009     2010     2011  

Other Financial and Operating Data

          

Gross margin (1)

     32.5     5.4     (10.3 )%      22.2     (1.8 )% 

Operating margin (1)

     28.0        0.5        (21.0     17.3        (21.3

Net margin (1)

     27.5     4.0     (21.3 )%      11.8     (28.2 )% 

Polysilicon production (in MT)

     —          —          225        5,052        10,455   

Average polysilicon selling price (per kilogram)

   $ —        $ —        $ —        $ 59.64      $ 56.46   

Wafers sold (in MW)

     223.8        636.3        898.1        1,717.6        1,540.7   

Average wafer selling price (per watt)

   $ 2.24      $ 2.35      $ 1.05      $ 0.89      $ 0.67   

Modules sold (in MW)

     —          —          32.7        346.1        551.0   

Average module selling price (per watt)

   $ —        $ —        $ 1.81      $ 1.83      $ 1.31   

 

(1) Gross margin, operating margin and net margin represent gross profit (loss), income (loss) from operations and net income (loss), respectively, divided by net sales.

 

B. CAPITALIZATION AND INDEBTEDNESS

Not applicable.

 

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.

 

D. RISK FACTORS

Investment in our securities including our ADSs and shares involves a high degree of risk. You should consider carefully the following risks and uncertainties, together with other information contained in this annual report, before you decide whether to buy or hold our securities.

Risks Relating to Our Company and Our Industry

We are operating with a significant working capital deficit; if we do not successfully execute our liquidity plan, we face the risk of not being able to continue as a going concern.

As of December 31, 2009, 2010 and 2011, we had a working capital deficit (being our total consolidated current liabilities less our total consolidated current assets) of $833.6 million, $1,602.4 million and

 

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$2,099.4 million. We incurred a net loss of $234.0 million and $609.0 million, respectively, for the years ended December 31, 2009 and 2011 although we generated a net profit of $296.5 million for the year ended December 31, 2010. As of December 31, 2011, we had cash and cash equivalents of $244.1 million. The majority of our cash and cash equivalents was held by our subsidiaries in China. In addition, we had short-term borrowings and current installments of our long-term borrowings totaling $2,032.0 million as of December 31, 2011, most of which were the obligations of our subsidiaries in China. These factors raise substantial doubt as to our ability to continue as a going concern.

PV business is capital-intensive. We have expended significant financial resources in order to construct, improve, ramp up and adjust our vertically integrated PV operations. We have financed a substantial portion of our capacity expansion by relying on short-term borrowings and prepayments from our customers. Although PRC commercial banks have made short-term financings available to us, it is almost impossible for us to secure long-term financings from them for our projects if we have yet to receive the final project approvals from the National Development and Reform Commission, or NDRC, and other applicable governmental authorities in China. The NDRC approval process is time-consuming, and we typically commence our preparatory and other construction work as approved by the other relevant governmental authorities before we have obtained the final NDRC approval necessary for us to commission a project. The lack of long-term financings in China and the on-going difficulties in the global financial markets have adversely impacted and may continue to adversely affect our liquidity, capital expenditure financing and working capital.

As of December 31, 2011, we had a working capital deficit (total consolidated current liabilities exceeding total consolidated current assets) of $2,099.4 million. As of the same date, we had cash and cash equivalents of $244.1 million, most of which were held by our subsidiaries in China with approximately 89.2% of our short term bank borrowings and current installments of our long-term debt totaling $1,869.6 million residing with these subsidiaries. Taking into account of our unaudited financial results for the fourth quarter of 2011, our “Consolidated Fixed Charge Coverage Ratio,” as defined in the indenture governing our 2014 senior notes, has been negatively impacted as a result of a significant reduction of the aggregate amount of our “Consolidated EBITDA,” as defined in the indenture governing our 2014 senior notes, for the four most recent full fiscal quarters, while our “Consolidated Fixed Charges,” as defined in the indenture governing our senior notes, for such four-quarter period, have increased. As a result, we will not be able to incur any additional indebtedness until our “Consolidated Fixed Charge Coverage Ratio” significantly improves on the basis of our four most recent full fiscal quarters unless such indebtedness falls into one of the permitted exceptions or exemptions, such as re-financing existing indebtedness. These factors raise substantial doubt as to our ability to continue as a going concern. However, management believes it has developed a liquidity plan, as summarized below, that, if executed successfully, will provide sufficient liquidity to meet our obligations as they become due for a reasonable period of time.

 

   

Delaying in capital expenditure and improvement in working capital management

We have been negotiating with a number of vendors, including suppliers of equipment and construction materials, for them to provide us with lower prices or more favorable payment terms in order to achieve cost savings. We have decided to postpone a substantial portion of our planned capital expenditures for the next 12 months. In addition, we have implemented measures to more closely monitor our inventory levels and our collection of receivable balances with an aim to improving liquidity.

 

   

Bank Financing

To improve liquidity, we have successfully negotiated with some of our banks and will continue to negotiate with other banks to obtain revolving bank facilities to ensure our bank borrowings can be renewed on an on-going basis. From January 1 to April 30, 2012, we have obtained additional secured and unsecured short-term bank borrowings in the aggregate principal amount of $924.3 million with interest rates ranging from 2.484% to

 

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9.500% and secured and unsecured long-term bank borrowings in the aggregate principal amount of $45.3 million with interest rates ranging from 5.900% to 7.050% (subject to repricing). We have also repaid short-term borrowings and current installments of long-term borrowings in the aggregate principal amount of $937.0 million during this period. We believe that we will be able to obtain additional facilities from the banks so that, together with our existing bank revolving facilities, we will be able to re-finance any bank loans due for repayment within the next 12 months to the extent necessary.

 

   

Refund of prepaid land use rights and disposal of properties

In view of our postponement in expansion, we have signed letters of intent with local governmental authorities for the return of our prepayments for land use rights. In addition, we have entered into several letters of intent to sell some of our real properties, mainly staff quarters and the corresponding land use rights, to local governmental authorities.

 

   

Additional equity offers

We intend to raise funds through equity offerings, including private placements and at-the-market offerings, when market conditions permit and such issuances are in the overall interests of our business.

For more information regarding our liquidity plan, see “Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources” and “Note (1) — Basis of Presentation” of our consolidated financial statements beginning on page F-1.

We believe that the measures as described in the above liquidity plan will be adequate to satisfy our liquidity requirements for the next 12 months. Our board of directors has also instructed and authorized our management to establish an ad hoc committee to be headed by Mr. Peng, our CEO, to monitor the progress of our implementation of the liquidity plan and to report to our board on a fortnightly basis. There is no assurance, however, we will be able to successfully implement the liquidity plan. If we fail to successfully execute this plan, we may not be able to continue as a going concern. Our consolidated financial statements do not reflect any adjustments relating to recoverability and classification of recorded assets or the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern. Significant difficulties in our operations or a deterioration of our financial condition could also result in the exercise of broadly drafted provisions in some of our loan agreements that give our lenders the right to accelerate the payment of the loans under such circumstances. Such acceleration could potentially trigger cross-default provisions in other financing agreements, including the indentures relating to our 4.75% convertible senior notes due 2013, or our 2013 convertible notes, and our US$-settled 10% senior notes due 2014, or our 2014 senior notes, if we are unable to repay these loans upon acceleration. The occurrence of any of the foregoing events would materially and adversely affect our financial condition, results of operations and business prospects.

We have substantial existing indebtedness, in particular short-term indebtedness, and we may incur substantial additional indebtedness in the future subject to our compliance with the covenants and other requirements in our existing financing arrangements, which could adversely affect our financial condition and our ability to generate sufficient cash to satisfy our outstanding and future debt obligations and we may not be able to refinance our current borrowings on terms that are acceptable to us, or at all.

We now have, and will continue to have, a substantial amount of indebtedness. As of December 31, 2011, our total liabilities amounted to $6,009.2 million, with outstanding short-term borrowings (including current installments of long-term borrowings) and short-term PRC notes at $2,095.5 million, and outstanding long-term

 

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borrowings (excluding current installments) and long-term PRC notes at $969.8 million. Subsequent to December 31, 2011 and up to April 30, 2012, we obtained additional secured and unsecured short-term bank borrowings in the aggregate principal amount of $924.3 million, with interest rates ranging from 2.484% to 9.500%, and secured and unsecured long-term bank borrowings in the aggregate principal amount of $45.3 million, with interest rates ranging from 5.900% to 7.050% (subject to repricing). During this period, we also repaid short-term borrowings and current installments of long-term borrowings totaling $937.0 million. We may from time to time incur substantial additional indebtedness subject to the restrictions contained in our existing financing arrangements although, as we have disclosed below, taking into account our unaudited financial results for the fourth fiscal quarter in 2011, due to our existing high leverage coupled with a net loss in the fourth quarter of 2011, our “Consolidated Fixed Charge Coverage Ratio,” as defined in the indenture governing our 2014 senior notes, has been negatively impacted as a result of a significant reduction of the aggregate amount of our “Consolidated EBITDA,” as defined in the indenture governing our 2014 senior notes, for the four most recent full fiscal quarters, while our “Consolidated Fixed Charges,” as defined in the indenture governing our 2014 senior notes, for such four-quarter period, have increased. As a result, we will not be able to incur any indebtedness until our “Consolidated Fixed Charge Coverage Ratio” significantly improves on the basis of our four most recent full fiscal quarters unless we could finance in reliance upon one of the exemptions or exceptions. If we or our subsidiaries incur additional debt, the risks that we face as a result of our indebtedness and leverage could intensify.

Our substantial existing debt and the incurrence of any additional debt could:

 

   

limit our ability to satisfy our obligations under our debt instruments;

 

   

increase our vulnerability to adverse general economic and industry conditions;

 

   

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

 

   

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

 

   

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

 

   

increase our exposure to interest rate fluctuations;

 

   

limit our ability to borrow additional funds and impose additional financial and other restrictive covenants on us; and

 

   

increase the cost of additional financing.

Because the majority of our indebtedness is short-term indebtedness, we may suffer a near-term liquidity problem if we are unable to refinance these borrowings as they become due. As of December 31, 2010 and 2011, our outstanding short-term borrowings (including current installments of long-term borrowings) were $1,501.6 million and $2,032.0 million, respectively, and our short-term borrowings (excluding the current portion of long-term borrowings) bore a weighted average interest rate of 4.27% and 6.24%, respectively. Generally, our short-term loans contain no specific renewal terms, although we have historically negotiated renewals of some of our loans shortly before they would mature. However, we cannot assure you that we will be able to renew our loans in the future as they mature. If we are unable to obtain renewals of any future loans or sufficient alternative funding on reasonable terms, we will have to repay these borrowings.

In addition to our debt, pursuant to a subscription agreement dated as of December 30, 2010, China Development Bank Capital Corporation Ltd., or CDB Capital, a wholly owned subsidiary of China Development

 

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Bank Corporation, or CDB, Excel Rise Holdings Limited and Prosper East Limited, investment funds affiliated with China Construction Bank Corporation, and Apollo Asia Investment Limited, an investment fund affiliated with Bank of China Limited, subscribed on June 3, 2011 for 240 million series A redeemable convertible preferred shares, par value $0.10 each, of LDK Silicon, or LDK Silicon preferred shares, which represented, on an as-if-converted basis, approximately 18.46% of the aggregate issued and outstanding share capital of LDK Silicon on a fully diluted basis, for an aggregate price of $240 million. Pursuant to the terms of the investment, the investors have the right to require us and/or LDK Silicon to redeem the LDK Silicon preferred shares at a redemption price equal to 100% of the subscription price plus a 23% investment internal rate of return if there should occur any material breach by us of the terms and conditions of the investment agreements prior to a qualified initial public offering by LDK Silicon (as defined in the agreement) or if LDK Silicon fails to complete such a qualified initial public offering by June 3, 2013. Under the terms of the investment, we will also be required to pay cash compensation to the investors in accordance with an agreed formula if the consolidated net profit of LDK Silicon and its subsidiaries fails to achieve a targeted net profit of $190 million in 2011. Based on the preliminary financial statements of LDK Silicon for the fiscal year 2011, we believe that we have achieved the net profit target for the year and will not be required to pay such cash compensation. In addition, the articles of association of LDK Silicon mandate an annual dividend on a pro rata basis among all existing shareholders of LDK Silicon up to an amount of its retained earnings so that the holders of LDK Silicon preferred shares will receive at least $15 million of such dividend, to the extent the declaration and distribution of such dividend are permitted by applicable laws and by contractual obligations applicable to us.

As discussed above in “— We are operating with a significant working capital deficit; if we do not successfully execute our liquidity plan, we face the risk of not being able to continue as a going concern,” obtaining additional bank financing is one element of our liquidity plan to address our liquidity problem. However, the lenders under our existing credit facilities as well as those for any new loan facilities subject to negotiation could terminate or refuse to fund additional borrowings, or raise the interest rates, under these facilities. In general, these facilities are subject to credit reviews and other conditions imposed by the lenders at the time we request additional borrowings under these facilities. In addition, our failure to comply with certain covenants in our loan and guarantee agreements may make it more difficult to obtain additional borrowings. If we are unable to borrow additional amounts under our existing credit facilities or any new facilities we negotiate, we may lack sufficient financial resources to make payments on our outstanding and future debt obligations, address our liquidity problem, or fund our other cash requirements.

Our ability to generate sufficient cash to satisfy our outstanding and future debt and other obligations will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond our control. For example, the PRC government may pass measures to tighten credit, including trade financing, available in the PRC market. For example, in 2011, China’s central bank, the People’s Bank of China, or PBOC, raised its benchmark one-year lending rate by an aggregate of 75 basis points to 6.56%. In addition to the higher interest rate, PBOC increased the deposit reserve ratio requirements of China’s domestic lenders in 2011 from 18.5% to 21.0% for large banks and from 15.0% to 17.5% for small and medium-sized banks, before it decided to lower such deposit reserve ratio requirements in February 2012 to 20.5% for large banks and 17.0% for small and medium-sized banks. Further and future monetary tightening measures in China as well as other monetary, fiscal and industrial policy changes by the PRC government could materially affect the cost and availability of financing, our liquidity and access to capital, and our ability to operate our business.

Depending on our operating cash flow and our operational needs, we may incur additional debt obligations to finance our operations and, as a result, we may allocate an increasing portion of our cash flow to service such obligations. Such diversion of our cash flow for debt service could impair our ability to make necessary capital expenditures, develop business opportunities or make strategic acquisitions. To the extent that our business is not generating sufficient cash flow from operations to service our debts and to make necessary capital expenditures,

 

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we may be forced to seek additional financing, dispose of assets, or seek to refinance some or all of our debts. These alternatives may not, however, be implemented on satisfactory terms, if at all. Although we had positive net cash flow of $18.6 million, $560.0 million from operating activities in the years ended December 31, 2009 and 2010, respectively while we had negative cash flow of $287.0 million in the year ended December 31, 2011, we cannot assure that we will have positive net cash flows from operating activities in the future. If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy that may include actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing existing indebtedness or seeking financing from the capital markets. We cannot assure you that we would be able to implement these strategies successfully or on satisfactory terms. Any of these constraints upon us could materially and adversely affect our business, financial condition, ability to satisfy our obligations and results of operations.

In addition, the indenture governing our 2014 senior notes prohibits us from incurring additional indebtedness unless (i) we are able to satisfy certain financial ratios or (ii) we are able to incur such additional indebtedness pursuant to any of the exceptions to the financial ratio requirements, and meet other applicable restrictions. Some of our other financing arrangements also impose operating and financial restrictions on our business. You may find additional information under “Item 5. Operating and Financial Review and Prospects —F. Tabular Disclosure of Contractual Obligations” and “Item 10. Additional Information — C. Material Contracts.” These restrictions in the indenture governing our 2014 senior notes and our other financing arrangements may negatively affect our ability to react to changes in market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund required capital expenditures, or withstand a continuing or future downturn in our business or the general economy. For example, taking into account our unaudited financial results for the fourth fiscal quarter in 2011, due to our existing high leverage coupled with a net loss in the fourth quarter of 2011, our “Consolidated Fixed Charge Coverage Ratio,” as defined in the indenture governing our 2014 senior notes, has been negatively impacted as a result of a significant reduction of the aggregate amount of our “Consolidated EBITDA,” as defined in the indenture governing our 2014 senior notes, for the four most recent full fiscal quarters, while our “Consolidated Fixed Charges,” as defined in the indenture governing our 2014 senior notes, for such four-quarter period, have increased. As a result, we will not be able to incur any additional indebtedness until our “Consolidated Fixed Charge Coverage Ratio” significantly improves on the basis of our four most recent full fiscal quarters. Unless we find a permitted exception or exemption from such ratio requirement, our ability to incur additional financial indebtedness is severely curtailed. Moreover, our ability to meet these financial and operating ratios and restrictions may be affected by any deterioration of our business, financial condition or results of operations or by various political, economic, social and market events beyond our control. Such events could impact our ability to satisfy these ratios or restrictions and result in a violation of the terms of certain of our financial arrangements or the indenture governing our 2014 senior notes. We cannot assure you that we will be able to comply with these ratios or restrictions. Any of these factors could materially and adversely affect our ability to satisfy our obligations under our 2014 senior notes, our 2013 convertible notes and other debt.

If we fail to comply with the undertakings and covenants under our loan agreements or obtain consents or waivers in respect of any breach of these undertakings and/or covenants, our financial condition, results of operations and business prospects may be materially and adversely affected.

Most of our long-term loan agreements and some of our short-term loan agreements between our PRC operating subsidiaries and the various PRC banks and financial institutions require the prior written consent of the lenders before we may undertake specified corporate actions or transactions, such as increasing debt financing, providing new guarantees, sale or disposal of major assets, pledge of assets, amending certain corporate registration records, and engaging in certain related-party transactions. Some of our loan agreements with commercial banks in China do not include any materiality threshold under these negative covenants. While we continue to negotiate with our PRC commercial banks with a view to modifying their form loan agreements

 

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approved by their headquarters, we have been using a practice to bridge the timing gap between our operational needs and the banks’ internal procedures. For our operational needs, we seek financing in various ways, from time to time, and often with a short completion cycle. Before each such corporate action or transaction that needs the prior written consents of our lenders, we would typically orally communicate with our lenders and, to the extent the lenders could not provide the prior written consents as requested, would proceed with the corporate action or transaction with their prior oral consents, with the mutual understanding that such lenders would provide their written confirmations of consent as soon as they complete their internal procedures. Therefore, we have in such situations technically failed to comply with the requirements that we obtain prior written consents from our lenders prior to undertaking certain specified corporate actions or transactions. Most of our lenders have accepted our practice, have subsequently provided their written confirmations of consent in such situations, and have waived our past covenant breaches. We have not, however, received such consent or waiver from a branch of Agricultural Bank of China in Hefei City of Anhui Province with respect to two loans in the aggregate principal amount of approximately $2.2 million that will become due and mature in September 2012. Our subsidiary borrower of such loans has failed to maintain its debt-to-asset ratio at 75% or less as required by the loan agreements. As a result, this lender has the right to accelerate the loans in accordance with the loan agreements, but, to date, we have not received any notice of event of default or any threat to accelerate the maturity of such loans. You may find additional disclosure in note (11)(a) of our consolidated financial statements beginning on page F-1.

To date, we have not been subject to any claims or proceedings, or any threat of such claims or proceedings, from our lenders for not strictly complying with the relevant loan covenants. None of our technical breaches of the loan covenants has triggered any cross-default provisions under our other financing documents. Neither have we or any of our subsidiaries been included as a defaulting borrower in the PBOC credit search system available to all lending institutions in China. However, we cannot assure you that we will succeed in obtaining consents or waivers in the future, or that our lenders will continue to accept this consent-and-waiver arrangement and grant us consents or waivers, or that our lenders will not impose additional operating and financial restrictions on us, and/or will not otherwise seek to modify the terms of our existing loan agreements in ways that are adverse to us.

Although the current consent-and-waiver procedures we have employed for our technical noncompliance under the current prevailing PRC lending environment have not had any material adverse impact on our liquidity, we cannot assure that we will not breach any material covenants or undertakings under our loan agreements and we will additionally be able to obtain consents or waivers from our lenders for such breaches. An event of default under our loan agreements may cause acceleration of the repayment of the indebtedness under the relevant loan agreements, which may in turn require us to repay the entire principal amounts, including interest accrued, of certain other existing indebtedness prior to their maturity under cross-default provisions in our existing loan agreements, including the indentures relating to our 2013 convertible notes and 2014 senior notes. If we are required to repay a significant portion or all of our existing indebtedness prior to their maturity or if we are unable to borrow additional amounts under existing credit facilities, we may lack sufficient financial resources to make these payments or to fund our other cash requirements. Any such event could have a material adverse effect on our financial condition, results of operations and business prospects. You may also refer to the risk factor entitled “— Our operations are restricted by the terms of our 2014 senior notes; if we are unable to comply with the restrictions and covenants in our debt agreements, including the indenture governing the 2014 senior notes, there could be a default under the terms of these agreements, which could cause repayment of our debt to be accelerated” for additional risks.

We require a significant amount of cash to fund our planned future capital expenditure requirements and working capital needs; if we cannot obtain additional sources of liquidity when we need it, our growth prospects and future profitability may be materially and adversely affected.

We produce polysilicon in two plants, Xiacun Plant, located at Yushui Xiacun Industrial Park in Xinyu City, and Mahong Plant, located at Xinyu Hi-Tech Industrial Park. As of March 31, 2012, our total polysilicon annual

 

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production capacity was approximately 17,000 MT, representing contributions of approximately 1,200 MT from our Xiacun Plant and approximately 15,800 MT from our Mahong Plant, with the completion of the third train at our Mahong Plant in the third quarter of 2011. We have been actively working to add a second production train, with an annualized 1,800-MT initial production capacity, at our Xiacun Plant, which will expand our aggregate annualized installed production capacity at Xiacun Plant to 3,000 MT. We also plan to implement debottlenecking improvements at our Mahong Plant, which will bring our aggregate annualized installed production capacity at our Mahong Plant to 22,000 MT. Our current debottlenecking initiatives aim to increase our silicon tetrachloride (SiCl4), or STC, to trichlorosilane (HSiCl3), or TCS, conversion by the improvement of the conversion capacity of our STC hot carbon rod reactors, or STC thermal converters, and by the installation of hydrochlorination facilities at both our Xiacun Plant and Mahong Plant. However, due to the uncertainties in the current PV market, we have slowed or delayed the implementation of parts of such expansion plans. We will, however, need additional funding to finance the expansion of our Xiacun Plant and the debottlenecking at both our Xiacun Plant and Mahong Plant and bring our total polysilicon production capacity to 25,000 MT per year, currently expected to be by the year-end of 2012.

As of March 31, 2012, we had an annualized production capacity of approximately 4.3 GW of solar wafers, 1.7 GW of solar cells and 1.7 GW of solar modules. During 2012, we plan to expand our annualized production capacity to 4.5 GW of solar wafers, 2.2 GW of solar cells and 2.6 GW of solar modules. We will also need substantial additional funding to finance our continued solar wafer, cell and module production capacity expansion and our working capital requirements. In April 2011, we announced a proposed $40 million investment to add a light-emitting disde, or LED, sapphire wafer manufacturing capability to our facilities in Nanchang City, Jiangxi Province, and a $35 million investment to establish a new manufacturing line to produce silane gas by installing add-on units to our existing polysilicon production facilities at Mahong Plant. Due to the current market conditions, we have similarly delayed the implementation of these additional expansions. We will need additional funding not only for such and related capital expenditures but also for the related working capital needs. We will also need capital to fund our research and development, or R&D, activities to remain competitive on cost and technology. In addition, future acquisitions, expansions, market changes or other developments may require us to seek additional financing. Historically, we have relied on equity, convertible debt and senior debt offerings, substantial short-term borrowings and advance payments from customers to finance our capital expenditures, working capital requirements, and the refinancing of our outstanding indebtedness.

Our ability to obtain external financing in the future is subject to a number of uncertainties, including:

 

   

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

 

   

general market conditions for financing activities by companies in our industry;

 

   

economic, political and other conditions in China and elsewhere;

 

   

speed and duration of the recovery from the current global economic slowdown; and

 

   

compliance with our restrictive covenents as contained in the indenture governing our 2014 senior notes or other restrictions contained in our other financing arrangements.

If we are unable to obtain funding in a timely manner or on commercially acceptable terms, or at all, our strategy to increase and streamline our vertical integration will be negatively affected and our growth prospects and future profitability may be materially and adversely affected.

Reduction or elimination of government subsidies and economic incentives for the PV industry could cause demand and prices for our products to decline, thus adversely affecting our business prospects and results of operations.

Growth of the PV market, particularly for on-grid applications, depends largely on the availability and size of government subsidies and economic incentives granted by various governments. The cost of solar power now

 

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substantially exceeds the cost of conventional power provided by electric utility grids in most locations around the world. Various governments have used different policy initiatives to encourage or accelerate the development and adoption of solar power and other renewable energy sources. Renewable energy policies are in place in certain European Union member states, most notably Germany and Italy, certain countries in Asia, including China, Japan and South Korea, certain states in Australia, and the United States. Examples of government-sponsored financial incentives include capital cost rebates, feed-in tariffs, tax credits, net metering and other incentives to end-users, distributors, system integrators and producers of PV products. These policies are intended to promote the use of solar power in both on-grid and off-grid applications and to reduce dependency on conventional forms of energy. On-grid applications refer to applications of PV products to systems that are connected to an electricity transmission grid and feed electricity generated into the electricity transmission grid, while off-grid applications refer to applications of PV products to systems that operate on a stand-alone basis to provide electricity independent of an electricity transmission grid. However, governments may decide to reduce or eliminate these economic incentives for political, financial or other reasons, including in response to fiscal pressures currently affecting many developed and developing nations. Governments may reduce these economic incentives in several ways, including imposing ceilings on the total amount of economic incentives available and reducing feed-in tariffs. If the government subsidies and economic incentives are reduced or eliminated, such reduction or elimination may adversely affect the growth of this market or result in increased price competition, either of which could cause our revenues to decline.

Government subsidies have already been reduced in a number of countries, such as Germany, Italy and Spain, and may be further reduced or eliminated in the future. For instance, the German government reduced the country’s solar energy feed-in tariffs in 2009 and 2010 and further trimmed its solar power subsidies in 2011. In Spain, since 2009, continued reductions in feed-in tariffs as a result of the government’s spending cuts have resulted in a weakened solar market. The Italian government also reduced feed-in tariffs in an effort to curb overheating of its solar market. Reductions in, or eliminations of, government subsidies and economic incentives before the PV industry reaches a sufficient scale to be cost-effective in a non-subsidized marketplace could reduce demand for our products and adversely affect our business prospects and results of operations. In addition, reductions in, or eliminations of, government subsidies and economic incentives may cause the prices for the PV products of our customers to decline and we may in turn face increased pressure to reduce the sale price of our products. To the extent any price decline cannot be offset by further reduction of our costs, our profit margin will suffer. There can be no assurance regarding the magnitude or length of time of the effects on our financial condition and results of operations caused by these developments in the global PV market or by the general global economy.

Global supply of PV products may exceed demand, which could cause prices for our products to decline, and we may develop excess production capacity and excess inventory.

Prices for our PV products are based on a variety of factors, including global prices for these products, supply and demand conditions, and the terms of our customer contracts, including sales volumes. Global spot prices for PV products have fluctuated significantly over the years. According to Solarbuzz, solar-use polysilicon average spot prices were between approximately $300 and $380 per kilogram during the first half of 2008. With the onset of the global financial crisis in the third quarter of 2008 and European financial crisis in 2011, solar-use polysilicon spot prices fell to $80 per kilogram by the first half of 2009, and continued to fall to approximately $53 per kilogram during the first quarter of 2010, $65 per kilogram during the first quarter of 2011 and $30 per kilogram during the fourth quarter of 2011. Similarly, solar wafer prices fell below $2 per watt for the first time in 2009, and reached $0.91 per watt in the fourth quarter of 2010, and $0.41 in fourth quarter of 2011, according to Solarbuzz. Solar module prices followed a similar pattern. Module prices fell to $1.45 per watt in the fourth quarter of 2010, and reached $0.87 per watt in fourth quarter of 2011, according to Solarbuzz. As the solar power industry strives to be increasingly competitive, we expect there to be continued downward pressure on pricing along the solar power value chain in the next few years due to anticipated cost reductions across the supply chain, increased volumes, and industry improvements in operational efficiency and technology.

 

 

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Declining prices of PV products have had a negative impact on the net realizable value of our inventories and we have had to write down the carrying value of our inventories to the extent that they are greater than their net realizable value. For the years ended December 31, 2009, 2010 and 2011, we recognized inventory write-downs of $177.8 million, $0.3 million and $288.1 million, respectively, representing the amounts that the book value of our inventories exceeded their estimated net realizable values, primarily as a result of the decline in PV product selling prices. In addition, for the years ended December 31, 2009, 2010 and 2011, we recognized a provision for loss on firm purchase commitments of $1.1 million, nil and $27.6 million, respectively, which was determined by applying a methodology similar to that used to make inventory write-down. If PV product prices decline in the future and we are unable to lower our costs in line with the price decline, our gross margins will be adversely affected and we could be required to make additional inventory write-downs and provision for loss on firm purchase commitments.

In addition, any aggressive expansion of manufacturing capacity in the future by us and our competitors may have a material adverse impact on the overall PV market. During 2012, we plan to expand our annualized production capacity of polysilicon, solar wafers, cells and modules to approximately 25,000 MT, 4.5 GW, 2.2 GW and 2.6 GW, respectively. Our expansion plans have been based on our projected market demand for solar polysilicon, wafers and modules, and are subject to change in line with the actual development of the global PV market. However, the past and continued expansion of production capacity by us and our competitors may result in significant excess capacity in the overall PV industry. As a result, prices for the PV products may decline, our production capacity utilization ratios may decrease and our results of operations and financial condition may be adversely affected.

Furthermore, we typically maintain a certain level of inventory of raw materials and finished or semi-finished goods based on our projected market demands. If the actual market demands fall short of our expectations, we will have excess inventory, which will adversely affect our working capital, and we could also be required to make inventory write-downs and our profitability could be adversely affected.

We have experienced significant quarterly fluctuations in our results of operations, and therefore our quarterly results are not indicative of our annual results and should not be unduly relied upon.

We have historically generated substantially less revenue in the first quarter of the year than the other three quarters largely due to the holiday season in China, lower shipments to the European market due to financial difficulties in the Eurozone as well as the downward adjustment in feed-in tariffs and subsidies at the beginning of each year. In addition, our changing product mix also tends to add fluctuations to our revenues and margins which may affect our first quarter profitability. Our customers also tend to place orders with us in the first quarter of a calendar year when their budget year begins. In 2009, approximately 25.8%, 20.8%, 25.7% and 27.7% of our annual revenues were generated in the first, second, third and fourth quarters, respectively. In 2010, approximately 13.9%, 22.5%, 26.9% and 36.7% of our annual revenues were generated in the first, second, third and fourth quarters, respectively. In 2011, approximately 35.5%, 23.1%, 21.9% and 19.5% of our annual revenue were generated in the first, second, third and fourth quarters, respectively. Our gross profit margins also tend to fluctuate on a quarterly basis largely due to fluctuations in the market prices of PV products we sell, our product mix, our ability to reduce manufacturing costs, our ability to procure low cost raw materials such as polysilicon, cells and other materials, and our ability to ramp up our in-house polysilicon and cell production. We anticipate that we will continue to experience significant fluctuations in revenues, cost of revenues and other results of operations from quarter to quarter during any year in the future. This quarterly fluctuation of revenues and other results of operations has adversely affected and is likely to continue to adversely affect our cash flow and working capital positions on a quarterly basis.

 

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Failure to bring our polysilicon production facilities up to full capacity within budget and on schedule or to produce polysilicon that meets our quality standards and cost objectives could adversely affect our results of operations and our business strategies.

The industrial production of high-purity silicon involves highly complex technical and operational processes, and to establish and maintain these complex processes involve significant inherent risks. Currently we produce polysilicon in two plants, Xiacun Plant and Mahong Plant. As of March 31, 2012, our Xiacun Plant had an annualized installed production capacity of 1,200 MT, and our Mahong Plant had an annualized installed production capacity of 15,800 MT. We produced a total of approximately 5,052 MT of polysilicon in 2010 and 10,455 MT of polysilicon in 2011, and expect to produce between 12,000 MT and 15,000 MT in 2012. We have been actively working to add a second production train, with an annualized 1,800-MT initial production capacity, at our Xiacun Plant, which will expand our aggregate annualized installed production capacity at Xiacun Plant to 3,000 MT. We also plan to implement debottlenecking improvements at our Mahong Plant, which will bring our aggregate annualized installed production capacity at our Mahong Plant to 22,000 MT, and to develop a silane production capacity of up to 2,000 MT per year by installing add-on units to our existing polysilicon production facilities at Mahong Plant when market condition improves. In addition, we have announced our entry into a non-binding framework cooperation agreement with the Hohhot municipal government to develop a new polysilicon plant in Hohhot City, Inner Mongolia Autonomous Region of China. Although we have completed basic engineering and design of the project, the commencement of the construction work is subject to final approvals from relevant NDRC and local government authorities. Furthermore, we rely in large part on contractors, consultants, managers and technicians that we have hired or will hire to construct, complete, operate and maintain these polysilicon plants. We also rely on equipment that we have imported or contracted to import for our polysilicon production operations.

Our ability to successfully carry out these operational plans for our polysilicon production is contingent upon various factors that are subject to risks and uncertainties, including:

 

   

our ability to raise additional funds to finance the construction, ramp-up, and maintenance of the polysilicon production and related facilities on reasonable terms, or at all, including our ability or inability to satisfy the various financial covenants and restrictions contained in our existing and future financing arrangements;

 

   

our ability to import additional equipment at reasonable cost and on a timely basis, or at all;

 

   

our ability to significantly increase our STC-TCS conversion;

 

   

the reliability, diligence, and proficiency of the contractors, consultants, managers, and technicians that we have hired or will hire to construct, complete, test-run, and maintain our plants;

 

   

the possibility of construction delays, delays in equipment deliveries, and cost overruns;

 

   

our ability to recruit and train additional skilled employees, including technicians and managers at different levels; and

 

   

our ability to obtain and maintain the various required PRC government approvals.

We cannot assure you that all of these contingencies will turn out in our favor. Any negative development could undermine our ability to maintain and expand our overall production capacity as planned, which could, in turn, adversely affect our business and results of operations. If we fail to ramp up our polysilicon production on time, fail to make them operational up to their installed capacity, or fail to produce polysilicon that meets our quality standards, or if the construction and ramp-up costs for our expansion and debottlenecking improvements significantly exceed our budget, or if we otherwise fail to carry out our expansion plans for any reason, our results of operations, implementation of our vertical integration, and our low-cost production strategies will be materially and adversely affected.

 

 

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We have limited experience producing polysilicon and may not succeed in producing polysilicon cost-effectively.

We commenced polysilicon production in the third quarter of 2009. As of March 31, 2012, our aggregate annualized installed production capacity was approximately 17,000 MT, while we produced a total of approximately 5,052 MT of polysilicon in 2010 and 10,455 MT of polysilicon in 2011, and expect to produce between 12,000 and 15,000 MT in 2012. We have limited experience producing polysilicon and may, therefore, face significant operational challenges in our polysilicon production. The technology we use to produce polysilicon is complex and is continuously being modified in an effort to improve yield and product performance. Operating large-scale industrial plants like ours contains inherent risks and operational excellence may take time to develop. We may encounter problems in our production process 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 production process to shorten production cycles or to improve our STC-TCS conversion processes are unsuccessful. We therefore may not be able to ramp up our production and enjoy economies of scale. If we experience such difficulties in our production process, we may be unable to achieve cost-effective production of polysilicon.

TCS is one of the most costly chemicals used in the production of polysilicon. We produce a substantial portion of our TCS internally via chlorination of metallurgical-grade silicon feedstock. Our ability to convert the STC generated as a byproduct from our production process back into TCS to re-enter production, forming a “closed loop,” is a critical factor in increasing our output and reducing our production costs and environmental compliance costs. Currently, we use a hydrogenation process to thermally convert STC into TCS. We are currently undertaking debottlenecking initiatives to increase the conversion capacity of our STC thermal converters and to construct hydrochlorination facilities to add onto our production trains as an additional conversion mechanism with the goal to convert more STC into TCS as our total polysilicon production capacity and output increase. We cannot assure you that we will be successful in improving the conversion capacity of our STC thermal converters or completing the construction of the hydrochlorination facilities on schedule, or at all, or integrating such facilities with our existing facilities without material disruption to our production. The production of TCS, including the STC-TCS conversion mechanisms, is difficult and requires strict controls over the management of raw materials and the production process. We have limited experience producing TCS and no previous experience operating hydrochlorination facilities. Therefore, we cannot assure you that our production of TCS will be more cost-efficient than purchasing TCS from external suppliers. Although we now produce internally a substantial portion of TCS we need for our production, we may still from time to time have to purchase additional amounts of TCS from external sources. We are at present also implementing a number of cost-saving initiatives to further reduce our production cost. If we are unable to enhance our TCS production, source additional TCS we require at a reasonable cost, or at all, or successfully execute the cost-saving initiatives, we may not be able to achieve lower cost per unit of production, which would lower our profitability. Any of the foregoing factors could materially and adversely affect our business, financial condition and results of operations.

Our future success substantially depends on our ability to manage our production and facilities effectively and to reduce our manufacturing costs. Our ability to achieve such goals is subject to a number of risks and uncertainties.

Our future success depends on our ability to manage our production and facilities effectively and to reduce our manufacturing costs. Our efforts to reduce our manufacturing costs include lowering our material costs, improving manufacturing productivity, and adopting additional lean manufacturing processes. If we are unable to achieve these goals, we may be unable to decrease our costs per watt, maintain our competitive position or improve our profitability. Our ability to achieve such goals is subject to significant risks and uncertainties, including:

 

   

our ability to renegotiate our existing supply agreements;

 

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delays and cost overruns as a result of a number of factors, many of which may be beyond our control, such as long lead times or delays with certain equipment suppliers;

 

   

our ability to address safety and quality issues;

 

   

delays or denial of required approvals by relevant government authorities; and

 

   

diversion of significant managerial and other resources by non-operational matters such as litigations.

If we are unable to establish or successfully make improvements to our manufacturing facilities or to reduce our manufacturing costs, or if we encounter any of the risks described above, we may be unable to improve our business as planned. Moreover, we cannot assure you that even if we achieve our goals of improving management and reducing cost, we will not otherwise fail to cope with the general market trends such as the decreases of prices for PV products, or to generate sufficient customer demand for our PV products.

We have limited experience and operating history in the solar cell and solar module businesses, and we may not succeed in our new endeavors, which could adversely affect our business expansion and vertical integration strategies and harm our reputation.

We commenced our solar module business in the third quarter of 2009 by sourcing our solar cell requirements from third parties. We commenced our solar cell production in the third quarter of 2010. As of March 31, 2012, we had an annualized production capacity of approximately 1.7 GW of solar cells and 1.7 GW of solar modules. We currently consume all of the solar cells that we produce in our production of solar modules, and we sell our solar modules principally to international solar panel makers, solar system integrators and PV wholesale distributors. During 2012, we plan to expand our annualized production capacity to 2.2 GW of solar cells and 2.6 GW of solar modules. Although we currently procure a significant portion of the solar cells we use in manufacturing modules primarily from our solar cell production facilities, our ability to successfully implement our solar cell and module business strategy is subject to various risks and uncertainties, including:

 

   

our short history in the new solar cell and module businesses;

 

   

the solar module business typically has longer cash conversion cycles with respect to inventory and therefore will lengthen our accounts receivable turnover time;

 

   

our expanded warranty liabilities associated with the solar module business, with warranty periods of 20 to 25 years;

 

   

our ability to increase our in-house cell manufacturing capabilities;

 

   

potential conflicts with our customers as a result of our direct competition with them in the solar cell and module businesses;

 

   

recruitment of additional skilled employees, including engineers, technicians and managers at different levels, in connection with our expansion in the solar cell and module businesses; and

 

   

potential conflicts with our customers as a result of our direct competition with them in the solar cell and module businesses; and

 

   

new risks associated with the solar cell and module businesses yet to be fully understood by the industry and market.

All these and other related factors and uncertainties relating to our solar cell and module businesses could adversely affect our business expansion strategy and our chance of success in our vertical integration.

 

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Unexpected equipment failures or accidents, including any accidental release of hazardous gases or materials, may lead to production curtailments or shutdowns, personal injuries, even deaths or damage to properties.

Our operations, especially wafer manufacturing and polysilicon production, use complex and potentially hazardous equipment, such as chemical vapor deposition, or CVD, reactors, STC thermal converters, and hydrochlorination reactors, directional solidification system, or DSS, furnaces, squares and wire saws, that requires skill and experience for safe operation. Our production of polysilicon employs volatile materials and involves chemical reactions that are sensitive to temperature and pressure, and intricate and meticulous external controls are mandatory to maintain safe operation. For example, we use TCS as a key intermediary in producing polysilicon. TCS is a type of chlorosilane gas that, when purified, is highly combustible upon contact with air, making it potentially destructive and extremely dangerous if mishandled or used in uncontrolled circumstances. We could experience events such as equipment failures, explosions, or fires due to employee errors, equipment malfunctions, accidents, electric power or cooling water supply interruptions, natural disasters, or other disruptions. A catastrophic event at one of our plants could disrupt or destroy a significant portion of our production capacity, and we will not be able to restore the disrupted or destroyed capacity for a significant period of time, if at all. In addition, such an event could damage properties or cause personal injuries or even deaths. As a result of these types of accidents or events, we may experience production curtailments or shutdowns or periods of reduced production, which would negatively affect our results of operations. Our polysilicon operations also involve the use, handling, generation, processing, storage, transportation, and disposal of hazardous materials that may result in fires, explosions, spills, leakage, and other unexpected or dangerous accidents causing personal injuries or death, property damage, environmental damage, and business interruptions. For instance, we experienced an accident at our Xiacun Plant in July 2010 due to non-compliant handling of certain add-on equipment by a third-party contractor during the trial run of such add-on equipment installed by the third-party contractor, which resulted in very serious bodily injuries to one of our employees and one employee of the third-party contractor and a temporary shut-down of the production unit with the add-on equipment. For further information regarding the incident, see “Item 4. Information on the Company — B. Business — Production Safety and Environment — Safety.” Even though there have been no legal proceedings against us, and we have not otherwise suffered any material adverse effect on our operations from this incident, we cannot assure you that other accidents at our plants due to machinery malfunctions or mishandling of hazardous materials or other reasons will not occur in the future, which may result in similar or more serious damage or even human death. Any event of these types could result in civil lawsuits or regulatory enforcement proceedings, which in turn could lead to significant liabilities. We maintain property insurance at our plants, but such coverage is limited and in any event does not extend to certain significant potential losses, including those from lost production. Damage from any of the above events or disruptions could also harm our reputation in the industry and among our customers and potential customers. Any such event or disruption could have a material adverse effect on our business, operating results, and financial condition.

Increases in electricity costs or shortage or interruption of electricity supply may adversely affect our operations.

We consume a significant amount of electricity in our operations, and we need a constant supply of electricity to maintain optimal production conditions. If the necessary level of electricity supply is not maintained, we may experience significant delays and disruptions in our production. With the rapid development of the PRC economy, demand for electricity has continued to increase. There have been electricity supply shortages in various regions across China, especially during the summer peak season and in winter when the weather is inclement. For instance, in early 2008, due to severe weather conditions over a period of two weeks, the electricity supply to our plants was curtailed as a result of damages to some of the national grid lines in certain PRC provinces, including Jiangxi Province. Consequently, we experienced delays in some of our shipments to customers and some of the shipments from our suppliers as a result of highway closures and power outages in various parts of China. There have been instances where high power-consuming industrial plants, like ours, are required by the government to temporarily curtail or suspend operations to alleviate burden on the power grid. Although we have installed backup power transformer substations on site at our production facilities,

 

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we cannot assure you that there will not be interruptions or shortages in our electricity supply or that sufficient electricity will continue to be available to us in the future as our requirements grow. Shortages in electricity supply may disrupt our normal operations and adversely affect our profitability.

We enjoyed certain electricity usage subsidies from the local government in Xinyu City. For the years ended December 31, 2009, 2010 and 2011, we incurred electricity costs of approximately $35.0 million, $127.0 million and $220.3 million, respectively, and recorded electricity subsidies of $4.8 million, $35.8 million and $66.2 million, respectively. As a result, we recorded a net electricity cost of approximately $30.2 million, $91.2 million and $154.1 million, respectively, for the same periods. In May 2010, the State Council and various PRC governmental agencies, including NDRC, issued a series of notices and instructions designed to control energy consumption and environmental pollution. One of these initiatives aims to immediately terminate preferential electricity consumption policies adopted by local governments that may benefit high-energy-consuming and/or highly polluting enterprises in their jurisdictions, unless the local preferential electricity consumption policies have been duly approved by the designated PRC central government agencies. The polysilicon industry has been included in the high-energy-consuming category under these central government notices. Our electricity subsidy arrangements were not approved by a central government agency and were terminated as of June 30, 2011. We have negotiated with the relevant local governments with respect to our electricity subsidies under these new governmental regulations and initiatives. In July 2011, various district-level local governments in Xinyu City agreed to grant us certain subsidies in support of our production. We cannot assure you that we will be granted or continue to receive the same or similar subsidies as we have enjoyed so far. Nor can we assure you that the local governments will not have to terminate or reduce the current subsidies that they have agreed to grant us as a result of these recent regulations and initiatives by the PRC central government. To date, we have not received any request from any relevant government authority to amend or terminate our electricity subsidy arrangement.

As our operations are energy-intensive and are highly dependent on continuous electricity supply, our results of operations will be materially and adversely affected if our electricity supply is interrupted or if our electricity costs significantly increase upon expiration, termination or adjustment of our subsidy arrangements with the local government.

We have recently started to engage in the solar farm project business and related EPC business, and we may not succeed in these new endeavors or may not have sufficient financing for them, which could adversely affect our vertical integration strategies and harm our reputation.

We develop solar farm projects in the United States, Europe and China and may enter additional markets for project development in the future. As of the date of this annual report, we have one jointly controlled entity and 16 subsidiaries established under the laws of jurisdictions within China and outside China, including Italy, Germany and the United States. We typically develop these projects with the intent of selling them to third parties upon completion of their development. For substantial projects, we have also used financing from commercial banks or financial institutions. We commenced our solar farm related engineering, procurement and construction, or EPC, business in China in the first quarter of 2009. While we use our own EPC capabilities in China, we conduct our international EPC business both on our own and in collaboration with other EPC companies. We have also been engaged in a number of solar power generation projects for sale to interested power companies. Our ability to successfully implement our solar farm projects and the related EPC business strategy is subject to various risks and uncertainties, including:

 

   

our lack of experience in these new businesses;

 

   

the need to raise additional funds to finance our new business operations, which we may be unable to obtain on reasonable terms or at all, including our ability or inability to satisfy the various financial covenants and restrictions contained in our existing and future financing arrangements;

 

   

the solar farm projects and related EPC business typically have longer cash conversion cycles than our polysilicon, wafer and module businesses and therefore our accounts receivable turnover time may increase;

 

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our expanded warranty liabilities associated with the solar farm projects and related EPC business;

 

   

our possible lack of competitiveness in the solar farm projects and related EPC business as compared to other vertically integrated PV companies;

 

   

potential delays in our timetable for the development of solar farm projects;

 

   

the costs incurred in developing these solar farm projects may exceed our budget;

 

   

our ability to sell our solar farm projects within targeted timelines, or at all;

 

   

potential conflicts with our down-stream customers as a result of our direct competition with them in the solar farm projects and related EPC business; and

 

   

the purchase of our solar farm projects requires significant capital expenditures by our customers and these customers may have difficulty in obtaining the necessary financing on acceptable terms or at all.

In addition, we will need to recruit additional skilled employees, including engineers, technicians and managers at different levels, for our successful operation in these businesses as we have limited experience in these areas. All these factors and uncertainties could adversely affect our business growth and our chance of success in these areas.

We intend to develop new solar farm projects through new companies that we establish or through jointly controlled entities or project partnerships. We expect to hold a majority equity interest in these project companies, which may require us to make substantial investments. In addition, we expect that these project companies will finance most of their project developments through debt financing. The obligations to fund these solar power development projects are expected, therefore, to make further demands on our capital expenditures and further increase our already substantial indebtedness. As we have disclosed in the risk factor entitled “— We have substantial existing indebtedness, in particular short-term indebtedness, and we may incur substantial additional indebtedness in the future subject to our compliance with the covenants and other requirements in our existing financing arrangements, which could adversely affect our financial condition and our ability to generate sufficient cash to satisfy our outstanding and future debt obligations and we may not be able to refinance our current borrowings on terms that are acceptable to us, or at all” above, following our recent announcement of our unaudited financial results for the fourth fiscal quarter in 2011, due to our existing high leverage coupled with a net loss in the fourth quarter of 2011, our “Consolidated Fixed Charge Coverage Ratio,” as defined in the indenture governing our 2014 senior notes, has been negatively impacted as a result of a significant reduction of the aggregate amount of our “Consolidated EBITDA,” as defined in the indenture governing our 2014 senior notes, for the four most recent full fiscal quarters, while our “Consolidated Fixed Charges,” as defined in the indenture governing our 2014 senior notes, for such four-quarter period, have remained constant. As a result, we will not be able to incur any indebtedness until our “Consolidated Fixed Charge Coverage Ratio” significantly improves on the basis of our four most recent full fiscal quarters. To the extent we may and could obtain additional financing for our solar farm projects, these capital expenditures and additional debt obligations could affect our liquidity, ability to obtain future financing or withstand any future downturn in our business or in the general economy.

We have announced our proposed investments in the LED sapphire wafer manufacturing and in silane gas production, and we may not succeed in these new lines of business, which could adversely affect our strategies to expand into higher value-added sectors and to lower our overall production costs.

In April 2011, we announced a proposed $40 million investment to add an LED sapphire wafer manufacturing capability to our facilities in Nanchang City, Jiangxi Province, in order to be able to capture the growth opportunities in the LED industry. We also announced in April 2011 a proposed $35 million investment to establish a new manufacturing line to produce silane gas by installing add-on units to our existing polysilicon production facilities at Mahong Plant in order to meet the growing demand from the semiconductor, solar and flat panel display industries. We have delayed the implementation of these expansion programs due to the on-going

 

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market conditions. Although we regard these additions as a natural growth from our existing business operations, they nevertheless constitute new business ventures for us. We have not engaged in any LED sapphire wafer manufacturing or silane gas production before, and our ability to successfully implement such new business strategies is subject to various risks and uncertainties, including:

 

   

our lack of experience in these new businesses;

 

   

our need to raise additional funds to finance these new business operations, which we may be unable to obtain on reasonable terms or at all, including our ability or inability to satisfy the various financial covenants and restrictions contained in our existing and future financing arrangements;

 

   

LED sapphire wafer manufacturing requires technologies different from our current polysilicon wafers, involving additional or different machinery, raw materials, manufacturing process and labor skills;

 

   

silane gas is an extremely toxic gas, and its production is a highly dangerous process, which requires not only additional or different machinery and manufacturing process, but also extremely particular labor skills and care;

 

   

our possible lack of competitiveness in these new business operations as compared to other PV companies;

 

   

the costs incurred in developing these new business operations may exceed our budget; and

 

   

our ability to incorporate these new products into higher value-added products as we have contemplated, or at all.

In addition, as in any new business venture, we will need to recruit additional skilled employees, including engineers, technicians and managers at different levels, for our successful expansion into these new businesses. Our current management team has limited experience in these areas, and we have to rely on lateral hires to assist us. Such laterally hired employees may be under contractual obligations with their existing or former employers relating to non-competition, non-solicitation, confidentiality and intellectual property protection, and our employment of such personnel may be construed as a violation of such obligations, which may impede or delay our employment of such skilled managers, engineers or technicians. All these factors could adversely affect our vertical integration strategy and our chance of success in these new expansion endeavors.

We have entered into long-term sales contracts with some of our customers that may be renegotiated at terms less favorable to us, and result in the return of prepayments we have received, or which our customers may breach or otherwise fail to perform; any such changes, refunds or breaches may materially and adversely affect our operations and may result in costly and time-consuming litigation or other proceedings.

We have entered into long-term sales arrangements with some of our major customers. Pursuant to these arrangements, we have committed to supply them with specific quantities of polysilicon, wafers and/or modules over the next few years, with some of these agreements subject to periodic negotiations of prices. We have also entered into framework agreements with other customers under which the volume and price, as well as other terms, are determined on a quarterly or annual basis or through monthly purchase orders. Some of our customers prepay a part of their procurements pursuant to their contracts with us. The global economic slowdown and crisis in the global financial markets in late 2008 and early 2009 and European financial crisis in 2011 caused a number of our wafer customers to seek to terminate their contracts or request us to delay our shipments of wafers. At their request, we re-negotiated various terms under the existing contractual arrangements, including contract quantity, price and delivery timetable. Through these developments, we had to concede to terms that in some cases were less favorable to us, including returning all or part of the prepayments our customers made to us pursuant to our contracts. Any significant deviation from the contractual terms or our inability to negotiate or renegotiate acceptable quantity, price and delivery terms from time to time with our customers may disrupt our operations and materially and adversely affect our financial condition and results of operations.

 

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We have been involved in litigations or arbitrations arising out of customer contract renegotiations or breaches of these contracts by our customers. These and additional dispute resolution proceedings have subjected and may continue to subject us to legal expenses that could be potentially expensive. These proceedings tend to distract our management from the day-to-day operation of our business. They also expose us to risks for which appropriate damages may not be awarded to or be collectable by us. Any of these risks and factors could materially and adversely affect our business and financial condition.

As we have significantly expanded our polysilicon, wafer, solar cell and module manufacturing facilities, we typically maintain a calculated level of inventory of raw materials and finished goods based on our existing and projected contractual arrangements with our customers. As a result, any breach or default by our customers with respect to their contractual arrangements with us may result in our bearing any related economic losses. Consequently, the non-performance of contracts by our customers could have a material adverse effect on our financial condition and results of operations.

We depend on a limited number of customers for a significant portion of product sales generally; changes in customer purchase amounts, terms or patterns may cause significant fluctuations or declines in our revenue.

Our customers are mostly solar cell and module manufacturers, solar farm developers, PV products distributors, and PV system integrators. Our largest customers as of December 31, 2011 in terms of goods and services sold included Jiangxi Risun Solar Energy Co., Ltd., or Jiangxi Risun, Gintech Energy Corporation, or Gintech, Shannxi Lu’an Photovoltaics Technology Co., Ltd., or Shannxi Lu’an, Sumitomo Corporation, or Sumitomo, and Solartech Energy Corporation, or Solartech. During the years ended December 31, 2009, 2010 and 2011, our top five customers collectively accounted for approximately 45.5%, 30.6% and 20.3%, respectively, of our net sales. For the year ended December 31, 2009, Gintech and Q-Cells contributed 12.5% and 10.7%, respectively, to our net sales; for the year ended December 31, 2010, Q-Cells and MEMC contributed 8.5% and 7.2%, respectively, to our net sales; and for the year ended December 31, 2011, Jiangxi Risun and Gintech contributed 5.5% and 4.5%, respectively, to our net sales.

We expect to continue to rely on a relatively small number of customers for a significant portion of our net sales for the foreseeable future. We cannot assure you that any of our customers will continue to purchase significant quantities, if any, of PV products from us. Because of our reliance on a limited number of customers, any of the following events may cause material fluctuations or declines in our net sales and profits:

 

   

reductions, delays or cancellations of purchase orders from one or more of our significant customers;

 

   

loss of one or more of our significant customers and our failure to procure additional or replacement customers; and

 

   

failure of any of our significant customers to make timely payments for our products.

Our customers may decide to develop capabilities to produce the PV products they currently buy from us, and in such a case, our sales to these customers would be adversely affected. If we fail to develop or maintain our relationships with our current and potential customers, or if any of our major customers encounters financial or operational difficulties or reduces its purchases of our products, it may be difficult for us to find alternative customers on a timely basis and on commercially reasonable terms or at all. Some of our existing customers make prepayments to us, and if contracts are modified or terminated, these customers may ask for return of such prepayments. Any of these events may have an adverse effect on our revenue, profitability and cash flows.

Failure to secure sufficient quantities of polysilicon feedstock on commercially reasonable terms could adversely affect our business and results of operations.

In addition to producing polysilicon by ourselves, we source some amount of solar-grade polysilicon feedstock from third parties, which is an essential raw material in manufacturing our solar wafers. We will

 

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continue to rely on third-party suppliers for some of our solar-grade polysilicon requirements until our in-house polysilicon production facilities reach their designed production capacity. Therefore, to such extent, our operations still continue to depend on our ability to procure sufficient quantities of solar-grade polysilicon on a timely basis and on commercially reasonable terms to supplement our in-house polysilicon production. Polysilicon is also an essential raw material for the semiconductor industry, which requires polysilicon of higher purity than that used in the solar industry. Spot solar-use polysilicon prices have fluctuated widely over the years, with such spot prices reaching an average of approximately $380 per kilogram in the second quarter in 2008 and then dropping to $80 per kilogram during the first half in 2009, $53 per kilogram during the first half of 2010, $65 per kilogram during the first half in 2011, and $30 per kilogram during the fourth quarter in 2011, each according to Solarbuzz. Most of our polysilicon supply agreements are subject to fluctuating market prices or price negotiations with our suppliers. In addition to price changes, suppliers may delay or default in their delivery obligations under the supply agreements. We cannot assure you that we will continue to be able to acquire polysilicon in sufficient quantities and on commercially reasonable terms or that we will be able to pass any increased costs of polysilicon to our customers. If we fail to do either, our business and profitability will be materially and adversely affected.

Polysilicon production requires significant capital investments, and there are only a limited number of polysilicon producers in the world. These polysilicon producers provide polysilicon feedstock not only to the solar industry but also to the semiconductor industry. From time to time, we have experienced delays or defaults by some of our polysilicon suppliers in delivering supplies to us. Material or prolonged delays or defaults in polysilicon supply could adversely impact our production and delivery schedule and harm our reputation. Our suppliers of raw materials and equipment, particularly virgin polysilicon suppliers, require us to make prepayments from time to time. We make these prepayments, without receiving any collateral, in order to secure a stable supply of solar-use polysilicon. As of December 31, 2011, our prepayments to polysilicon suppliers amounted to $32.6 million. Some of our suppliers have failed to meet their delivery schedules in the past. In addition, we commenced production of polysilicon in the third quarter of 2009 and sell some of this output to third-party customers. As a result of this development, and as a result of perceived competition from us, some virgin polysilicon suppliers may not want to supply us with polysilicon in such quantity or at all. Before our in-house polysilicon production facilities reach their designed production capacity, if we fail to develop or maintain our relationships with polysilicon suppliers, if any of our major suppliers fails or becomes unwilling to deliver the polysilicon we have ordered on time or at all, or if any of them encounters difficulties in its production or shipment of polysilicon feedstock to us, whether due to natural disasters, labor unrest, adverse global economic conditions, or any other reason, it may be difficult for us to find alternative sources on a timely basis and on commercially reasonable terms or at all. If any such defaulting supplier fails to return our prepayments, our cash flows would be adversely affected.

We recognized a provision for doubtful recoveries of $38.5 million, $40.8 million and $107.0 million, respectively, for prepayments to suppliers as of December 31, 2009, 2010 and 2011. Our claims for repayment of these amounts, or any other claims against our suppliers to recover prepayments, would rank as unsecured claims, which would expose us to the credit risks of our suppliers in the event of their insolvency or bankruptcy. Under such circumstances, our claims against the defaulting suppliers would rank below those of secured creditors, which would undermine our chances of obtaining the return of our advance payments. In addition, if the market price of polysilicon decreases after we prepay our suppliers, we may not be able to adjust historical payments insofar as they relate to future deliveries. Furthermore, if demand for our PV products decreases, we may incur costs associated with carrying excess materials. Accordingly, any of the above scenarios may have a material adverse effect on our financial condition, results of operations and liquidity.

If we are not able to manage our growth effectively, our results of operations may be adversely affected.

We have expanded our business operations significantly over the past few years. Although we have adjusted our expansion plan in light of the global economic conditions from time to time, the success of our business

 

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growth will depend upon, among other factors, the general economic environment for the PV industry, our success in implementing our liquidity plan, our ability to succeed in our new businesses, our ability to maintain and expand our relationships with customers, suppliers and other third parties, the improvement of our operational and financial systems, enhancement of our internal procedures and controls, increase in our production capacity and output, and effective recruitment, training and retention of managers, technicians, engineers and skilled employees. We cannot assure you that the current global PV market and prospects will support our existing and anticipated production capacity or that our current and planned operations, personnel, systems, internal procedures and controls will be adequate to support our growth. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, successfully execute our business strategies or respond to the competitive economic and industrial environment and pressures, and our business, results of operations and financial condition may be adversely affected.

Our customers may not prepay for their orders under agreed contractual terms, resulting in longer accounts receivable turnover cycles.

We have required certain customers to prepay a portion of the purchase price of their orders. These prepayment arrangements with our customers have historically allowed us to rely less on borrowings to cover our working capital cash needs. Since the global financial crisis of late 2008 and early 2009 and European financial crisis in 2011, this practice has become less sustainable, and, as a result, we have agreed to reduce the contractual prepayments of some of our customers and have accepted payments from other customers upon the delivery of our goods. Advance payments from customers decreased from $376.8 million as of December 31, 2009 to $344.8 million as of December 31, 2010 and $332.2 million as of December 31, 2011. Our accounts and bills receivable increased from $217.9 million as of December 31, 2009 to $384.3 million as of December 31, 2010 and to $491.4 million as of December 31, 2011. Our expansion into the solar module and other PV down-stream businesses in recent years has not only increased our working capital needs but has also extended our overall accounts receivable turnover time. Our module customers typically require longer payment terms as compared to our wafer customers. Our down-stream business also tends to increase our inventory turnover days as compared to our wafering business. As a result, our expansion into solar module and other down-stream businesses may cause our working capital needs to significantly increase. If our working capital requirements increase, our business operations may be materially and adversely affected if we fail to raise more cash on a timely basis, or at all, due to the resulting longer accounts receivable turnover cycles.

We recognized a provision for doubtful recoveries of $4.6 million, $6.2 million and $117.3 million, respectively, for trade accounts receivable as of December 31, 2009, 2010 and 2011. Our claims for repayment of these amounts, or any other claims against our customers to recover the trade accounts receivable, would rank as unsecured claims, which would expose us to the credit risks of our customers in the event of their insolvency or bankruptcy. Under such circumstances, our claims against the defaulting customers would rank below those of secured creditors, which would undermine our chances of obtaining the return of our trade accounts receivable. Accordingly, the failure of any of our new or existing customers to meet their payment obligations would adversely affect our working capital, financial position, liquidity and results of operations.

Our operations in China are subject to various governmental approvals, registrations, and reviews, and our failure to obtain necessary approvals, maintain necessary registrations, or pass necessary reviews on a timely basis, or at all, could materially and adversely affect our business, results of operations and financial condition.

Business operations of our scale require approval by, and registration with, various PRC governmental authorities in charge of, for example, land, buildings, urban planning, quality regulation, safety, business operations and commercial activities, customs, taxation, environmental protection, and foreign exchange administration. If our operations continue to expand, we may, from time to time, be required to maintain or renew our existing registrations or obtain additional approvals, which we cannot assure you that we will be able

 

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to do at all times. For example, although we have obtained land use rights certificates and property ownership certificates for properties underlying a majority of our production facilities, as of the date of this annual report, we are still in the process of acquiring the land use right certificates relating to properties with a total of approximately 2.2 million square meters and the property ownership certificates relating to properties with a total gross floor area of approximately 0.4 million square meters, each underlying certain of our polysilicon production facilities and wafer production facilities. If we fail to obtain, or experience material delay in obtaining, these land use rights certificates and property ownership certificates, our business, results of operations, and financial condition may be materially and adversely affected.

We are required to apply for necessary approvals from the NDRC authorities in order to keep our operations and our planned additional production capacities in compliance with the PRC regulation. The PRC government has since 2010 issued various notices proclaiming that polysilicon production capacity in China has reached excess levels. The State Council and various PRC government agencies, including NDRC, issued a series of notices and instructions in May 2010 in an effort to control energy consumption and environmental pollution, in which the polysilicon industry was identified in both the over-capacity and the high-energy-consuming categories. In December 2010, a number of PRC government agencies, including NDRC, issued a circular along with the Conditions of Entry into the Polysilicon Industry, setting forth criteria and restrictions for entry into the polysilicon industry, pursuant to which any new construction of polysilicon production plant or reconstruction or expansion of existing polysilicon production plants requires approval from the relevant national investment administration authorities. Existing polysilicon projects, including ours, according to such circular, would be subject to periodic reviews by the Ministry of Industry and Information Technology, or MIIT, authorities in China. If we are not able to obtain or renew the necessary approvals on a timely basis, or at all, we may be required to stop using facilities in excess of our approved capacity, otherwise subject our facilities to use restrictions, or withdraw or terminate our on-going projects. Should that happen, our ability to execute our vertical integration strategy and expansion plan as well as our growth and profitability may be materially and adversely affected.

We operate in a competitive market against players who may enjoy greater resources, and we may not be able to compete successfully.

The PV manufacturing market is highly competitive. Many of our current and potential competitors have a longer operating history, better name recognition, greater resources, larger customer base, better access to raw materials and equipment, better vertically integrated platform, and greater economies of scale than we do. A number of our customers and suppliers are also our competitors. We have expanded in recent years into the downstream solar cell and module businesses and face a series of related risks as we have disclosed in the risk factors entitled “— We have limited experience and operating history in the solar cell and solar module businesses, and we may not succeed in our new endeavors, which could adversely affect our business expansion and vertical integration strategies and harm our reputation,” “— We have recently started to engage in the solar farm project business and related EPC business, and we may not succeed in these new endeavors or may not have sufficient financing for them, which could adversely affect our business expansion and vertical integration strategies and harm our reputation” and “— We have announced our proposed investments in the LED sapphire wafer manufacturing and in silane gas production, and we may not succeed in these new lines of business, which could adversely affect our strategies to expand into higher value-added sectors and to lower our overall production costs.” The key barriers to enter our industry at present consist of availability of financing and development of technological know-how. If these barriers disappear or become more easily surmountable, new competitors may successfully and more easily enter our industry, resulting in loss of our market share and increased price competition.

We have expanded our international business operations, and our failure or inexperience in these new endeavors could adversely affect our business expansion strategies and harm our reputation.

We have expanded our business operations outside China. Although we have had some international business operations ever since our inception, they were historically concentrated in international sales and

 

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procurement of raw materials. In recent years, in addition to the development of solar farm projects overseas, our international business expansion also took the form of direct acquisitions of existing businesses. In March 2011, we acquired a 72% interest in Solar Power, Inc., a California-based solar power EPC company, or SPI, for approximately $33 million. SPI’s shares are listed and traded on the OTCBB market. In April 2012, we acquired a 71% interest in sunways AG, or Sunways, a German stock corporation with its shares listed on the Frankfurt Stock Exchange, for approximately $30 million. Sunways currently produces, assembles and distributes solar cells and modules, PV system inverters, and other components for the renewable power production. We may engage in additional acquisitions or undertake various other strategic alternatives, such as strategic alliances and joint ventures with other players in the PV industry.

As we engage in and expand our operations outside China, these international operations expose us to a number of related risks and uncertainties, including:

 

   

difficulty with staffing and managing overseas operations;

 

   

fluctuations in currency exchange rates;

 

   

increased costs associated with developing and maintaining marketing and distribution presence in various countries;

 

   

providing customer service and support in these markets;

 

   

our ability to manage multiple sales channels effectively as we expand our sales channels beyond distributors to include direct sales as well as sales to system integrators, end-users and installers;

 

   

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

 

   

failure to develop appropriate risk management and internal control structures tailored for overseas operations;

 

   

inability to obtain, maintain or enforce intellectual property rights;

 

   

unanticipated changes in prevailing economic conditions and regulatory requirements; and

 

   

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

As we expand internationally, in order to make such acquisitions and strategic alternatives synergistic and favorable to our overall business operations, integration and pro-active global management will be crucial to our success as a vertically integrated global PV player. A significant portion of our current operations are concentrated in China and, if we are unable to effectively manage the global integration and other risks relating to international operations, they could impair our ability to expand our business abroad. As a result, our results of operations may be materially and adversely affected, and our business expansion and vertical integration strategies will be materially hampered.

We compete with alternative solar technologies, and we may not be able to compete successfully.

We are currently focused on crystalline silicon solar technologies and we compete with alternative solar technologies. The PV industry is characterized by evolving technologies and standards. These technological evolutions and developments place increasing demands on the improvement of our products such as higher PV efficiency and larger and thinner wafers. Some companies have spent significant resources in R&D of proprietary solar technologies that may eventually produce PV products at costs similar to, or lower than, those of crystalline silicon PV products without compromising product quality. For example, they are developing or currently producing PV products based on thin-film PV materials, which require significantly less polysilicon to produce than our crystalline silicon PV products. These alternative PV products may cost less than those based on crystalline technologies while achieving a competitive level of conversion efficiency. Our founder, chairman, chief executive officer and ultimate controlling shareholder, Mr. Xiaofeng Peng, in his personal capacity, and his

 

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family members are engaged in certain alternative energy projects, including a project involving thin-film technology. In addition, Mr. Peng and his family may invest or otherwise participate in their personal capacity in other alternative energy projects, such as projects involving solar thermal, wind energy and biofuels. After considering the available business opportunities, we have decided not to enter into thin-film module production.

The solar technologies in general also compete with other renewable energy technologies, such as biomass, hydroelectric, wind, and geothermal technologies, as well as nuclear power technologies, in addition to conventional power generation, for, among other things, government subsidies, market share, and public acceptance and support. If prices for conventional and other renewable energy sources decline, or if these sources enjoy greater policy support than solar power, the solar power industry could suffer and our business and results of operations may be adversely affected.

We also compete with alternative polysilicon technology, and we may not be able to compete successfully.

Although the vast majority of polysilicon produced in the world utilizes the CVD process, or the modified Siemens process, which consumes a large amount of electricity, several alternative crystalline silicon-based production processes have been developed that may significantly reduce power consumption and other production costs. For example, MEMC, Renewable Energy Corporation, or REC, and Wacker Chemie AG, or Wacker, currently use, or are constructing facilities that use, the fluidized bed reactor, or FBR, method for producing polysilicon. Tokuyama Corporation has also developed a polysilicon technology called the “vapor-to-liquid deposition” process. Other producers are developing the ability to produce upgraded metallurgical grade silicon as a low-cost alternative to solar-grade polysilicon produced through modified Siemens process. Further developments in competing polysilicon production technologies may result in lower manufacturing costs or higher product performance than those achieved from the Siemens processes, including the modified Siemens process that we currently employ. As a result, we may need to invest significant resources in R&D to maintain our market position, keep pace with technological advances in the PV industry and effectively compete in the future. Our failure to further refine and enhance our products or to keep pace with evolving technologies and industry standards could cause our products and production facilities to become uncompetitive or obsolete, which could in turn reduce our market share and cause our net sales and profits to decline.

We rely on a limited number of suppliers for our production equipment and consumables, and failure or delay by any of them in delivering equipment or consumables to us could adversely impact our production.

We rely on a limited number of equipment suppliers in and outside China for all of our principal manufacturing equipment and spare parts, including our CVD reactors, STC thermal converters, hydrochlorination reactors, multicrystalline DSS furnaces, monocrystalline pullers, squarers that we use to cut ingots into smaller blocks, wafering wire saws that we use to slice these blocks into wafers, our solar cell manufacturing equipment, and solar module manufacturing equipment. In addition, we rely on a limited number of suppliers for the consumables, such as crucibles and slurry, that we use in our wafer production. These suppliers have supplied most of our current equipment and spare parts, and we also rely on them to provide a substantial portion of the principal manufacturing equipment and spare parts contemplated in our expansion program. If we fail to develop or maintain our relationships with these and other equipment or consumables suppliers, or should any of our major equipment or consumables suppliers encounter difficulties in the manufacturing or shipment of its equipment or consumables to us, including due to financial difficulties or natural disasters, or otherwise fail to supply equipment or consumables according to our requirements, it will be difficult for us to find alternative providers for the equipment or consumables we need on a timely basis and on commercially reasonable terms, if at all. We also rely on our suppliers for the routine maintenance, check-up, and repair with respect to some of our equipment. In the event that our equipment malfunctions or fails to function due to lack of support, or our equipment or crucibles lead to defective or substandard products, our business, financial condition and results of operations could be adversely affected.

 

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If we are unable to fulfill our customer orders or other commitments to customers on a timely basis, we may lose customers, our reputation may be damaged, and we may incur economic losses for breach of contracts.

We have from time to time experienced delays in fulfilling purchase orders from some of our customers due to fluctuations in our production output as we ramp up our vertically integrated production capacity, fluctuations in general market demand for our products due to the global or regional economic conditions, disruptions to our delivery of products due to extraordinary weather conditions, and various other factors. In the past, when the global PV market was expanding aggressively, we often entered into contractual commitments with our customers in anticipation of our successful and timely implementation of our expansion program. Under such circumstances, our ability to meet these contractual commitments to our customers depended significantly on the successful and timely implementation of such expansion program. If we are unable to fulfill our customer orders or other commitments to customers on a timely basis, 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 for non-delivery or failure to meet delivery schedules or product specifications. If any of our customers invokes these clauses against us, we may need to defend ourselves 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, which could adversely affect our business, financial condition and results of operations.

We are exposed to various risks related to legal proceedings, international trade sanctions, or claims or allegations in press articles or market reports, which could adversely affect our business operations, financial condition and reputation, and may cause loss of business.

Litigation in general can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We and/or our directors and officers have been, and in the future may be, involved in allegations, litigation or legal or administrative proceedings, including those related to alleged violations of securities laws. Regardless of the merits, responding to these matters and defending against litigation can be time consuming and costly, and may result in us incurring substantial legal and administrative expenses, as well as divert the attention of our management. Any such allegations, lawsuits or proceedings could have a material adverse effect on our business operations. Further, unfavorable outcomes from these claims or lawsuits could adversely affect our business, results of operations, or financial condition.

International trade related investigations and proceedings and any anti-dumping and/or countervailing tariff imposed by any jurisdiction may cause a material adverse effect on our business prospects, financial condition and results of operations. In October 2011, for example, several U.S.-based manufacturers of PV products filed a petition with the U.S. Department of Commerce, or DOC, and the U.S. International Trade Commission, or ITC, alleging that imports from China have caused injuries to the PV industry in the U.S. and seeking tariffs of more than 100% on crystalline silicon PV cells imported from China into the U.S., whether or not assembled into solar modules. A group of PRC PV product exporters have responded to the complaint, contesting the allegations. ITC is currently in the process of making a preliminary determination on whether the alleged injuries to the U.S. PV industry exist. Meanwhile, DOC is in the process of determining whether each PV exporter in China is engaged in dumping activities or exporting PV products supported by illegal government subsidies into the U.S. If both ITC and DOC make an affirmative determination, each PRC respondent company will have an opportunity to contest to DOC the calculation of individualized anti-dumping duty and countervailing duty that would be applicable to it. Given the early stage of such investigations by DOC and ITC, it is not certain whether the U.S. government will impose antidumping and/or countervailing tariffs as requested, or whether the relevant PRC respondent companies will challenge any adverse U.S. government decisions in court. We have historically sold limited quantities of our PV products directly to the U.S. market, but we have supplied polysilicon to other PRC-based PV product manufacturers who export their PV products to the U.S. market. Any anti-dumping and/or countervailing tariff finally imposed by the U.S. authorities may indirectly affect us through its impact on such PRC-based PV product manufacturers, and may have a material adverse effect on our business prospects, financial condition and results of operations. As we have significantly relied on international customers for our products since our inception, any similar or other trade related investigations and proceedings as well as any

 

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similar or other resultant anti-dumping and/or countervailing tariff imposed by jurisdictions where we have directly or indirectly sold significant quantities of our PV products may result in a material adverse effect on our business prospects, financial condition and results of operations.

We have also been, and may continue to be, subject to adverse press articles, media or market reports, or other public statements or allegations on our business operations, financial condition, internal control, corporate governance, environmental protection, workplace safety, and/or our relationship with customers, suppliers, governmental authorities, banks, and investors, with or without appropriate bases. Although we will disclose any material development as required by law to keep our investors informed, and may attempt to correct some of the wrong information in the marketplace, we cannot assure you that adverse statements or allegations in the public domain will, with or without justification, cast us in a negative light and may adversely affect our business reputation and operations as well as the value and trading price of our shares and other securities.

Our business depends on the continued services of our executive officers and key personnel, and our business may be severely disrupted if we lose their services.

Our success depends on the continued services of our executive officers and key personnel, in particular Mr. Xiaofeng Peng, our founder, chairman and chief executive officer. We do not maintain key-man life insurance on any of our executive officers and key personnel. If one or more of our executive officers and key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. As a result, our business may be materially disrupted and we may have to incur additional expenses in order to recruit and retain new personnel. In addition, if any of our executives joins a competitor or forms a competing company, we may lose some of our customers. Each of our executive officers and key personnel has entered into an employment agreement with us that contains confidentiality and non-competition provisions. However, if any dispute arises between our executive officers or key personnel and us, we cannot assure you, in light of uncertainties associated with the PRC legal system, that these agreements could be enforced in China where most of our executive officers and key personnel reside and hold most of their assets. In addition, Mr. Peng, our founder, chairman, chief executive officer and controlling shareholder, in his personal capacity, and his family members are engaged in certain alternative energy projects, including a project involving thin-film technology. Mr. Peng and his family may invest or otherwise participate in their personal capacity in other alternative energy projects, such as projects involving solar thermal, wind energy and biofuels. To the extent that Mr. Peng devotes significant time to any such projects, it may reduce his time and services devoted to our company as chairman and chief executive officer, which could materially and adversely affect our business.

Our founder, chairman, and chief executive officer, Mr. Xiaofeng Peng, has substantial control over our company and his interests may not be aligned with the interests of our shareholders.

Mr. Peng, our founder, chairman and chief executive officer, currently beneficially owns, through LDK New Energy Holding Limited, his wholly owned British Virgin Islands company, or LDK New Energy, 72,892,163 of our shares, representing approximately 53.27% of our outstanding share capital, without taking into account any securities that any shareholder or option holder has the right to acquire within 60 days after the date of this annual report through the exercise of any option, warrant or right. As such, Mr. Peng will have substantial control over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors, dividend policy and other significant corporate actions. Mr. Peng may take actions that are not in the best interest of our company or our shareholders and other securities holders.

Mr. Peng, in his personal capacity, and his family members are engaged in certain alternative energy projects, including a project involving thin-film solar technology. LDK New Energy is the beneficial owner of all of the equity interest of the thin-film solar company. In addition, Mr. Peng and his family may invest or otherwise participate in their personal capacity in other alternative energy projects, such as projects involving solar thermal, wind energy and biofuels which might not be aligned with the interests of our shareholders.

 

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Our controlling shareholder, Mr. Peng, has directly or indirectly pledged a significant portion of his equity interests in our company to secure certain loan facilities. A default under these loan facilities could potentially result in a change of control of our company.

Our controlling shareholder, Mr. Peng, through his wholly owned entity, LDK New Energy, has pledged a significant portion of his equity interest (in the form of ordinary shares or ADSs) in our company to secure certain loan facilities to finance his investment in the thin-film solar project and other projects. These loan facilities also require LDK New Energy to pledge additional shares or ADSs or other collateral if the market value of the pledged shares or ADSs fall below a certain threshold. For example, the decline of the price of our ADSs on the New York Stock Exchange has from time to time triggered margin calls under these loan facilities. As of the date of this annual report, LDK New Energy has pledged up to 52.0 million of our ordinary shares (including ordinary shares represented by ADSs), representing approximately 38.88% of our outstanding ordinary shares, to secure such loan facilities. Under such loan agreements, Mr. Peng has also provided unlimited personal guarantees to secure the loans. LDK New Energy and Mr. Peng may from time to time obtain additional loans that are secured by a pledge of additional equity interests (in the form of ordinary shares or ADSs) in our company to finance the thin-film solar project or for other purposes. Turbulences in the global economy and financial markets or declines in the market value of our ADSs could trigger additional margin calls for these loan facilities. Failure or delay by LDK New Energy to promptly meet these margin calls or other default under these financing arrangements could result in the sale or other disposition of some or all of the pledged shares. As Mr. Peng has provided personal guarantees for some of our existing loan facilities, if we default under the loan agreements for which Mr. Peng has provided such personal guarantees, Mr. Peng’s personal properties, including his shares in us, may be seized and sold by the relevant lenders. Any of these events may potentially result in a change in control of our company.

Upon the occurrence of a change of control, we will be required to purchase the 2014 senior notes at a purchase price equal to 101% of the principal amount plus accrued and unpaid interest in accordance with the terms of the indenture. In addition, a change of control of our company may constitute a default under our loan agreements, which could potentially trigger cross-default provisions in other financing agreements, including the 2014 senior notes and 2013 convertible notes. If we are required to repay a significant portion or all of our existing indebtedness prior to their maturity or if we are unable to borrow additional amounts under existing credit facilities, we may lack sufficient financial resources to make these payments or to fund other cash requirements, which would have a material adverse effect on our financial condition, results of operations and business prospects.

We may be adversely affected by volatile trends of solar energy market and industry, which is at an early stage of development and is subject to many factors which are beyond our control, and therefore our revenues may be volatile.

We are affected by solar energy market and industry trends as well as macro-economic factors. The PV market in general is at an early stage of development and the extent of acceptance of PV technology and products is uncertain. Market data on the PV industry are not as readily available as that on other more established industries where trends can be assessed more reliably from data gathered over a longer period of time. As a result, the average selling price and the market demand for PV products are highly volatile and subject to many factors which are beyond our control, including:

 

   

wide commercial adoption and application of PV technology;

 

   

cost-effectiveness, performance and reliability of PV technology and products compared to conventional and other renewable energy sources and products;

 

   

availability of government subsidies and economic incentives to support the development of the PV industry;

 

   

success of, or increased government support for, other alternative energy generation technologies, such as fuel cells, wind power, hydroelectric power and biomass energy;

 

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success of solar technologies other than crystalline silicon;

 

   

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

 

   

deregulation of the electric power industry and the broader energy industry; and

 

   

levels of capital expenditures by end-users of PV products, which tend to decrease when economic growth slows.

If the average selling price or demand for PV products decrease dramatically, we may not be able to grow our business or generate sufficient revenues to sustain our profitability. For example, partially due to the global economic slowdown and turmoil in the global financial markets since late 2008, we incurred a net loss of $234.0 million and $609.0 million, respectively, for the years ended December 31, 2009 and 2011 although we generated a net profit of $296.5 million for the year ended December 31, 2010. In addition, the prices of PV products have declined since the first half of 2010 due primarily to lower prices of polysilicon during this time and increased manufacturing capacity for PV products. Any negative market and industry trends could materially and adversely affect our business, financial condition and results of operations. We cannot assure you that we will not generate net losses or no greater amounts of net losses going forward due to numerous factors beyond our control, including the external global economic environment, the well-being of the PV industry, and our internal productivity and other operational conditions.

We may be adversely affected by volatile market and industry trends; in particular, the demand for our PV products may decline, which may reduce our revenues and earnings.

We are affected by solar energy market and industry trends as well as macro-economic factors. For example, the prices of PV products have declined since the first half of 2010 due primarily to lower prices of polysilicon during this time and increased manufacturing capacity for PV products. As the impact of the global economic crisis subsided through 2011, the combination of increased demand and growth from new markets and buyers, such as the United States, Canada, China, India, and Thailand), and decreased average selling prices of PV products contributed to an overall increase in demand for PV products in 2011. The demand for PV products is also influenced by macroeconomic factors such as the global economic conditions, the supply and prices of other energy products, such as oil, coal and natural gas, as well as government regulations and policies concerning the electric utility industry. A decrease in oil prices, for example, may reduce demand for investment and consumption in alternative energy. A global economic downturn, which affects the availability of financing, may also contribute to decreased sales and shipments of PV products and the slowdown of the solar project market segments. Any negative market and industry trends could materially and adversely affect our business, financial condition and results of operations.

Our strategy includes alliances, joint ventures, acquisitions and dispositions of assets, and restructuring of our business operations; our failure to successfully implement this strategy could have a material adverse effect on our business.

As part of our strategy, we intend to enter into strategic acquisitions and investments and establish strategic alliances with third parties in the PV industry if suitable opportunities arise. We may acquire or invest in technologies, businesses or assets that are strategically important to our business expansion. For example, in January 2008, we acquired a 33.5% interest in Jiangxi Sinoma New Material Co., Ltd., or Jiangxi Sinoma, a Xinyu-based crucibles manufacturer, from Xinyu Chengdong Investment and Construction Co., Ltd. for consideration of approximately Rmb 16.8 million. In February 2010, we acquired crystalline module manufacturing equipment in China from Best Solar Co., Ltd., a wholly owned subsidiary of LDK New Energy, or Best Solar, for consideration of $21.2 million. In March 2011, we acquired a 72% interest in SPI, California-based solar power EPC company, for approximately $33 million. In April 2012, we acquired a 71% interest in Sunways, a German PV company, for approximately $30 million. We may engage in similar or other acquisitions

 

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and investments that we believe will complement our expansion strategies, including acquisitions or investments in new technology. We may also make strategic dispositions of our assets or restructure our business operations. We may raise additional financing through a partial and complete disposal of our stakes in our polysilicon plant or other businesses. Any strategic acquisition, investment and alliance with third parties could subject us to a number of risks, including risks associated with the assimilation of new operations, technologies and personnel, any unforeseen or hidden liabilities, the inability to generate sufficient revenue and income to offset the costs and expenses of acquisitions, the potential loss of, or harm to, our relationships with employees, customers and suppliers as a result of integration of new businesses, and a reduction or loss of control of operations that are material to our business. Moreover, strategic acquisitions, investments and alliances may divert our cash flow from servicing our debts and making necessary capital expenditures and subject us to impairment losses on our acquisitions and investments in equity securities and risks of non-performance by counterparties, which may in turn lead to monetary losses that may materially and adversely affect our business. An acquisition could also expose us to related litigation and other proceedings, unknown liabilities and other unforeseen risks. For example, a putative class-action lawsuit was initiated by a minority shareholder of SPI seeking to enjoin our acquisition of SPI and seeking money damages soon after we acquired a stake in SPI, with us named as a defendant together with SPI and its board of directors in the class action. Although this class action has been dismissed with prejudice, such and other lawsuits and proceedings could cause us to incur additional legal and other costs and expenses (including the payment of damages, settlement sums or other compensation) as well as divert the attention of our management. Difficulties encountered with respect to the acquisitions, investments, or alliances or in the process of integration could have an adverse effect on our ability to manage our business. Any failure to integrate any acquired businesses or joint ventures into our operations successfully and any material liabilities or potential liabilities of any acquired businesses or joint ventures that are not identified by us during our due diligence process for such acquisitions or investments could materially and adversely affect our business and financial condition.

Product defects could result in increased costs, damage to our reputation and loss of revenues and market share.

Our products may contain defects that are not detected until they have been shipped, installed or otherwise incorporated into PV products of our customers. In 2009, 2010 and 2011, we recorded inventory write-downs of $2.4 million, $5.8 million and $17.1 million, respectively, due to defects identified in some of our products. In the ordinary course of our business, we also encounter periodic sales returns due to non-conformity with customers’ specifications or product defects. In each case, we are required to replace our products promptly. Product defects and the possibility of product defects could cause significant damage to our market reputation and reduce our product sales and market share. If we cannot successfully maintain consistency and quality throughout our production process, this will result in substandard quality or performance of our products. 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 replacements of products, our credibility and market reputation will be harmed and sales of our PV products may be adversely affected.

We are subject to the management report and auditor attestation report requirements of Section 404 of the Sarbanes-Oxley Act; if we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.

As a public company, we are subject to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act and the related rules of the Securities and Exchange Commission, or the SEC, require that we evaluate the effectiveness, as of the end of each fiscal year, of our internal control over financial reporting and include in our annual report on Form 20-F for each fiscal year (i) a report of our management on our internal control over financial reporting that contains, among other things, management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the most recent fiscal year, including a statement on whether or not internal control over financial reporting is effective and (ii) the opinion of our registered public accounting firm, either unqualified or adverse, as to whether we

 

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maintained, in all material respects, effective internal control over financial reporting as of the end of such fiscal year. Our management and auditors are not permitted to conclude that our internal control over financial reporting is effective if there are one or more “material weaknesses” in our internal control over financial reporting, as defined in rules of the SEC and the U.S. Public Company Accounting Oversight Board, or PCAOB. We cannot assure you that our internal control over financial reporting will continue to be effective or that any significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Moreover, if we fail to maintain the adequacy of our internal control, we may not be able to conclude that we have effective internal control over financial reporting. Even if we do conclude that our internal control over financial reporting is effective, our independent registered public accounting firm may still issue a report that is qualified or adverse if it is not satisfied with our internal control. Furthermore, effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important to help us to manage the company effectively and prevent fraud. We have incurred, and will continue to incur, significant costs and have used, and will continue to use, significant management and other resources in order to comply with Section 404 of the Sarbanes-Oxley Act.

Our independent registered public accounting firm’s audit documentation related to their audit report included in this annual report may be located in China. The Public Company Accounting Oversight Board currently cannot inspect audit documentation located in China and, as such, you may be deprived of the benefits of such inspection.

Our independent registered public accounting firm that issues the audit report included in our annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the applicable laws of the United States and professional standards. Our operations are principally conducted in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities. Accordingly, any audit documentation located in China related to our independent registered public accounting firm’s report included in our filings with the SEC is not currently inspected by the PCAOB.

Inspections conducted by the PCAOB outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating audit documentation located in China and its related quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

The inability of the PCAOB to conduct inspections in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to audits outside China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

The financial disclosure in interactive data we are required to provide on SEC’s electronic filing system and our own website involve special and technical processing and processes, and may expose us to unintended additional risks and liabilities.

We started to provide financial disclosure in interactive data format on SEC’s electronic filing system and post them on our corporate website in connection with our annual report on Form 20-F for the fiscal year ended December 31, 2010 as required by the SEC rules and regulations. As required by the SEC, we use the eXtensible Business Reporting Language, or XBRL, and the taxonomy or standard list of tags in XBRL format developed for financial reporting in interactive format consistent with U.S. GAAP and SEC rules and regulations. The XBRL list of tags contains descriptive labels, definitions, authoritative references to U.S. GAAP and the SEC rules and regulations where applicable, and other elements, all of which aim to provide the contextual information necessary for interactive data to be recognized and processed by software. For the fiscal year ended December 31, 2010, we tagged our consolidated financial statements, with the footnotes and schedules each tagged in a block of text. Starting with this annual report, we will be required to tag the detailed quantitative

 

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disclosures within the footnotes and schedules to our consolidated financial statements and will be permitted, but not required, to the extent we choose, to tag each narrative disclosure. As we took advantage of 30-day grace period for submitting our initial interactive data exhibit for fiscal year 2010, we will similarly make use of the 30-day grace period permitted for submitting our first interactive data exhibit in connection with this annual report. Starting with our annual report for the fiscal year ending December 31, 2012, we will not have the benefit of any such grace period, and must file such interactive data as an exhibit to our annual report on Form 20-F. As required by the SEC rules and regulations, we are also required to post our interactive data for at least 12 months on our corporate website on the same day we submit or file our annual report on Form 20-F.

When we apply XBRL taxonomy or data tags to our consolidated financial statements and the notes and schedules, we are initially guided by the software in tagging information contained in our financial statements with the appropriate tags in the standard list. Each element in the standard list of tags has a standard label. We typically therefore match the standard labels to each caption in our consolidated financial statements and notes and schedules. To the extent we have flexibility in how to report our financial information under U.S. GAAP in our consolidated financial statements and notes and schedules, we may decide to use a non-standard financial statement line item that is not included in the standard list of tags. In this situation, we will create a company-specific element, called an extension. Similarly, when we identify a difference between some elements associated with the standard label and those associated with our financial reporting item, we may change, or extend, the standard label when we tag such financial disclosure. Due to the complexity and technicality in tagging our consolidated financial statements and the notes and schedules, we have outsourced the tagging process to a third party specialist, with the data tagging subject to our review and approval.

As financial statements in interactive data format are intended to be processed by software applications, the unprocessed data are not readable by humans. You will need viewers to convert or render the interactive data file to human readable format. Some viewers are similar to Web browsers used to read HTML files. You will also need software to process interactive data so as to automate and facilitate access to and analysis of the tagged data. We cannot assure you of the availability of any applications in existence or under development that may provide the functionality that you require for your purposes. XBRL is an open standard that defines or tags data using standard definitions. These tags are supposed to establish a consistent structure of identity and context, capable of being recognized and processed by a variety of different software applications. We understand that XBRL was developed and is currently supported by XBRL International, and that software applications, such as databases, financial reporting systems, and spreadsheets, recognize and process tagged financial information. You should also note that the XBRL standard will not remain static and is subject to updating, and the list of newer tags may differ significantly from the old or existing list. Such new developments will not only impact our tagging process going forward, but also your use of our tagged financial disclosure.

We are subject to liabilities under the federal securities laws with respect to our interactive data files submitted or filed with the SEC, with a modified liability for our interactive data submitted for the fiscal year ended December 31, 2010 and to be submitted for the fiscal year ended December 31, 2011. Such modification will primarily deem our interactive data not as filed, but only as submitted, for purposes of specified liability provisions under the federal securities laws, and we are additionally protected from liability for failure to comply with the tagging requirements for the fiscal years ended December 31, 2010 and 2011 if our interactive data file should fail to meet the SEC requirements so long as the failure shall have occurred despite our good faith effort and we have corrected the failure promptly after becoming aware of it. In addition, if we fail to provide the required financial disclosure in interactive data format on SEC’s electronic filing system or post such interactive data our own corporate website each on the date so required, we will not be regarded as current with our reports under the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act, and, as a result, will not be eligible to use the short registration statement forms, such as Form F-3, and will not be deemed to have available adequate current public information for purposes of the resale exemption safe harbor provided by Rule 144 under the Securities Act of 1933, as amended, or the Securities Act.

 

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If we are unable to attract, train and retain technicians and a skilled labor force, our business may be materially and adversely affected.

Our continued success depends, to a significant extent, on our ability to attract, train and retain technicians and a skilled labor force for our business. Recruiting and retaining capable technicians, particularly those with expertise in the PV industry, are vital to our success. Our principal operations are located at Xinyu City of Jiangxi Province, a relatively less developed region compared to coastal cities in China. Our location adds difficulties to our recruiting efforts. In addition, there exists substantial competition for qualified technicians in the PV industry, and there can be no assurance that we will be able to attract or retain technicians. Neither can we assure you that we will be able to recruit, train and retain skilled workers. As we have disclosed in the risk factors entitled “— We have expanded our international business operations, and our failure or inexperience in these new endeavors could adversely affect our business expansion strategies and harm our reputation,” “— We have recently started to engage in the solar farm project business and related EPC business, and we may not succeed in these new endeavors or may not have sufficient financing for them, which could adversely affect our business expansion and vertical integration strategies and harm our reputation” and “— We have announced our proposed investments in the LED sapphire wafer manufacturing and in silane gas production, and we may not succeed in these new lines of business, which could adversely affect our strategies to expand into higher value-added sectors and to lower our overall production costs,” we now face additional difficulties in staffing our overseas operations and the new business operations we have recently expanded into or will enter into. If we fail to attract and retain qualified employees, our business and prospects may be materially and adversely affected.

Fluctuations in exchange rates could adversely affect our business.

As of December 31, 2011, our sales were primarily denominated in U.S. dollars, Renminbi and euros. As we develop our modules and solar farm project businesses, we will increasingly be exposed to currency risks relating to euros and U.S. dollars. Our costs are largely denominated in Renminbi and U.S. dollars, while our capital expenditures are largely denominated in U.S. dollars, Renminbi and euros. Therefore, fluctuations in currency exchange rates could have a material adverse effect on our financial condition and results of operations. Fluctuations in exchange rates, particularly among the U.S. dollar, Renminbi and euro, affect our gross and net profit margins and could result in foreign exchange and operating losses.

The functional currency of our principal operating subsidiaries, which are located in China, is the Renminbi. To the extent these subsidiaries hold assets denominated in U.S. dollars, any appreciation of Renminbi against the U.S. dollar could result in a charge to our statements of operations and a reduction in the value of their U.S. dollar-denominated assets. In addition, a depreciation of Renminbi against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results.

We incurred a net foreign currency exchange loss of $0.6 million and $2.0 million during the years ended December 31, 2009 and 2011, respectively, and we recorded a net foreign currency exchange gain of $8.3 million for the year ended December 31, 2010. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur additional net foreign currency losses in the future. During 2009, 2010 and 2011, we entered into certain foreign exchange forward contracts to reduce the effect of our foreign exchange exposure. However, we cannot assure you that these types of hedging activities will be effective in managing our foreign exchange risk exposure.

Compliance with environmental and safety regulations is expensive, and noncompliance may result in adverse publicity and potentially significant monetary damages and fines or suspension of our business operations.

The majority of our business operations are located in China, and we are required to comply with all PRC national and local regulations regarding the protection of the environment and the safety of operations. Our overseas subsidiaries are required to comply with national, federal and local regulations regarding the environmental protection and operational safety for their businesses in their respective jurisdictions. Compliance

 

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with environmental and safety regulation is expensive. The PRC government is adopting more stringent environmental protection and operational safety regulations and the costs of complying with these regulations are expected to increase. See “Item 4. Information on the Company — B. Business Overview — Regulatory Framework — Environmental regulations” and “— Production Safety and Environment” for details. Although we have obtained all of the necessary approvals and permits for our production facilities currently existing or under construction, we cannot assure you that we will be able to comply with all applicable environmental protection and operational safety requirements, and obtain all of the required governmental approvals and permits that may be or may become applicable to us on a timely basis, or at all, or will be able to complete all our registrations and filings with the government, in time for all of our projects currently under construction or our future projects. The relevant governmental authorities may impose on us fines for any non-compliance, set deadlines for rectification, and order us to cease construction or production if we fail to comply with their requirements.

For each of our PV production facilities in China, we are required to conduct an environmental impact assessment, obtain approval of the assessment before commencing construction and complete an examination and obtain an environmental acceptance approval before we begin production. We must also periodically renew the various environmental acceptance approvals that we have obtained to be able to continue our business operations. Our polysilicon production facilities, in particular, use, generate, store, dispose of, and discharge toxic, volatile and otherwise hazardous chemicals and wastes. We are therefore subject to licensing requirements, regulations and periodic monitoring by local environmental protection authorities regarding the use, storage, transportation and disposal of such hazardous chemicals and the disposal of other wastes we generate. Discharge of waste water from our production facilities is an example, for which we must file reports with and obtain discharge permits from the relevant PRC government authorities.

We are also subject to the periodic production safety examinations and reviews in order to obtain or renew our operational safety permits. As we disclosed in the risk factor entitled “— Unexpected equipment failures or accidents, including any accidental release of hazardous gases or materials, may lead to production curtailments or shutdowns, personal injuries, even deaths or damage to properties,” our operations, especially wafer manufacturing and polysilicon production, use complex and potentially hazardous equipment, such as CVD reactors, STC thermal converters, and hydrochlorination reactors, DSS furnaces, squarers and wire saws, that requires skill and experience for safe operation. We also use and discharge toxic, volatile and otherwise hazardous chemicals in our polysilicon production processes, for which we must register with the relevant authorities and obtain the relevant safety permits before we may use such hazardous chemicals in our production processes, including a permit for the storage and use of hazardous chemicals and a permit for the use of atmospheric pressure containers. Although we have obtained all the necessary operational safety permits for our current operations, we will not be able to renew such operational safety permits, or obtain them for projects under construction or within our expansion plan, if we fail to comply with present or future safety regulations in China. Our failure may subject us to substantial fines or damages or the suspension of our production operations, which may harm our reputation and could negatively affect our results of operations and financial position.

We have limited insurance coverage and may incur losses resulting from product liability claims or business interruptions.

We are exposed to risks associated with product liability claims in the event that the use of our PV products results in injury. Due to our limited historical experience, we are unable to predict whether product liability claims will be brought against us in the future or to predict the effect of any resulting adverse publicity on our business. The successful assertion of product liability claims against us could result in potentially significant monetary damages and require us to make significant payments. Moreover, we do not carry any product liability insurance and may not have adequate resources to satisfy a judgment in the event of a successful claim against us. We do not carry any business interruption insurance. Based on the insurance products available in China, even if we decide to take out business interruption coverage, such insurance as currently available offers limited

 

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coverage compared to that offered in many other jurisdictions. Any business disruption or natural disaster could result in substantial losses and diversion of our resources.

Failure to protect our intellectual property rights, know-how and technology may undermine our competitive position.

We have developed various production process-related know-how and technologies in the production of polysilicon, ingots, wafers, cells and modules. Know-how and technologies of this type play a critical role in our quality control and cost reduction. In addition, we have on-going R&D programs with a view to continually developing techniques and processes that will improve our production efficiency and product quality. Our intellectual property and proprietary rights arising out of these R&D programs will be crucial in maintaining our competitive edge in the PV industry. We currently have 31 issued patents, 10 patent right grant notices that entitle us to receive issued patents upon satisfaction of certain registration procedures, and 138 patent applications pending globally, of which 130 are pending in China. In addition, we also have two registered copyrights and three registered trademarks in China. We rely primarily on patent, trademark, trade secret, copyright law and contractual arrangements with employees to protect our intellectual property and proprietary rights. Nevertheless, these afford only limited protection and the actions that we may take to protect our intellectual property and proprietary rights may not be adequate. Our failure to protect our production process related know-how and technologies and/or our intellectual property and proprietary rights may undermine our competitive position. Third parties may infringe or misappropriate our proprietary technologies or other intellectual property and proprietary rights. Policing unauthorized use of proprietary technology can be difficult and expensive. Also, litigation, which can be costly and divert management attention and other resources away from our business, may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of our proprietary rights. We cannot assure you that the outcome of such potential litigation will be in our favor or that we will be able to effectively enforce any remedies available to us. An adverse determination in any such litigation or failure to enforce our remedies will impair our intellectual property and proprietary rights and may harm our business, prospects and reputation.

We may be exposed to intellectual property infringement, misappropriation or other claims by third parties and an adverse determination could result in us paying significant damages.

Our success depends on our ability to use and develop our technology and know-how, to produce our polysilicon, ingots, wafers, cells and modules and to sell our polysilicon, ingots, wafers, cells and modules without infringing the intellectual property or other rights of third parties. We may be subject to litigation involving claims of patent infringement or violation of intellectual property rights of third parties. For example, in June 2008, an objection was filed against Jiangxi LDK Solar regarding its trademark “LDK.” The initial decision of the applicable trademark authority on this objection was granted in our favor in November 2010 and we are awaiting the final judgment. The validity and scope of claims relating to PV technology patents involve complex scientific, legal and factual questions and analyses and, therefore, may be highly uncertain. The defense and prosecution of intellectual property suits, patent opposition proceedings, trademark disputes and related legal and administrative proceedings can be both costly and time consuming and may significantly divert our resources and the attention of our technical and management personnel. An adverse ruling in any such litigation or proceedings 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 production 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 dispute.

We have granted, and may continue to grant, stock options under our stock incentive plan and our net income could be adversely impacted.

We adopted a stock incentive plan in 2006. As of the date of this annual report, we have outstanding stock options under this plan with respect to 10,348,468 shares, all of which were granted to our directors, employees,

 

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consultants and service providers. During the past few years, as a result of the significant decreases in our share prices, we and some of our optionees agreed to cancel some of the previously granted, but not yet vested, stock options and to replace them with newly granted options with similar terms at lower exercise prices. According to Accounting Standards Codification, or ASC, Topic 718, “Share-Based Payment,” issued by the Financial Accounting Standards Board, or FASB, we are required to recognize share-based compensation as compensation expense in the statement of operations based on the fair value of equity awards on the date of the grant, with the compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. For the years ended December 31, 2009, 2010 and 2011, our non-cash share-based compensation expenses amounted to $14.2 million, $11.0 million and $9.9 million, respectively, with respect to share options granted to our employees. The additional expenses associated with share-based compensation may reduce the attractiveness of issuing stock options under our stock incentive plan. However, if we do not grant stock options or we reduce the number of stock options that we grant, we may not be able to attract and retain key personnel. If we grant more stock options to attract and retain key personnel, the expenses associated with share-based compensation may adversely affect our net income.

Most of our production, storage, administrative and R&D facilities are located in close proximity to one another in Xinyu City of Jiangxi Province. Any damage or disruption at these facilities would have a material adverse effect on our business, financial condition and results of operations.

Most of our production, storage, administrative and R&D facilities are located in close proximity to one another in Xinyu City of Jiangxi Province in China. A natural disaster, such as fire, floods, typhoons or earthquakes, severe snow storms, or other unanticipated catastrophic events, including power interruptions, telecommunications failures, equipment failures, explosions, fires, break-ins, terrorist acts or war, could significantly disrupt our production and business operations. If any of our production facilities or material equipment were to experience any significant damage or downtime, or if any of our storage, administrative and R&D facilities were to suffer any material damage or disruption, we may be unable to meet our production targets and our business would be adversely affected. Moreover, as we have disclosed in the risk factor entitled “— We have limited insurance coverage and may incur losses resulting from product liability claims or business interruptions,” we do not carry any business interruption insurance. As the insurance industry in China is still in its early stage of development, even if we decide to take out business interruption coverage, such insurance available in China offers limited coverage, which may be insufficient to cover the damage or disruption at these facilities. Any such business disruption or natural disaster could result in substantial losses and diversion of our resources, and have a material adverse effect on our business, financial condition and results of operations.

We rely principally on dividends, if any, and the interest and principal payments on intercompany loans or advances paid by our subsidiaries to fund our cash and financing requirements, and any limitation on the ability of our PRC subsidiaries to pay dividends or repay intercompany loans or advances to us could have a material adverse effect on our ability to conduct our business.

We are a holding company with no material operations. We conduct our operations mainly through our PRC subsidiaries. As a holding company, we may depend on the receipt of dividends and the interest and principal payments on intercompany loans or advances from our subsidiaries to satisfy our obligations, including our obligations under our 2013 convertible notes and 2014 senior notes and to pay any dividends we may declare. The ability of our subsidiaries to pay dividends and make payments on intercompany loans or advances to their shareholders is subject to, among other things, distributable earnings, reserve funds, cash flow conditions, restrictions contained in the articles of association of our subsidiaries, applicable laws and restrictions contained in the debt instruments or agreements of such subsidiaries. In addition, if any of our subsidiaries raises capital by issuing equity securities to third parties, the dividends declared and paid with respect to such equity securities would not be available to us, such as any dividends declared and paid by LDK Silicon on approximately 18.46% of its share capital that LDK Silicon sold to CDB Capital and affiliates of China Construction Bank Corporation and Bank of China Limited on June 3, 2011. In addition, the articles of association of LDK Silicon, as amended in connection with such investments in LDK Silicon preferred shares, mandate an annual dividend on a pro rata

 

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basis among all existing shareholders of LDK Silicon up to an amount of its retained earnings so that the holders of LDK Silicon preferred shares will receive at least $15 million of such dividend, to the extent the declaration and distribution of such dividend are permitted by applicable laws and by contractual obligations applicable to us. These restrictions and developments could reduce the amounts that we receive from our subsidiaries, which could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, service our debts, or otherwise fund and conduct our business.

In connection with the consummation of the sale of LDK Silicon preferred shares to CDB Capital and affiliates of China Construction Bank Corporation and Bank of China Limited, we have entered into a share pledge agreement with the investors pursuant to which we have pledged 15% of our shares in Jiangxi LDK Solar (including any dividends paid on those shares) to secure our obligations relating to the investments in LDK Silicon preferred shares. In accordance with market practice in China, any dividends declared by Jiangxi LDK Solar on the pledged shares will be paid into an escrow account and held to secure our obligations relating to the investments in LDK Silicon preferred shares until the pledge is eventually released.

PRC laws and regulations permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations and such profits differ from profits determined in accordance with U.S. GAAP in certain significant respects, including the use of different bases of recognition of revenue and expenses. Our PRC subsidiaries are also required to set aside a portion of their after-tax profits according to PRC accounting standards and regulations to fund certain reserves that are not distributable as cash dividends. In practice, our PRC subsidiaries are also required to obtain a required tax clearance with the local tax bureau and complete the corresponding foreign exchange procedures before paying any dividends. In addition, under the PRC Enterprise Income Tax Law, or the EIT Law, effective since January 1, 2008, and its implementing regulations, PRC income tax at the rate of 10% is applicable to dividends payable by PRC enterprises to “non-resident enterprises” (enterprises that do not have an establishment or place of business in China or that have such an establishment or place of business in China but for which the relevant dividend income is not effectively connected with such establishment or place of business), subject to any exemption or lower withholding tax rate as may be contained in any income tax treaty or agreement between China and the jurisdictions of incorporation of such “non-resident enterprises.” Pursuant to an avoidance of double taxation arrangement between Hong Kong and the mainland PRC government, if a non-PRC parent company is a Hong Kong resident and directly holds a 25% or more interest in a PRC enterprise, such PRC withholding tax rate may be lowered to 5%. Although some of our PRC operations are held through Hong Kong entities, such as LDK Solar International Company Limited, or LDK Hong Kong, and LDK Silicon Holding Co., Limited, or LDK Silicon Hong Kong, we have not yet obtained the Hong Kong resident status for these entities for such withholding tax purposes. Recent PRC governmental explanations have casted additional uncertainties on whether and the extent to which Hong Kong holding companies may be eligible for the benefits under this Hong Kong-mainland China double taxation avoidance arrangement. We therefore cannot assure how long it will take to apply for a Hong Kong tax residence, if and when we apply, and whether we will be successful in our applications. As a result, neither can we assure you that we will have sufficient cash flow from dividends or repayments on intercompany loans or advances from our PRC subsidiaries to pay any dividend we may declare.

Furthermore, although we currently do not have any offshore shareholder loan to our PRC subsidiaries that are foreign invested companies, we may resort to such offshore lending in the future, rather than equity contribution, to our PRC subsidiaries to finance their operations. In such events, the market interest rates that our PRC subsidiaries can pay with respect to offshore loans generally may not exceed comparable interest rates in the international finance markets. Under the EIT Law, our PRC subsidiaries are also required to pay a 10% (or 7% if the interest is paid to a Hong Kong resident under certain circumstances) withholding tax on our behalf on the interest paid under any shareholder loan. Prior to payment of interest and principal on any such shareholder loan, the PRC subsidiaries (as foreign-invested enterprises in China) must present evidence of payment of the withholding tax on the interest payable on any such shareholder loan and evidence of registration with the PRC State Administration of Foreign Exchange, or SAFE, authorities as well as any other documents that the SAFE

 

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authorities may require. You may find additional information under “Item 10. Additional Information — E. Taxation — People’s Republic of China Taxation” in this annual report.

Our operations are restricted by the terms of our 2014 senior notes; if we are unable to comply with the restrictions and covenants in our debt agreements, including the indenture governing the 2014 senior notes, there could be a default under the terms of these agreements, which could cause repayment of our debt to be accelerated.

The indenture governing our 2014 senior notes includes a number of significant restrictive covenants. These covenants restrict, among other things, our ability, and the ability of most of our subsidiaries, to:

 

   

incur or guarantee additional indebtedness and issue disqualified or preferred stock;

 

   

declare dividends on capital stock or purchase or redeem capital stock;

 

   

make investments or other specified restricted payments;

 

   

issue or sell capital stock of most of our subsidiaries;

 

   

guarantee indebtedness of our subsidiaries;

 

   

sell assets;

 

   

create liens;

 

   

enter into sale and leaseback transactions;

 

   

engage in any business other than permitted business;

 

   

enter into agreements that restrict our subsidiaries’ ability to pay dividends, transfer assets or make intercompany loans;

 

   

enter into transactions with shareholders or affiliates; and

 

   

effect a consolidation or merger.

These covenants could limit our ability to plan for or react to market conditions or to meet our capital needs. Our ability to comply with these covenants may be affected by events beyond our control, and we may have to curtail some of our operations and growth plans to maintain compliance. As we have disclosed in the risk factor entitled “— We have substantial existing indebtedness, in particular short-term indebtedness, and we may incur substantial additional indebtedness in the future subject to our compliance with the covenants and other requirements in our existing financing arrangements, which could adversely affect our financial condition and our ability to generate sufficient cash to satisfy our outstanding and future debt obligations and we may not be able to refinance our current borrowings on terms that are acceptable to us, or at all” above, following our recent announcement of our unaudited financial results for the fourth fiscal quarter in 2011, due to our existing high leverage coupled with a net loss in the fourth quarter of 2011, our “Consolidated Fixed Charge Coverage Ratio,” as defined in the indenture governing our 2014 senior notes, has been negatively impacted as a result of a significant reduction of the aggregate amount of our “Consolidated EBITDA,” as defined in the indenture governing our 2014 senior notes, for the four most recent full fiscal quarters, while our “Consolidated Fixed Charges,” as defined in the indenture governing our 2014 senior notes, for such four-quarter period, have remained constant. As a result, we will not be able to incur any indebtedness until our “Consolidated Fixed Charge Coverage Ratio” significantly improves on the basis of our four most recent full fiscal quarters.

If we are unable to comply with the restrictions and covenants in the indenture governing our 2014 senior notes or our current or future debt obligations and other agreements, there could be a default under the terms of these agreements. In the event of a default under these agreements, the holders of our debt could terminate their commitments to lend to us, accelerate repayment of the debt and declare all the outstanding amounts due and payable or terminate the agreements, as the case may be. Furthermore, some of our debt agreements, including

 

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the indenture governing our 2014 senior notes and the indenture governing our 2013 convertible notes, contain cross-acceleration or cross-default provisions. As a result, our default under one debt agreement may cause the acceleration of repayment of not only such debt but also other debt, including the 2014 senior notes or our 2013 convertible notes, and result in a default under our other debt agreements, including the indenture governing our 2014 senior notes and the indenture governing our 2013 convertible notes. If any of these events occurs, we cannot assure you that our assets and cash flow would be sufficient to repay in full all of our indebtedness, or that we would be able to find alternative financing. Even if we could obtain alternative financing, we cannot assure you that it would be on terms that are favorable or acceptable to us.

Risks Relating to Business Operations in China

Changes in PRC political and economic policies and conditions could adversely affect our business and prospects.

China has been, and will continue to be, our primary production base and currently almost all of our assets are located in China. While the PRC government has been pursuing economic reforms to transform its economy from a planned economy to a market-oriented economy since 1978, a substantial part of the PRC economy is still being operated under various controls of the PRC government. By imposing industrial policies and other economic measures, such as control of foreign exchange, taxation and foreign investment, the PRC government exerts considerable direct and indirect influence on the development of the PRC economy. Many of the economic reforms carried out by the PRC government are unprecedented or experimental and are expected to be refined and improved over time. Recently, the PRC government has been contemplating and introducing in-depth structural reforms in China in order to further transition the PRC economy into a market economy. Political, economic and social factors may also lead to further adjustments of the PRC reform measures, including its fiscal and monetary policies. This reform and adjustment process may not necessarily have a positive effect on our operations and our future business development. Our business, prospects and results of operations may be materially and adversely affected by changes in the PRC economic and social conditions and by changes in the policies of the PRC government, such as measures to control inflation, changes in the rates or method of taxation, changes in government spending, and the imposition or lifting of restrictions on currency conversion.

Changes in foreign exchange and foreign investment regulations in China may affect our ability to invest in China and the ability of our PRC subsidiaries to pay dividends and service debts in foreign currencies.

Renminbi is not a freely convertible currency at present. Although the PRC government has recently been trying to internationalize Renminbi, it continues to regulate conversion between Renminbi and foreign currencies. Changes in PRC laws and regulations on foreign exchange may result in uncertainties in our financing and operating plans in China. Over the years, China has significantly reduced the government’s control over routine foreign exchange transactions under current accounts, including trade and service related foreign exchange transactions, payment of dividends and service of foreign debts. In accordance with the existing foreign exchange regulations in China, our PRC subsidiaries may, within the scope of current account transactions, pay dividends and service debts in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, there can be no assurance that the current PRC foreign exchange policies with respect to debt service and payment of dividends in foreign currencies will continue in the future. Changes in PRC foreign exchange policies may have a negative impact on our ability to service our foreign currency-denominated indebtedness and to distribute dividends to our shareholders in foreign currencies since we, as a Cayman Islands holding company, rely on our operating subsidiaries in China to convert their Renminbi cash flow to service such foreign debt and to make such dividend payments. Foreign exchange transactions by our PRC subsidiaries under the capital account continue to be subject to significant foreign exchange controls. In particular, foreign exchange transactions involving foreign direct investment, foreign debts and outbound investment in securities and derivatives are subject to limitations and require approvals from the relevant SAFE authorities. We have the choice, as permitted by the PRC foreign investment regulations, to invest our net proceeds from our various offerings in the form of registered capital or a

 

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shareholder loan into our PRC subsidiaries to finance our operations in China. Our choice of investment is affected by the different treatments under the relevant PRC regulations with respect to capital-account and current-account foreign exchange transactions in China. For example, our transfer of funds to our subsidiaries in China is subject to approval of PRC governmental authorities in case of an increase in registered capital, or subject to registration with PRC governmental authorities in case of a shareholder loan. These and other limitations on the flow of funds between us and our PRC subsidiaries could restrict our ability to act in response to changing market conditions and limit our flexibility in the management of our cash flow and financings.

The uncertain legal environment in China could have a negative impact on our business and prospects and also limit the legal protections available to you.

Our principal operating subsidiaries, Jiangxi LDK Solar, Jiangxi LDK Silicon and Jiangxi LDK Polysilicon, are foreign-invested enterprises in China and are subject to laws and regulations applicable to foreign investments in China in general and laws and regulations applicable to wholly foreign-owned enterprises and sino-foreign joint venture enterprises in particular. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, the civil law system is a system in which decided legal cases have little precedential value. When the PRC government started its economic reform in 1978, it began to formulate and promulgate a comprehensive system of laws and regulations to provide general guidance on economic and business practices in China and to regulate foreign investments. China has made significant progress in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, the promulgation of new laws, changes in existing laws and abrogation of local regulations by national laws may have a negative impact on our business and prospects. In addition, as these laws, regulations and legal requirements are relatively recent and because of the limited volume of published cases and their non-binding nature, the interpretation and enforcement of these laws, regulations and legal requirements involve significant uncertainties. These uncertainties could limit the legal protections available to foreign investors, including you.

Expiration of, or changes to, current PRC tax incentives that our business enjoys could have a material adverse effect on our results of operations.

Under PRC tax laws and regulations effective prior to January 1, 2008, a company established in China was typically subject to a national enterprise income tax at the rate of 30% on its taxable income and a local enterprise income tax at the rate of 3% on its taxable income. The PRC government provided various incentives to foreign-invested enterprises to encourage foreign investments. These incentives included reduced tax rates and other measures. Foreign-invested enterprises that were determined by PRC tax authorities to be manufacturing companies with authorized terms of operation for more than 10 years were eligible for:

 

   

a two-year exemption from the national enterprise income tax from their first profitable year; and

 

   

a 50% reduction of their applicable national enterprise income tax rate for the succeeding three years.

The local preferential enterprise income tax treatment was within the jurisdiction of the local provincial authorities as permitted under the prior PRC tax laws relating to foreign-invested enterprises. The local tax authorities would decide whether to grant any tax preferential treatment to foreign-invested enterprises on the basis of their local conditions. The Jiangxi provincial government announced that energy companies with authorized terms of operation for more than 10 years were eligible for:

 

   

a five-year exemption from the 3% local enterprise income tax from their first profitable year; and

 

   

a 50% reduction of their local enterprise income tax rate for the succeeding five years.

Under these pre-existing PRC tax laws and regulations, Jiangxi LDK Solar, as a foreign-invested manufacturing enterprise, was entitled to a two-year exemption from the national enterprise income tax for 2006 and 2007 and would be subject to a reduced national enterprise income tax rate of 15% from 2008 through 2010.

 

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Likewise, Jiangxi LDK Solar was entitled to a five-year exemption from the local enterprise income tax beginning in 2006 and would be subject to a reduced local enterprise income tax rate of 1.5% from 2011 through 2015.

The EIT Law, which became effective on January 1, 2008, imposes a unified income tax rate of 25% on all domestic enterprises and foreign-invested enterprises unless they qualify for preferential tax treatments under certain limited exceptions. The EIT Law and the related regulations permit companies to continue to enjoy their preferential tax treatments under the prior tax regime until such treatments expire in accordance with their terms, on the condition that such preferential tax treatments are available under the grandfather clauses of the EIT Law and the related regulations. As a result, Jiangxi LDK Solar was subject to a reduced unified enterprise income tax rate of 12.5% from 2008 to 2010. In December 2009, Jiangxi LDK Solar was recognized by the PRC government as a “High and New Technology Enterprise,” or HNTE, under the EIT Law and is therefore entitled to the preferential enterprise income tax rate of 15% from 2009 to 2011. Under the EIT Law, where the transitional preferential enterprise income tax policies and the preferential policies prescribed under the EIT Law and its implementation rules overlap, an enterprise may choose the more favorable policy, but may not enjoy multiple preferential policies. Jiangxi LDK Solar chose to complete the above-mentioned 2-year-exemption-plus-3-year-50%-reduction tax holiday for the overlapping period of 2009 and 2010. As a result, Jiangxi LDK Solar will be subject to income tax at 15% for 2011. Subject to renewal, the HNTE status of Jiangxi LDK Solar will enable it to enjoy the preferencencial income tax rate of 15% from 2012 to 2014. Based on our self-assessment result, we believe that Jiangxi LDK Solar meets all the criteria for the renewal of its HNTE status. In September 2011, Jiangxi LDK Silicon was recognized by the PRC government as an HNTE and is entitled to the preferential income tax rate of 15% from 2011 to 2013. Based on our prevailing business plan, our management expects Jiangxi LDK Silicon will continue to meet all the critieria for HNTE qualification upon renewal of such status which will enable it to enjoy the preferential income tax rate of 15% from 2014 to 2016. Our other PRC subsidiaries do not enjoy any preferential tax treatment in China. When our current tax benefits expire or otherwise become unavailable to us for any reason, including their termination by the relevant government authority, our profitability will be adversely affected.

We may be treated as a PRC resident enterprise for income tax purposes, which may subject us to PRC income tax on our worldwide income.

Under the EIT Law and its implementation rules, enterprises established outside mainland China whose “de facto management bodies” are located in mainland China are considered “PRC resident enterprises for income tax purposes.” The implementation rules define the term “de facto management body” as a management body that exercises material and overall management control over the business, personnel, accounts and properties of an enterprise. We hold our shareholders’ meetings and board meetings outside mainland China and keep our register of shareholders outside mainland China. However, most of our directors and members of our senior management are currently based inside mainland China and we keep our books of account inside mainland China. The PRC tax authorities may consider these circumstances relevant in determining whether we are a PRC resident enterprise for income tax purposes. Although we have not been notified by any PRC tax authorities that we are a PRC resident enterprise under the PRC tax law, and although it is unclear whether we have a “de facto management body” located in mainland China for PRC tax purposes, we intend to take the position that we are not such a PRC resident enterprise. We cannot assure you however that the PRC tax authorities will agree with our position. If we are deemed a PRC resident enterprise for income tax purposes, we will be subject to, among other things, the PRC enterprise income tax at the rate of 25% on our worldwide income excluding, however, the dividend income we receive from our PRC subsidiaries. If we are treated as a PRC resident enterprise under the PRC tax law, we could face significant adverse tax consequences, which could adversely affect the value of our shares and ADSs.

 

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

The PRC labor laws and regulations have a direct impact on our business operations. The National People’s Congress promulgated the Labor Contract Law of China, which became effective on January 1, 2008. This labor contract law, together with its implementation rules and regulations, aims at providing employees with greater protection in their employment relationships. For example, the labor contract law requires employers to enter into written contracts with their employees, and if an employer fails to enter into a written contract with an employee within one month of the commencement of the employment, the employer is required to pay to the employee double salary for the noncompliance period for up to one year. This labor law also calls for open-ended employment contracts rather than fixed-term contracts under specified circumstances. The law further prohibits an employer from entering into a one-year or shorter-term contract with an employee if it constitutes the third consecutive renewal of the employment contract unless it is so requested by the employee. As a result of this more labor-friendly legislation, our discretion in the hiring and termination process has been significantly curtailed, which could in turn affect our overall labor costs and our ability to adjust our labor needs in response to market changes. Our business, financial condition and results of operations could therefore be adversely affected by these PRC labor laws and regulations.

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

SAFE issued a public notice in October 2005, together with its subsequent implementation procedures and clarifications, to require PRC residents, both legal and natural persons, to register with the relevant SAFE authorities before they establish or take control of any company outside China for the purpose of acquiring any asset of or equity interest in PRC companies and raising funds overseas. SAFE refers to such companies outside China as “offshore special purpose companies” in its notice. In addition, SAFE also requires any PRC resident that is the shareholder of an offshore special purpose company to amend its SAFE registration with respect to the offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China. If any PRC shareholder of an offshore special purpose company fails to make the required SAFE registration and amendment, the PRC subsidiaries of that offshore special purpose company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the offshore special purpose company. Moreover, failure to comply with such SAFE registration and amendment requirements could result in liabilities under the PRC law for evasion of applicable foreign exchange restrictions. Our current beneficial owners who are PRC residents have completed registration with the relevant SAFE authorities as required under the above-mentioned SAFE notice except for updating the registration with SAFE in connection with any change of their equity interests in us from time to time and the change of the assets and liabilities of our company as a result of any equity or debt offerings by us from time to time. The failure of these beneficial owners to amend their SAFE registrations in a timely manner pursuant to the SAFE notice or the failure of our other future beneficial owners who are PRC residents to comply with the SAFE registration requirements may subject such beneficial owners to fines and legal sanctions, and may also result in restrictions on our PRC subsidiaries in their abilities to distribute profits to us, or may otherwise materially and adversely interfere with our business.

All employee participants in our existing 2006 stock incentive plan who are PRC citizens may be required to register with SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt additional option plans for our directors and employees under PRC laws.

In March 2007, SAFE issued the Operating Procedures on Administration of Foreign Exchange Regarding Participation by PRC Individuals in Employee Stock Ownership Plan and Stock Option Plan of Overseas Listed Companies, or the Stock Option Rule. It is not clear whether the Stock Option Rule covers any type of equity

 

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compensation plans or incentive plans which provide for the grant of ordinary share options or authorize the grant of restricted share awards. For plans so covered that are adopted by an overseas listed company, the Stock Option Rule requires the employee participants in those plans who are PRC nationals to register with the relevant SAFE authorities within 10 days of the commencement of each quarter. In addition, the Stock Option Rule also requires the employee participants who are PRC nationals to follow a series of requirements on making necessary applications for foreign exchange purchase quotas, opening special bank accounts and filings with the SAFE authorities before they exercise their stock options.

Although we have assisted our employees in their registration with the SAFE authorities in connection with our stock option plan according to the Stock Option Rule, failure to comply with such provisions may subject us and the participants of our stock option plan who are PRC nationals to monetary fines and other legal sanctions. Although, to date, we have not received any notice from any SAFE authorities regarding any legal sanctions applicable to us or our employees, we cannot assure that we or our PRC employees will not fail to comply with such provisions in the future or that any such failure will not prevent us from further granting options under our stock incentive plan to our employees, which could adversely affect our business operations as a result.

We face risks related to health epidemics and other outbreaks of contagious diseases, including influenza A (H1N1), avian flu and SARS.

Our business could be adversely affected by the effects of influenza A (H1N1), avian flu, SARS, a highly contagious form of atypical pneumonia, or other epidemic outbreaks. In April 2009, an outbreak of influenza A caused by the H1N1 virus occurred in Mexico and the United States, and rapidly spread into a number of countries. There have been reports of outbreaks of a highly pathogenic avian flu, caused by the H1N1 virus, in certain regions of Asia and Europe. Over the years, there have been reports on the occurrences of avian flu in various parts of China, including a few confirmed human cases. An outbreak of avian flu in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, particularly in Asia. Additionally, any recurrence of SARS similar to the outbreaks in 2003 which affected China, Hong Kong, Taiwan, Singapore, Vietnam and certain other countries and regions could also have adverse effects of a similar scale. Any prolonged occurrence or recurrence of these contagious diseases or other adverse public health developments may have a material adverse effect on our business operations. These include limitations on our ability to travel or ship our products outside China as well as temporary closure of our production facilities for quarantine or for preventive purposes. Such closures or travel or shipment restrictions could severely disrupt our business operations and adversely affect our financial condition and results of operations. We have not adopted any written preventive measures or contingency plans to combat any health epidemics and other outbreaks of contagious diseases, including influenza A (H1N1), avian flu, or SARS.

Risks Relating to Our ADSs and Shares

The market price of our ADSs has been and may continue to be volatile, which could cause the value of your investments to decline.

The market price of our ADSs experienced, and may continue to experience, significant volatility. For the period from June 1, 2007 (commencement of trading of our ADSs on the New York Stock Exchange) to December 31, 2011, the closing price of our ADSs on the New York Stock Exchange has ranged from a low of $2.70 per ADS to a high of $73.95 per ADS. You may find additional information on the historical high and low closing prices of our ADSs as reported by the New York Stock Exchange under “Item 9. The Offer and Listing — A. Offer and Listing Details — 4. Information Regarding the Price History of the Stock” and “— C. Markets” in this annual report.

 

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Numerous factors, including many over which we have no control, may have a significant impact on the market price of our ADSs, including, among other things:

 

   

announcements of technological or competitive developments in the PV industry;

 

   

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

 

   

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

 

   

announcements of studies and reports relating to the PV efficiencies of our products or those of our competitors;

 

   

actual or anticipated fluctuations in our quarterly operating results;

 

   

changes in financial estimates or other material comments by securities analysts relating to us, our competitors or our industry in general;

 

   

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

 

   

a breach or default, or the perception of a possible breach or default, under our existing loan agreements, credit facilities or other debt instruments;

 

   

announcements by other companies in our industry relating to their operations, strategic initiatives, financial condition or performance or relating to our industry in general;

 

   

announcements of acquisitions or consolidations involving industry competitors or industry suppliers or customers;

 

   

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

 

   

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

 

   

sales or perceived sales of additional ordinary shares or ADSs by us or our significant shareholders;

 

   

pledges or perceived pledges of additional ordinary shares or ADSs by our significant shareholders, and the foreclosure or perceived foreclosure of such security interests, whether or not potentially resulting in a change of control;

 

   

impact and development of any lawsuit, currently pending or threatened, or that may be instituted in the future.

In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of our ADSs, regardless of our operating performance. These factors, among others, could significantly depress the trading price of our ADSs.

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

Under the Cayman Islands law, we may only pay dividends out of our profits or our share premium account subject to our ability to service our debts as they fall due in the ordinary course of our business. Our ability to pay dividends will therefore depend on our ability to generate sufficient profits. We cannot give any assurance that we will declare dividends of any amount, at any rate or at all. We have not paid any dividend in the past. Future dividends, if any, will be at the discretion of our board of directors and will depend upon our future operations and earnings, capital expenditure requirements, general financial condition, legal and contractual restrictions and other factors that our board of directors may deem relevant. Because we are a holding company, we rely principally on dividends, if any, paid by our subsidiaries to us to fund our dividend payments, if any, to our shareholders, including you, and any limitation on the ability of our PRC subsidiaries to pay dividends to us could have a material adverse effect on our ability to pay dividends to you. You should refer to the section entitled “Item 8. Financial Information — A. Consolidated Statements and Other Financial Information — Dividend Distribution Policy” in this annual report for additional information regarding our current dividend policy.

 

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Our future financings, through sales of our ADSs, shares or equity-linked securities in the public market, may cause a dilution in your shareholding, cause the price of our ADSs to decline, or place restrictions on our operations.

We may require additional funding to meet our working capital or capital expenditure requirements or in connection with our acquisitions, strategic collaborations or other transactions in the future. If we raise such funding through issuance of new equity or equity-linked securities, it may cause a dilution in the percentage ownership of our then existing shareholders. Sales of a substantial number of ADSs or other equity-linked securities in the public market could depress the market price of our ADSs, and impair our ability to raise capital through the sale of additional equity or equity-linked securities. We cannot predict the effect that future sales of our ADSs or other equity-linked securities would have on the market price of our ADSs.

Alternatively, if we decide to meet our funding requirements by way of additional debt financing, to the extent we could do so in compliance with the various covenants and other restrictions contained in our existing financing arrangements, we may cause additional restrictions placed on us through such debt financing arrangements, which may:

 

   

limit our ability to pay dividends or require us to seek consents before we pay dividends;

 

   

increase our vulnerability to general adverse economic and industry conditions;

 

   

limit our ability to pursue our business strategies;

 

   

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

 

   

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

You should refer to the risk factor entitled “— Risks Relating to Our Company and Our Industry — We have substantial existing indebtedness, in particular short-term indebtedness, and we may incur substantial additional indebtedness in the future, which could adversely affect our financial condition and our ability to generate sufficient cash to satisfy our outstanding and future debt obligations and we may not be able to refinance our current borrowings on terms that are acceptable to us, or at all” for additional information on the financial covenants contained in some of our debt instruments.

Substantial future sales or perceived sales by our existing shareholders of our ADSs, ordinary shares or equity-linked securities in the public market could cause the price of our ADSs to decline.

Sales by our existing shareholders of our ADSs or ordinary shares, including those equity-related securities issued upon the exercise of our outstanding stock options, in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. As of December 31, 2011, we had 133,518,800 ordinary shares outstanding, including 83,049,491 ordinary shares represented by 83,049,491 ADSs. Mr. Peng currently has borrowings invested in his alternative energy projects from financial institutions, which are secured by pledges of a significant amount of his shares and ADSs in our company, as we have disclosed in the risk factor entitled “— Risks Relating to Our Company and Our Industry — Our controlling shareholder, Mr. Peng, has directly or indirectly pledged a significant portion of his equity interests in our company to secure certain loan facilities. A default under these loan facilities could potentially result in a change of control of our company.” If Mr. Peng defaults on his obligations under these financings, the financial institutions may sell the pledged shares and ADSs. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any financial institutions, or the availability of these securities for future sale, will have on the market price of our ADSs. The price of our ADSs may decline as a result.

 

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

Holders of ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying shares in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions from ADS holders, the depositary will endeavor to vote the underlying shares in accordance with these instructions. Otherwise, ADS holders will not be able to exercise their right to vote unless they withdraw the shares underlying their ADSs and vote such shares directly. Under our currently effective articles of association, as amended and restated, the minimum notice period required to convene a general meeting is 10 clear days. When a general meeting is convened, ADS holders may not receive sufficient notice of a shareholders’ meeting to permit such holders to withdraw their shares to allow them to cast their vote with respect to any specific matter. If requested in writing by us, the depositary will mail a notice of such a meeting to ADS holders. In addition, the depositary and its agents may not be able to send voting instructions to ADS holders or carry out ADS holders’ voting instructions in a timely manner. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if the ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholder meeting.

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

The 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 our articles of association, or for any other reason.

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

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

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

If we offer our shareholders any rights to subscribe for additional shares or any other rights, the depositary may make these rights available to you after consultation with us. We cannot make rights available to you in the United States unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. In addition, under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities

 

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

Anti-takeover provisions of our articles of association could prevent a change in control even if such takeover is beneficial to our shareholders, and certain provisions of our 2013 convertible notes and 2014 senior notes could also discourage an potential acquirer.

Our articles of association contain provisions that could delay, defer or prevent a change in control of our company that could be beneficial to our shareholders. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that investors are willing to pay in the future for our ADSs. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a price above the then current market price of our ADSs. These provisions provide that our board of directors has authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption (subject to approval of our shareholders if so required under our articles of association) and liquidation preferences, any or all of which may be greater than the rights associated with our shares, in the form of ADSs or otherwise. Our board of directors may decide to issue such preferred shares quickly with terms calculated to delay or prevent a change in control of our company or make the removal of our management more difficult. If our board of directors decides to issue such preferred shares, the price of our ADSs may fall and the voting and other rights of holders of our shares and ADSs may be materially and adversely affected.

In addition, our 2013 convertible notes and 2014 senior notes contain provisions that could make it more difficult or more expensive for a third party to acquire us, or may even prevent a third party from acquiring us. For example, upon the occurrence of certain transactions constituting a fundamental change, holders of our 2013 convertible notes will have the right, at their option, to require us to repurchase for cash all or any portion of our 2013 convertible notes. Upon certain change of control transactions, holders of our 2013 convertible notes may elect to convert all or a portion of our 2013 convertible notes and holders of our 2014 senior notes have the right to require us to redeem all or a portion of such 2014 senior notes at 101% of their principal amount plus accrued and unpaid interest. We may also be required to increase the conversion rate for conversions of our 2013 convertible notes in connection with certain fundamental changes. By discouraging a potential acquirer, these provisions could have the effect of depriving our shareholders of an opportunity to sell their shares or ADSs at a premium over prevailing market prices, and might reduce the price of our shares and ADSs as a result.

We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under the Cayman Islands law than that under the U.S. law, ADS holders may have less protection for their shareholder rights than such holders would under the U.S. law.

We are a Cayman Islands company and 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 our shareholders to take action against our directors, actions that may be taken by our minority shareholders and the fiduciary responsibilities of our directors to us under the Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is

 

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derived in part from comparatively limited judicial precedents in the Cayman Islands as well as those from the 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 the Cayman Islands law are not as clearly established as they are under statutes or judicial precedents in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

In addition, most of our directors and officers are nationals and residents of countries other than the United States. Substantially all of our assets and a substantial portion of the assets of these persons are located outside the United States. The Cayman Islands courts are also unlikely:

 

   

to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and

 

   

to impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.

There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. As a result of all of these limitations, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, members of our board of directors or controlling shareholders than they would as shareholders of a public company incorporated and existing under the laws of a jurisdiction in the United States.

You may have difficulty enforcing judgments obtained against us.

As disclosed, we are a Cayman Islands company and substantially all of our assets are located outside the United States. Most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside the United States. In addition, substantially all of our current operations are conducted in China. As a result, it may be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors. It may also be difficult for you to effect service of process within the United States upon our directors or officers. Furthermore, there is uncertainty as to whether the courts of the Cayman Islands or China would recognize or enforce judgments of U.S. courts against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any of its states. It is also uncertain whether such Cayman Islands or PRC courts would be competent to hear original actions brought in the Cayman Islands or China against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any of its states.

 

ITEM 4. INFORMATION ON THE COMPANY

 

A. HISTORY AND DEVELOPMENT

Our legal and commercial name is LDK Solar Co., Ltd. We were incorporated in the Cayman Islands on May 1, 2006 by LDK New Energy, a British Virgin Islands company wholly owned by Mr. Xiaofeng Peng, our founder, chairman and chief executive officer, to acquire all of the equity interests in Jiangxi LDK Solar from Suzhou Liouxin Industry Co., Ltd., or Suzhou Liouxin, and Liouxin Industrial Limited. On July 10, 2006, upon approval of the relevant PRC government authorities, Jiangxi LDK Solar, a solar wafer manufacturer, became our wholly owned subsidiary. On September 5, 2006, we incorporated LDK Hong Kong in Hong Kong as our wholly owned subsidiary. On January 15, 2007, we incorporated LDK Solar USA, Inc., or LDK USA, in California as our wholly owned subsidiary. In June 2007, we completed the initial public offering, or IPO, of our ADSs and listed our ADSs on the New York Stock Exchange.

 

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Subsequent to our IPO, we established two wholly owned PRC subsidiaries, Jiangxi LDK Silicon and Jiangxi LDK Polysilicon, on July 12 and October 11, 2007, respectively, both in Jiangxi Province, China. In an effort to reorganize our polysilicon business, we incorporated LDK Silicon in the Cayman Islands on December 8, 2009 as our direct wholly owned subsidiary and the holding company for our polysilicon business, and LDK Silicon Hong Kong in Hong Kong on January 12, 2010 as a direct wholly owned subsidiary of LDK Silicon to hold our equity interests in Jiangxi LDK Silicon and Jiangxi LDK Polysilicon in China. On June 3, 2011, pursuant to a subscription agreement dated as of December 30, 2010, CDB Capital and investment funds affiliated with China Construction Bank Corporation and Bank of China Limited subscribed for 240 million LDK Silicon preferred shares, which represented, on an as-if-converted basis, approximately 18.46% of the aggregate issued and outstanding share capital of LDK Silicon on a fully diluted basis.

In March 2009, we incorporated LDK Solar Europe S.A., or LDK Europe, in Luxemburg as our wholly owned subsidiary to engage primarily in designing and developing solar farm projects in Europe. LDK Hong Kong owns a 100% interest in LDK Europe.

In August and September 2010, we incorporated LDK Xinyu, in Jiangxi Province, China and LDK Hefei, in Anhui Province, China respectively to engage in solar cell production.

In September 2008 and January 2010, we incorporated LDK Nanchang, in Jiangxi Province, China and LDK Suzhou, in Jiangsu Province, China repectively to engage in solar module production.

In March 2011, we acquired a 72% interest in SPI, a California-based solar power EPC company. SPI’s shares are listed and traded on the OTCBB market.

In April 2012, we acquired a 71% interest in Sunways, a German-based PV company with its shares listed on the Frankfurt Stock Exchange.

We are currently 53.27% beneficially owned by Mr. Peng without taking into account any securities that any shareholder has the right to acquire within 60 days after the date hereof through the exercise of any option, warrant or right. As a result, Mr. Peng maintains, as he has since our inception, effective control over our business and corporate matters that require shareholders’ approval.

Under our memorandum of association, the purpose of our company is unrestricted. Our principal executive offices are located at Hi-Tech Industrial Park, Xinyu City, Jiangxi Province 338032, People’s Republic of China, and our telephone number is (86 790) 686-0171. Our website is www.ldksolar.com . Information contained on our website is not a part of this annual report.

See “Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources —Capital Expenditures” for information on our capital expenditures.

 

B. BUSINESS OVERVIEW

We are a leading vertically integrated manufacturer of PV products. While our historical strength was in the solar wafer business, we have expanded our business to meet the PV industry’s requirements for high-quality and low-cost polysilicon, wafers, cells, modules, systems, power projects and solutions. While we continue to pursue further vertical integration at each step of our PV product value chain, our revenue also includes significant portions of sales of our solar wafers, modules and polysilicon.

Polysilicon. We commenced production and sale of polysilicon in the third quarter of 2009. As of March 31, 2012, our two polysilicon plants, Mahong Plant and Xiacun Plant, located near our wafer production facilities, had an aggregate installed annualized polysilicon production capacity of approximately 17,000 MT. We leverage a modified Siemens process as the basis for our polysilicon production, employ state-of-the-art production

 

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facilities at our polysilicon plants, and are able to produce polysilicon that meets the premium quality requirements of international PV and electronics industries. While all of the polysilicon we currently produce is solar-grade, our Mahong Plant is capable of producing electronic-grade polysilicon in accordance with international industry standards and practice, representing approximately 90% of our aggregate polysilicon production capacity. We intend to increase our total installed annualized polysilicon production capacity to 25,000 MT by the year-end of 2012 through the completion of our two plants, technological improvement, process refinement and equipment enhancement. As part of our strategy to reduce wafer production costs, we consume a significant portion of our polysilicon output in our wafer production. For each of the years ended December 31, 2009, 2010 and 2011, we produced approximately 225 MT, 5,052 MT and 10,455 MT of polysilicon, respectively, and consumed 100% and approximately 72.7% and 82.8%, respectively, of our total polysilicon production, with the rest sold to independent third-party customers.

Solar Wafers. We manufacture solar wafers in our wafer production facilities in Xinyu City Hi-Tech Industrial Park in Jiangxi Province, China. We produce and sell multicrystalline and monocrystalline solar wafers globally to manufacturers of solar cells and solar modules. We also provide wafer processing services, producing wafers for customers who provide polysilicon materials to us. As of March 31, 2012, we had an annualized solar wafer production capacity of approximately 4.3 GW. We plan to expand our annualized solar wafer production capacity to 4.5 GW by the year-end of 2012. As part of our vertical integration strategy to capture opportunities at each value chain in the PV business, we consume a major portion of our solar wafer output in our solar cell production starting from 2010. For each of the years ended December 31, 2010 and 2011, we produced approximately 2.50 GW and 2.23 GW of solar wafers, respectively, and consumed approximately 3.5% and 29.5%, respectively, of our total solar wafer production in our in-house production of solar cells, with the rest sold to independent third-party customers.

Solar Cells. We commenced solar cell production in the third quarter of 2010. We produce solar cells in our production facilities in Hefei City of Anhui Province, and in Xinyu City Hi-Tech Industrial Park in Jiangxi Province, China. As of March 31, 2012, we had an annualized solar cell production capacity of approximately 1.7 GW, and plan to expand our annualized solar cell production capacity to 2.2 GW by the year-end of 2012. For each of the years ended December 31, 2010 and 2011, we produced approximately 30.0 MW and 590.0 MW of solar cells, respectively. We have used all the solar cells we produce in our in-house production of solar modules, in addition to outsourcing a significant amount of our cell requirements from third party suppliers.

Solar Modules. We commenced solar module production in 2010 and commenced commercial sales of our solar modules to PV product developers, distributors and system integrators in the third quarter of 2009. We produce solar modules in our production facilities in Nanchang City of Jiangxi Province, Suzhou City of Jiangsu Province, Hefei City of Anhui Province, and Shenzhen City of Guangdong Province, China. As of March 31, 2012, we had an annualized solar module production capacity of approximately 1.7 GW, and plan to expand our annualized solar module production capacity to 2.6 GW by the year-end of 2012. Our modules have been certified in various European countries and the U.S. For each of the years ended December 31, 2010 and 2011, we produced approximately 540.0 MW and 840.0 MW of solar modules, respectively, and consumed approximately 4.0% and 9.0%, respectively, of our total solar module production in our solar farm projects, with the rest sold to independent third-party customers.

Solar Farm Projects. We design and develop solar farm projects in China, Europe and the U.S. and may enter additional markets. We develop solar farm projects both on our own and through jointly-controlled entities. We develop these projects with the intent to sell them to third parties upon completion of their development. We also provide EPC services for solar farm projects. We typically enter into a letter of intent to sell our solar farm project prior to, and contingent upon, the completion of such project. We have financed our solar farm projects with bank financings.

Our production facilities are primarily located in Xinyu City, Jiangxi Province, with our cell production facilities also in Hefei City, Anhui Province, and our module production facilities in Nanchang City, Jiangxi

 

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Province, Suzhou City, Jiangsu Province, Hefei City, Anhui Province, and Shenzhen City, Guangdong Province, China.

Our principal PV product customers, in terms of net sales for the year ended December 31, 2011, include Jiangxi Risun, Gintech, Shannxi Lu’an, Sumitomo and Solartech.

In the years ended December 31, 2009, 2010 and 2011, we had total net sales of $1,098.0 million, $2,509.3 million and $2,157.8 million, respectively. For the years ended December 31, 2009 and 2011, we recorded a net loss of $234.0 million and $609.0 million. For the year ended December 31, 2010, we had net income of $296.5 million.

Competitive Strengths

We believe that our growth and strong market position are largely attributable to our following principal competitive strengths:

 

   

Large-scale cost-effective production. We are one of the largest manufacturers of PV products in terms of capacity and production. We have established large-scale manufacturing facilities with an annual manufacturing capacity of approximately 17,000 MT for polysilicon, 4.3 GW for solar wafers, 1.7 GW for solar cells and 1.7 GW for solar modules as of March 31, 2012. Leveraging our scale and market position, we have been able to improve our cost structure by procuring raw materials and advanced production equipment on favorable terms. Our cost structure has further been enhanced by our vertically integrated business model, efficient production process, China-based manufacturing facilities and R&D, and the economies of scale of our operations. By producing all of our products in China, we have been able to benefit from low-cost labor, land, ancillary equipment and facilities, consumables and utilities.

 

   

High-level of vertical integration. We are a vertically integrated PV product manufacturer with production capabilities at each step of the supply chain from polysilicon to solar farm projects. While historically our strength was in the solar wafer business, we have expanded our business to meet the PV industry’s requirements for high-quality and low-cost solar materials, polysilicon, wafers, modules, systems, projects and solutions. We believe our vertically integrated model will help capture additional revenue opportunities and reduce negative pressure on the margins resulting from periodic volatility in the industry. Depending on market conditions, we have the flexibility to buy and sell PV products along the value chain to maximize our revenue and profit. In addition, with our in-house production capabilities, we can ensure stable feedstock at each supply chain, better quality control and shorter production turnaround. The expanded addressable market as a result of our vertical integration also contributes to the diversification of our customer base.

 

   

Leading PV product manufacturer with a strong brand. We are a leading producer of PV products globally in terms of capacity and/or production. Our continuous success, leading manufacturing scale and well-recognized product quality have enabled us to establish a strong brand name and reliable reputation in our industry. In addition, our modules have been certified in various European countries and the U.S., which allows us to sell modules under our own brand name and also on an OEM basis. The credibility of the LDK brand name has enabled us not only to expand our global footprint quickly, but also to cross-sell our products as we further pursue and optimize our vertical integration strategies.

 

   

Operational excellence with technological innovation. We have made significant investment in R&D and as a result significantly improved the efficiency of our overall operations. Specifically, we have developed technologies to reduce our production costs at each step of the production process, which include recycling more polysilicon, producing larger ingots, recovering more slurry, increasing production yield and more efficient usage of utilities and consumables. We have devoted and will continue to devote significant resources to developing innovative technologies that further enhance our product quality. We have also invested significant resources in developing newer wafer products that may lead to higher cell conversion efficiency and in designing more efficient solar modules.

 

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Diversified customer base. We have established a number of long-term relationships and sales arrangements with key players in the PV industry. Our current customer base consists of some of the major international players in the PV sector, including Gintech, Sumitomo, Solartech, MEMC, NEO solar and Hyundai. Our revenues are also diversified geographically around the world. During the year ended December 31, 2011, we sold our PV products to over 470 customers in 31 countries or regions.

Our Strategy

We intend to pursue the following strategies:

 

   

Continue to reduce our production costs. We have developed proprietary manufacturing processes to reduce our costs and increase our operational efficiency in our overall production processes. We plan to continue to devote substantial R&D resources and recruit additional experienced R&D personnel to enhance our technological capabilities in order to reduce manufacturing costs, improve production yield and pursue technological innovation. We are currently undertaking debottlenecking initiatives to convert more STC into TCS in an effort to lower our polysilicon production cost and boost our polysilicon production capacity. We are also in the process of implementing a number of cost-saving measures, including acquiring high-pressure steam from a co-located steam generation plant currently under construction and applying an advanced coating technology to lower the electricity consumption of our CVD reactors. We expect that these initiatives will significantly reduce our per-unit energy costs. We are committed to further reducing our per-unit cost and enhancing our cost leadership in the PV industry by further optimizing our vertical integration model and each of its value chains. In addition, we will strive to enhance our operational excellence, localize feedstock and consumable sources, and reduce energy consumption in order to become more cost competitive.

 

   

Develop and commercialize innovative technologies. We plan to continue to develop and commercialize innovative technologies. In collaboration with universities, research institutions and equipment manufacturers, we have developed various production process related know-how and technologies in-house. We currently have a number of on-going R&D programs with a view to developing techniques and processes that will improve our conversion efficiency and product quality or lower production cost. We have 31 issued patents, 10 patent right grant notices, which entitle us to receive issued patents upon satisfaction of certain registration procedures, and 138 patent applications pending globally, of which 130 were pending in China. We have implemented and intend to continue to implement these and other patents and patent applications to further improve our polysilicon production, silicon recycling, wafer production processes, solar cell structures, module designs and efficiency of our production equipment. We expect to continue to develop, procure and commercialize technologies that have significant potential applications and may provide significant competitive advantages to us.

 

   

Continue to enhance our vertical integration. We plan to continue to enhance our vertical integration to strengthen our competitive position globally. We currently produce polysilicon, solar wafers, cells and modules in-house, and procure additional solar cells from solar cell manufacturers. We also develop solar farm projects and provide related EPC services in Europe, the United States and China. In addition to building up weaker links in our solar value chain to enhance our polysilicon production capabilities, we are undertaking debottlenecking initiatives to increase the conversion capacity of our STC thermal converters and to construct hydrochlorination facilities to add onto our polysilicon production trains as an additional conversion mechanism with the goal to convert more STC into TCS as our total polysilicon production capacity and output increase. We are also constructing a new production line to produce high-efficiency solar cells as part of our expansion of our cell production. We believe that by being a vertically integrated PV company, we will be able to provide our customers with a range of services and products while at the same time giving us better control of the time to market, costs, supply and quality of the products we manufacture.

 

 

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Further expand our customer base and increase our brand recognition. We plan to further expand our customer base and increase our brand recognition by increasing our sales and marketing efforts in countries such as the U.S., China and various European countries. We intend to continue to increase our brand recognition by delivering high-quality PV products and services. Besides selling to third parties, we use significant amount of our intermediate products in our solar farm projects. We intend to continue to build out our solar farm project development teams in Europe, the United States and China, which will enable us to promote our branded PV products through the construction and sale of solar farm projects. We develop these projects with the intent to sell them to third parties upon completion of their development.

 

   

Enter adjacent growth markets to diversify product offerings. We intend to continue to consider suitable opportunities to enter into adjacent growth markets to expand our product offerings. For instance, we plan to take advantage of our large TCS production capacity and install add-on units at relatively low incremental costs to produce other high-value silicon-based materials. Through such efforts, we endeavor to optimize returns on our production assets and become able to offer other silicon-based materials for the solar and electronics industries. Our announced $35 million investment in manufacturing silane gas will have significant synergies with our polysilicon manufacturing expertise and will enhance our product offerings in the long term. Silane is a silicon gas produced by further refining TCS generated in our polysilicon production process, and a key input for the manufacture of integrated circuits, and thin-film transistor LCDs, in addition to solar cells. It can also be further processed to produce ultra-pure polysilicon. In addition, to the extent that we believe it is synergistic and favorable to our business and that our financial condition permits, we may also consider acquisitions of other PV operations. We believe that our relationships with many industry participants and our knowledge of, and experience in, the PV industry enables us to understand industry trends, technological developments and applications of PV technologies, which should assist us in considering these various alternatives.

Our Products and Services

We are a leading vertically integrated manufacturer of PV products. While our historical strength was in the solar wafer business, we have expanded our business to meet the PV industry’s requirements for high-quality and low-cost polysilicon, wafers, cells, modules, systems, power projects and solutions. While we continue to pursue further vertical integration at each step of our PV product value chain, our revenue also includes significant portions of sales of our solar wafers, modules and polysilicon. We also sell a number of ancillary products, including liquid chlorine and caustic soda.

The following table sets forth our installed annual production capacity as of December 31, 2011 and March 31, 2012 and our expected installed annual production capacity as of December 31, 2012.

 

          Installed Annual Capacity  

Product

  

Location

   December 31, 2011      March 31, 2012      December 31, 2012  

Polysilicon

   Mahong Plant, Xinyu City; Jiangxi Province      15,800 MT         15,800 MT         22,000 MT   
   Xiacun Plant, Xinyu City; Jiangxi Province      1,200 MT         1,200 MT         3,000 MT   

Wafer

   Xinyu City, Jiangxi Province      4.3 GW         4.3 GW         4.5 GW   

Cell

   Xinyu City, Jiangxi Province; Hefei City, Anhui Province      1.7 GW         1.7 GW         2.2 GW   

Module

   Nanchang City, Jiangxi Province; Suzhou City, Jiangsu Province; Hefei City, Anhui Province; Shenzhen City, Guangdong Province      1.7 GW         1.7 GW         2.6 GW   

 

 

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Polysilicon production

We commenced the construction of our polysilicon production facility in Xinyu City, Jiangxi Province, China in August 2007, and have since built two polysilicon plants, Xiacun Plant and Mahong Plant. We currently produce polysilicon for the PV industry that meets the needs of both monocrystalline and multicrystalline silicon-based PV applications. We produce polysilicon in rods, broken into chunks, which we use as feedstock in our solar wafer manufacturing or sell to other PV product manufacturers, who further process it into ingots, wafers, cells, and modules for PV applications. Our polysilicon is ready for use and requires no further finishing at our customers’ sites. In terms of purity, our polysilicon has, on average, nine Ns, meaning containing a silicon content of at least 99.9999999%.

We leverage a modified Siemens process as the basis for our polysilicon production, employ state-of-the-art production facilities at our polysilicon plants, and are able to produce polysilicon that meets the premium quality requirements of international PV and electronics industries. All of the polysilicon we currently produce is solar-grade. Based on tests we have conducted, our Mahong Plant is capable of producing electronic-grade polysilicon in accordance with international industry standards and practice, representing approximately 90% of our polysilicon production capacity as of December 31, 2011. The international industry standards and practice with regard to “electronic-grade” polysilicon focus on impurities levels and their composition as well as physical properties, rather than silicon purity alone. Our Mahong Plant is designed and equipped with state-of-the-art production facilities capable of producing electronic-grade polysilicon in terms of purity, but as our current focus is on solar-use polysilicon production, we have yet to create the requisite clean handling environment that would enable us to supply electronic-grade polysilicon to the electronics industry. We do not have any current plan to produce and supply electronic-grade polysilicon to the electronics industry unless we have a strong business case with favorable market conditions.

Xiacun Plant and Mahong Plant. Our Xiacun Plant was initially designed to comprise one production train, with an annualized 1,000-MT initial polysilicon production capacity. We commenced polysilicon production at our Xiacun Plant and made our first shipment of polysilicon in the third quarter of 2009. Our Mahong Plant was initially designed to comprise three production trains, each with an annualized 5,000-MT initial polysilicon production capacity. In September 2009, our Mahong Plant commenced operations with the completion of its first production train, which entered production in January 2010. The second train at our Mahong Plant was completed in July 2010 and entered production in October 2010, and the third train was mechanically completed in September 2011 and is expected to enter production in the second half of 2012 subject to market conditions. As of March 31, 2012, we had a total annualized installed polysilicon production capacity of approximately 17,000 MT. We intend to increase our total installed annualized polysilicon production capacity to 25,000 MT by the year-end of 2012 through the completion of our two plants, technological improvement, process refinement and equipment enhancement, such as our ongoing debottlenecking and hydrochlorination at both Mahong Plant and Xiacun Plant, and the addition of “Line B” at our Xiacun Plant. We have engaged Fluor Corporation and its affiliates to provide general engineering, procurement, construction and management services for our Mahong Plant. As part of our strategy to reduce wafer production costs, we consume a significant portion of our polysilicon output in our wafer production. For each of the years ended December 31, 2009, 2010 and 2011, we produced approximately 225 MT, 5,052 MT and 10,544 MT of polysilicon, respectively, and consumed 100% and approximately 72.7% and 82.8%, respectively, of our total polysilicon production, with the rest sold to independent third-party customers.

Debottlenecking. When a constraint in one procedure of our large polysilicon production facility restricts or limits the overall production flow, a “bottleneck” develops that lowers the capacity, or otherwise limits the functionality, of some other procedures or the entire manufacturing system. The removal of such constraints, or “debottlenecking,” becomes necessary to enhance the production capacity of the entire system. At present, the main bottleneck in our polysilicon production is STC-TCS conversion. Secondary bottlenecks include utilities such as our tank storage, nitrogen, hydrogen, demineralized water, cooling water, waste water treatment, and process venting/scrubbing systems. Through our ongoing debottlenecking initiatives, we intend to remove all such primary and secondary bottlenecks.

 

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In order for us to ramp up and increase our polysilicon production at or beyond our initial installed production capacity, our thermal converters are currently insufficient to recycle all of our STC into TCS and, therefore, we have to rely on external parties to off-take some excess STC and purchase additional TCS from external suppliers to support our production. A significant increase in recycling our STC into TCS will effectively remove this bottleneck in our polysilicon production and boost our production capacity to desired levels while obviating the need to dispose of excess STC and purchase additional TCS. We are implementing two concurrent measures to improve our STC-TCS conversion. First, we are undertaking improvements to our thermal converters to improve their conversion capacity. Second, we are constructing hydrochlorination facilities, at both Xiacun Plant and Mahong Plant, as an additional conversion mechanism. The hydrochlorination facility in the Xiacun Plant was put into operation in December 2011. We expect our hydrochlorination facilities in the Mahong Plant to complete their mechanical construction and enter operation in the first half of 2013.

Silane Gas Production. We announced in April 2011 our intention to invest $35 million to construct a silane gas production facility with an annualized initial production capacity of up to 2,000 MT of silane gas to meet the demand from the semiconductor, solar and flat panel display industries. We have completed the project design for the silane production, and have engaged Fluor Corporation and its affiliates to provide general engineering, procurement, construction and management services for this silane project. Due to market conditions, we have delayed the implementation of this silane gas manufacturing line, but intend to resume when market conditions permit.

Inner Mongolia Polysilicon Manufacturing Facility. In September 2011, we entered into a framework cooperation agreement with the Municipal Government of Hohhot, capital of Inner Mongolia Autonomous Region, China, with regard to the construction and development of a proposed polysilicon manufacturing facility in Jinsan Development Zone to produce high-purity polysilicon. As planned, the Hohhot facility will have two phases, each an annualized polysilicon production capacity of 30,000 MT. The framework cooperation agreement, except for certain confidentiality terms, is not legally binding, and only memorializes mutual understandings by both sides. Although we have completed basic engineering and design of the project, the commencement of the construction work is subject to final approvals from relevant NDRC and local government authorities.

Our Xiacun Plant occupies approximately 0.8 million square meters and is located in Yushui Xiacun Industrial Park in Xinyu City, approximately 15 kilometers away from our facilities at Xinyu Hi-Tech Industrial Park. Our Mahong Plant occupies a site area of approximately 2.3 million square meters and is located next to our primary facilities in the Xinyu Hi-Tech Industrial Park.

As of December 31, 2011, we had installed the following equipment in our polysilicon production plants:

 

   

67 CVD reactors;

 

   

32 STC thermal converters; and

 

   

other ancillary polysilicon production equipment.

 

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We leverage a modified Siemens process, a non-proprietary technology generally used in the polysilicon industry, as the basis for our polysilicon production process, which centers on closed-loop gas recycle and recovery systems. The following chart illustrates our closed-loop polysilicon production process:

LOGO

Our polysilicon production process starts with mixing HCl with a bed of metallurgical-grade silicon powder in a CVD reactor, which produces TCS. TCS is then purified through distillation to remove the main byproduct, STC, and other byproducts and impurities. Next, the purified TCS gas is fed into CVD reactors, or “Siemens reactors” as generally referred to in the industry, containing seed polysilicon rods, which are thin filaments made of high-purity silicon. In a hydrogen environment at high temperatures, TCS decomposes or disintegrates, and deposits or attaches additional silicon onto the seed polysilicon rods, therefore “growing” the rods. When the rods eventually grow to desired diameters, they are harvested from the CVD reactors and moved to a clean area for further processing. The grown-up rods are broken into chunks, with the carbon ends removed, and the ultra-pure polysilicon chunks sorted, packaged, and shipped to our wafer section or to our polysilicon customers.

Both the metallurgical-grade silicon chlorination and TCS decomposition reactions generate STC as a byproduct, which is fed back into the TCS production process for re-use as a production input, and hence recycled in what is known as a closed-loop process. The STC generated from both the metallurgical-grade silicon chlorination and the TCS decomposition is fed through STC thermal converters, where it undergoes a hydrogenation reaction with hydrogen, resulting in TCS and HCl. This TCS, mixed with unreacted STC, is further redirected back to the TCS distillation procedure as preparation for TCS decomposition through the closed loop. Over the years, in order for us to maintain production levels at or near our desired capacity, our thermal hydrogenation procedure is insufficient to convert more STC into TCS and, therefore, we have to rely on third parties to offtake some excess STC and purchase some additional TCS from external suppliers. As a part of our efforts to convert more STC into TCS, we are constructing hydrochlorination facilities, one put into operation in December 2011 and the other is scheduled to enter commercial operation in the first half of 2013, to run in parallel with our existing STC thermal converters. Hydrochlorination is an efficient STC-TCS conversion process, during which STC reacts with silicon and hydrogen, also resulting in TCS and HCl. The HCl created in

 

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the CVD reactors, the STC thermal converters, and the hydrochlorination procedure is also recycled and re-used in the metallurgical-grade silicon chlorination reaction. The closed-loop system enables a high degree of TCS, STC, HCl, and hydrogen utilization throughout the production process, thereby enhancing raw material conversion efficiency, reducing waste output, and lessening environmental impact.

Our planned production of silane will involve further processing of TCS. Some purified TCS will be redirected from the production loop to a chemical processing unit where the gas goes through a series of distillation steps that redistribute the gas molecules to eventually form silane. The removed molecules will at each step be recycled back to the closed loop.

System Control. Our entire polysilicon production process is controlled by an advanced computerized control system. All the pipes, valves, CVD reactors, STC thermal convertors, and other critical components are monitored by electronic sensors. Data from these sensors are transmitted to our polysilicon central control room in real time, rigorously monitored, analyzed, and acted upon by rotating shifts of our engineers 24 hours a day, seven days a week. As part of our standard procedure, our engineers adjust the level of production activities remotely. In the event a security incident arises, our engineers are able to shut down the various systems in the polysilicon production or discrete parts of the various systems remotely. Our advanced control system improves our polysilicon production capacity and safety while reducing staff-related operating expenses. Our polysilicon production process, including production, cleaning, packaging, and transportation, conforms with applicable international standards, and our comprehensive waste management system is compliant with environmental protection standards of China.

Cost-Saving Initiatives. In order to achieve economies of scale and reduce per-unit production cost in our polysilicon manufacturing business, we have significantly ramped up our polysilicon production, and have been implementing the debottlenecking initiatives to boost our production capacity to enable further production increases. In addition, we are developing and implementing a number of cost-saving initiatives to further lower our production cost.

 

   

First, we completed our switch from diesel to natural gas for our fuel needs in June 2011. We used a significant amount of diesel in our operations to power some of our production equipment, and this switch to natural gas should help us save such fuel costs. Due to our current technological and equipment set-up, we have retained the flexibility of switching back to diesel-powered systems in the event that there may be an economic case to do so in the future.

 

   

Second, we acquired high-pressure steam from a nearby co-located steam generation plant in Xinyu City. The use of steam in some of our production processes has further decreased our cost of energy.

 

   

We consume a significant amount of electricity in our polysilicon production operations, and a constant supply of electricity is critical to our ability to maintain optimal production conditions. Currently, our facilities are powered by the common industrial power grid. Since September 2007, we have been subsidized by the local PRC government in electricity usage. See “— Suppliers — Production Inputs.”

 

   

We are also applying an advanced coating technology to our CVD reactors as well as implementing certain process improvements to reduce our CVD reactors’ electricity consumption.

 

   

As we ramp up our operations, we are in the process of defining and implementing a set of continuous improvement measures to improve operational excellence and enhance operational reliability and thereby further reducing operating cost.

 

   

We are also closely monitoring the development of, and market for, the various polysilicon production equipment in China. To the extent locally made equipment meets our quality requirements with a substantial pricing advantage, we will also consider purchasing such locally made equipment to reduce our equipment cost without compromising our quality.

 

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Wafer production

We manufacture and sell solar wafers in our wafer production facilities in Xinyu City Hi-Tech Industrial Park in Jiangxi Province, China. We currently produce and sell solar wafers in three principal sizes of 125 by 125 mm, 150 by 150 mm and 156 by 156 mm, and with thicknesses from 180 to 220 microns. In addition to our multicrystalline wafer products, we also manufacture monocrystalline wafers. As of March 31, 2012, we had an annualized wafer production capacity of approximately 4.3 GW. By the end of 2012, we plan to expand our annualized solar wafer capacity to approximately 4.5 GW.

We also provide wafer processing services to both monocrystalline and multicrystalline solar cell and module manufacturers, who provide us with their own silicon materials, such as polysilicon feedstock and ingots. We process this feedstock to produce ingots. We then slice these ingots and the ingots provided by our customers into wafers to be delivered back to our customers. We charge a fee based on the number of wafers processed and the type of materials we receive. In addition, we also sell silicon materials, which include ingots and polysilicon scraps.

As part of our vertical integration strategy to capture opportunities at each value chain in the PV business, we consume a major portion of our solar wafer output in our solar cell production starting from 2010. For each of the years ended December 31, 2010 and 2011, we produced approximately 2.50 GW and 2.23 GW of solar wafers, respectively, and consumed approximately 3.5% and 29.5%, respectively, of our total solar wafer production in our in-house production of solar cells, with the rest sold to independent third-party customers.

We have also delayed the implementation of the $40 million LED sapphire wafer manufacturing facility in Nanchang City, Jiangxi Province, we announced in April 2011, but intend to resume once market conditions permit in order to capture the growth opportunities in the LED industry by supplying up to 2.0 million two-inch equivalent pieces of LED sapphire wafers on an annual basis.

Production of wafers can be divided into two main steps:

 

   

Production of Polysilicon Ingot. We prepare our polysilicon feedstock with de-ionized water in etching stations. The prepared polysilicon feedstock is then placed in crucibles and each crucible is loaded into our DSS furnaces for melting and crystallization. Polysilicon ingots formed during the crystallization process are then cut into smaller blocks with a squarer, in a process known as squaring. Our polysilicon ingots are currently 270 kilograms or 450 kilograms in weight and 690 by 690 mm or 840 by 840 mm in width and 243 mm in height. We have been engaged in R&D efforts in collaboration with GT Solar to increase the number of wafers that can be produced per standard ingot by approximately 15%. We successfully produced a multicrystalline silicon ingot weighing 660 kilograms in June 2009. The 660-kilogram ingot was the largest ingot we have produced and represented a 46.7% increase in capacity from the standard 450 kilogram ingot. The casting process for monocrystalline wafers is generally more expensive than that for multicrystalline wafers with similar dimensions. However, monocrystalline wafers are generally more efficient than multicrystalline wafers because the increased conductivity of electrons in monocrystalline silicon yields higher energy conversion rates than multicrystalline silicon.

 

   

Wafering. After inspection, the polysilicon blocks are cropped and prepared for slicing. Then the polysilicon blocks are sliced into wafers by wire saws. We then wash and dry the wafers at our wafer cleaning stations for final inspection, packaging and delivery.

 

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Illustrated below is a diagram of our multicrystalline and monocrystalline ingot production and wafering process:

 

LOGO

We manufacture multicrystalline and monocrystalline wafers and ingots at our facilities in Xinyu City, Jiangxi Province, China. Our wafer manufacturing facilities occupy a site area of approximately 3.1 million square meters in Xinyu Hi-Tech Industrial Park of the high-tech development zone of Xinyu City.

Our multicrystalline and monocrystalline wafer manufacturing operations are housed in four plants in the Xinyu Hi-Tech Industrial Park. As of December 31, 2011, we had the following multicrystalline and monocrystalline wafer manufacturing equipment in operation:

 

   

488 DSS furnaces used for multicrystalline ingot production;

 

   

256 sets of pullers used for monocrystalline ingot production;

 

   

87 squarers used to cut ingots into blocks;

 

   

318 wire saws used to slice blocks into wafers; and

 

   

other supplemental or ancillary facilities.

We have been improving our technologies and expertise to optimize the mix of polysilicon feedstock of different grades and to ensure and improve our wafer yields. We use wire saws rather than band saws in our squaring. This enables us to reduce silicon material loss in the squaring processes, or kerf loss. We use automatic wafer cleaning and sorting equipment to improve sorting efficiency and reduce breakage.

We recover some of the polysilicon slurry generated in the wafering, wafer cleaning and sorting process. We have also purchased slurry recovery systems from Applied Materials, Inc., or Applied Materials, and GT Solar to recover the slurry internally. As of December 31, 2011, we had installed three slurry recovery systems. The slurry recovery ratio of these systems is over 75% of slurry we generate. Through additional R&D, we endeavor to recycle and re-use as many of our production consumables as possible. This is not only a cost reduction measure, but also an important part of our program of conducting environmentally friendly operations.

Cell production

We commenced our solar cell production in the third quarter of 2010. We produce solar cells in our production facilities in Hefei City of Anhui Province, and in Xinyu City Hi-Tech Industrial Park in Jiangxi Province, China. Depending on the availability of our in-house supply, we may source a portion of our cell requirements from third parties. As of March 31, 2012, we had an annualized solar cell production capacity of approximately 1.7 GW, and plan to expand our annualized solar cell production capacity to 2.2 GW by the year-end of 2012. For each of the years ended December 31, 2010 and 2011, we produced approximately 30.0 MW and 590.0 MW of solar cells, respectively. We have used all the solar cells we produce in our in-house production of solar modules, in addition to outsourcing a significant amount of our cell requirements from third party suppliers. In 2010, we also completed an R&D line for high-efficiency solar cells.

 

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Module production

We commenced solar module production in 2010 and commenced commercial sales of our solar modules to PV product developers, distributors and system integrators in the third quarter of 2009. We produce solar modules in our production facilities in Nanchang City of Jiangxi Province, Suzhou City of Jiangsu Province, Hefei City of Anhui Province, and Shenzhen City of Guangdong Province, China. As of March 31, 2012, we had an annualized solar module production capacity of approximately 1.7 GW, and plan to expand our annualized solar module production capacity to 2.6 GW by the year-end of 2012. For each of the years ended December 31, 2010 and 2011, we produced approximately 540 MW and 840 MW of solar modules, respectively, and consumed approximately 4.0% and 9.0%, respectively, of our total solar module production in our solar farm projects, with the rest sold to independent third-party customers.

Our modules have been certified in various European countries and the U.S. We sell our modules under our own brand name and also on an OEM basis for our customers. Our solar module warranty period lasts for 20 to 25 years. As a result, we bear the risk of warranty claims long after we have sold our products and recognized revenues.

Solar farm project development and related EPC

We design and develop solar farm projects in China, Europe and the U.S. and may enter additional markets. We develop solar farm projects both on our own and through jointly-controlled entities. We develop these projects with the intent to sell them to third parties upon completion of their development. We also provide EPC services for solar farm projects. We develop solar farm projects and provide related EPC services in Europe through our subsidiary, Solar Green Technology S.p.A. We develop solar farm projects in the U.S. through our subsidiary, SPI, California-based solar power EPC company. We develop solar farm projects with the intent to sell them to third parties upon completion of their construction. We typically enter into a letter of intent to sell our solar farm project prior to, and contingent upon, the completion of such project. We have financed our solar farm projects with bank financings.

As of the date of this annual report, we have seven subsidiaries engaged in solar farm project in China and one jointly controlled entity and nine subsidiaries engaged in solar farm projects outside China, with seven established under the laws of Italy and two under the laws of the United States of America. We own an equity interest between 51% and 100% in these projects through our subsidiaries. We expect that these solar farm projects will be sold by the end of 2012 or within six months after their completion, while we establish additional similar project companies from time to time in these and other jurisdictions.

Quality Control

We adhere to a strict system of quality control over our operations, from the sourcing of raw materials to production and delivery. We have quality-control measures in place at each stage of our production process to closely monitor the quality of our production and to ensure that our products meet all our internal benchmarks and customers’ specifications. In addition, we have established a quality documentation system for all purchasing, production and sales units and implemented procedures for constant improvement and flaw prevention.

Our senior management team is actively involved in setting quality control policies and monitoring our quality control performance. However, it is impossible to avoid product defects. As we have disclosed in “Item 3. Key Information — D. Risk Factors — Risks Relating to Our Company and Our Industry — Product defects could result in increased costs, damage to our reputation and loss of revenues and market share” in this annual report, we encounter periodic sales returns in our ordinary course of business due to improper cleaning, non-conformity with customers’ specifications or product defects.

 

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As of December 31, 2011, we had a core quality management unit consisting of 2,651 persons overseeing our quality control processes, audits and engineering. In addition, this unit runs the testing procedures at the quality-control checkpoints during the production process of polysilicon, ingots, wafers, cells and modules.

We purchase raw materials from trusted suppliers on our approved vendor list whenever possible and only those suppliers that pass our assessment are admitted to our approved vendor list. Raw materials are inspected by our quality management unit. Raw materials which fail to pass our incoming inspection are returned to the suppliers. At each stage of the production process, we conduct tests to ensure quality and compliance with all our internal production benchmarks. Following completion of the production process, our products are inspected and tested thoroughly in the form of an output quality check to ensure that all customers’ specifications are met before our products are delivered to customers.

We are currently implementing an ISO9001 Quality Assurance system at our production facilities. Our quality assurance and quality control procedures, together with our corporate standards established for the quality checks exercised by our quality management unit, are compliant with ISO9001 requirements as well as our own internal quality guidelines. We obtained the ISO9001 Quality Assurance Certification in March 2010, which is effective through March 2013.

Customers, Sales and Marketing

Our principal customers include Jiangxi Risun, Gintech, Shanxi Lu’an, Sumitomo, Solartech and MEMC in terms of net sales for the year ended December 31, 2011. For the years ended December 31, 2009, 2010 and 2011, we derived approximately 25.0%, 34.2% and 38.6%, respectively, of our net sales from sales to PV customers in China and approximately 75.0%, 65.8% and 61.4%, respectively, from exports. During the years ended December 31, 2009, 2010 and 2011, our top five customers collectively accounted for approximately 45.5%, 30.6% and 20.3%, respectively, of our net sales. For the year ended December 31, 2009, Gintech, Q-Cells and Hyundai contributed 12.5%, 10.7% and 7.5%, respectively, of our net sales. For the year ended December 31, 2010, Q-Cells and MEMC contributed 8.5% and 7.2%, respectively, of our net sales. For the year ended December 31, 2011, Jiangxi Risun and Gintech contributed 5.5% and 4.5%, respectively, of our net sales. No other single customer contributed more than 10% of our net sales in 2009, 2010 or 2011. For a description of our net sales generated from the geographic regions of our customers, see “Item 5. Operating and Financial Review and Prospects — A. Operating Results — Net Sales” in this annual report. We intend to continue to enhance and broaden our revenue and customer base to target other leading global PV products manufacturers.

We have written agreements with most of our customers although our sales to some of our customers have been based on periodic purchase orders. Our customers generally make an advance payment representing a portion of the contract value to us. The global economic slowdown and crisis in the global financial markets in late 2008 and early 2009 caused a number of our customers to request us to delay our shipments of wafers and certain customers requested us to re-negotiate the contract price. As a result, during the second half of 2008 and in 2009, we amended and/or supplemented many of our long-term supply contracts with our customers. Substantially all of these contracts were entered into in 2007 and the first half of 2008 with delivery volumes and unit pricing that reflected the strong market conditions of the solar industry prior to the global economic slowdown and crisis in the global financial market. These amendments and supplements generally provide for postponement of deliveries, adjustment to pricing on a prospective basis by reference to the current market, adjustment to the ratio between supply of polysilicon feedstock and delivery of solar wafers, and changes from solar wafers to solar modules. Any significant 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.

Our net sales generated from the various geographic regions during the years ended December 31, 2009, 2010 and 2011 as a percentage of our net sales has experienced some significant changes. Based on the immediate destination of our goods shipped, our sales to China as a percentage of our total sales increased from

 

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25.0% in the year ended December 31, 2009 to 34.2% in the year ended December 31, 2010 and to 38.6% in the year ended December 31, 2011. Our net sales to Asia Pacific ex-China during the year ended December 31, 2010 decreased to 22.6% as compared to 50.3% during the year ended December 31, 2009 and slightly increased to 26.5% in the year ended December 31, 2011. Our net sales to Europe increased from 20.4% during the year ended December 31, 2009 to 35.6% during the year ended December 31, 2010 and decreased to 28.7% in the year ended December 31, 2011. Our net sales to North America increased from 4.3% during the year ended December 31, 2009 to 7.6% during the year ended December 31, 2010 and decreased to 6.2% in the year ended December 31, 2011.

Suppliers

Production Inputs

We use raw materials and consumables including metallurgical-grade silicon feedstock, TCS, virgin polysilicon, recyclable polysilicon, cells, consumables and other materials to produce our PV products, including polysilicon, wafers, cells and modules. The majority of our polysilicon feedstock consists of polysilicon scraps and recyclable polysilicon. Production inputs also include ancillary materials, fuel, electricity and other utilities.

Since 2009, we have been increasingly sourcing our virgin polysilicon feedstock from our in-house production. We commenced our polysilicon production in 2009. As we continue to ramp up our in-house polysilicon production capacity, we expect to rely increasingly on our in-house supply of polysilicon feedstock to meet our solar-grade silicon needs. See “— Our Products and Services — Polysilicon production.” We also source polysilicon feedstock from the spot market from time to time depending on the price and our requirements. Polysilicon is a raw material used to manufacture wafers.

For the years ended December 31, 2009, 2010 and 2011, polysilicon feedstock comprised approximately 54.7%, 50.4% and 49.2% of our wafer costs of goods sold (excluding inventory write-downs and loss on firm purchase commitments), respectively.

Our costs of other materials used to manufacture cells and modules have increased significantly in 2011 as we continue to ramp up our cell production as well as module production. We expect the costs of materials used to manufacture cells and modules to increase as we continue with our vertical integration strategy.

We have written agreements with our principal polysilicon feedstock suppliers. We have also entered into polysilicon raw material supply arrangements with our customers. In addition, we have sourced significant amounts of polysilicon feedstock from suppliers in the spot markets without any prior written agreements.

From time to time, we may have to make prepayments to our virgin polysilicon and other suppliers in order to secure a stable supply of our virgin polysilicon feedstock and other materials. We make these prepayments without receiving any collateral. As of December 31, 2011, our prepayments to suppliers amounted to $39.3 million, including prepayments made to virgin polysilicon suppliers.

To the extent our in-house cell production cannot meet the demand of our module production, we purchase the short-fall from third parties for use in our module production. For the year ended December 31, 2010 and 2011, cells purchased from third parties comprised approximately 79.4% and 49.2% of our module cost of goods sold, respectively, and 23.9% and 19.8% of our total cost of goods sold. We purchase cells from cell manufacturers including Helo Solar (HK) Co., Ltd, or Helo Solar, Solartech and Jiangxi Risun. As we ramp up our in-house cell production, we expect to rely less on third parties for our cell supplies.

We use consumables in our production including slurry, sawing wires, crucibles and other materials. We source most of our consumables from suppliers in China. In January 2008, we acquired 33.5% of Jiangxi Sinoma, a Xinyu-based crucibles manufacturer, in an effort to ensure supply of our needs for crucibles.

 

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Equipment

We source our key manufacturing equipment mostly from leading international manufacturers and some reputable domestic manufacturers. GT Solar has provided most of our DSS furnaces, CVD reactors and STC thermal converters. JYT Corporation has also provided some of our DSS furnaces. All of our DSS furnaces are equipped with safety kits that limit potential damage in the event of an accident. M.S.A. Apparatus Construction for Chemical Equipment Ltd. is also a supplier of some of our CVD reactors and STC thermal converters. JYT Corporation has provided all of our current monocrystalline pullers. Meyer Burger and Applied Materials have provided all of our squarers and wire saws. We have purchased our cell manufacturing equipment from Applied Materials and others. We also purchase ancillary equipment from these and other manufacturers.

We also closely monitor the development of the PV equipment manufacturing industry in China. To the extent such locally made equipment meets our quality requirements and also presents a significant pricing advantage to us, we will also selectively source our equipment locally.

Competition

The PV market is highly competitive and rapidly evolving. We may face increasing pressure on price reduction, reduced profit margin or loss of market share. Like us, during the past few years, other PV companies have also engaged in aggressive expansion programs. In addition, the number of new entrants in the PV market has also rapidly increased due to the growth of actual and forecasted demand for PV products.

As a vertically integrated manufacturer of PV products, we compete with other integrated solar companies as well as with manufacturers of polysilicon, solar wafers and modules, and developers of PV projects. We compete with players such as CSI, First Solar, GCL-Poly Energy Holdings Limited, Hemlock Semiconductor Group, JA Solar, M.SETEK, MEMC, OCI Company Ltd., REC, ReneSola, Suntech Power, Trina, Wacker Chemie, Yingli and DAQO New Energy Corp. In recent years, many technology companies, which have historically not manufactured solar products, have recently also been developing PV capabilities in-house. These players include AU Optronics, Samsung and TSMC. Some of our current and potential competitors may have a longer operating history, wider name recognition, greater resources, larger customer base, better access to low-cost raw materials and greater economies of scale than us.

We believe that the key competitive factors in the PV market include:

 

   

cost competitiveness and price;

 

   

product quality;

 

   

economies of scale;

 

   

advanced technology and manufacturing processes;

 

   

strong global distribution channels and customer relationships;

 

   

reputation for consistency and excellence; and

 

   

brand recognition.

Some companies have spent significant resources in the R&D of proprietary solar technologies that may eventually produce PV products at costs similar to, or lower than, those of our solar wafers without compromising product quality. For example, there are polysilicon producers that are developing silicon production technologies that may lead to significantly lower cost to produce solar polysilicon of similar purity and quality as ours. There are also manufacturers who are developing or currently producing PV products based on thin-film PV materials, which require significantly less polysilicon to produce than our solar products. These alternative PV products may cost less than those based on multicrystalline or monocrystalline technologies while achieving the same or better level of conversion efficiency. Our founder, chairman, chief executive officer and

 

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controlling shareholder, Mr. Peng, in his personal capacity, and his family members are engaged in certain alternative energy projects, including a project involving thin-film technology. In addition, Mr. Peng and his family may invest or otherwise participate in their personal capacity in other alternative energy projects, such as projects involving solar thermal, wind energy and biofuels. See “Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management.” We have decided not to enter into the thin-film module production business.

The solar industry in general also competes with other sources of renewable energy and conventional power generation.

Property

We both own and lease properties for our operations. When we state that we own certain properties in China, we own the relevant long-term land use rights. In China, with very few exceptions, industrial land is owned by the state.

Owned property

We own the land use rights related to our production facilities, including our polysilicon, wafer, cell and module production facilities, located in Xinyu City and Nanchang City, Jiangxi Province, Hefei City, Anhui Province, Suzhou City, Jiangsu Province, Shenzhen City, Guangdong Province, China. In 2011, we acquired additional land use rights for a total site area of 1,503,136 square meters located in Xinyu City, Suzhou City, Nanchang City and Hefei City for approximately $68 million. As of the date of this annual report, we own approximately 9,822,783 square meters for an original term of 50 years, renewable upon its expiration. We are currently in the process of acquiring land use rights with respect to a total site area of approximately 2,248,565 square meters.

As of the date of this annual report, we have obtained property ownership certificates relating to our plants in Xinyu City and Nanchang City, Jiangxi Province, Hefei City, Anhui Province, Suzhou City, Jiangsu Province, Shenzhen City, Guangdong Province, China with a gross floor area of approximately 1,673,930 square meters and we are in the process of acquiring property ownership certificates with a total a gross floor area of approximately 361,049 square meters. We occupy our owned properties for purposes of production, R&D and as our headquarters office and employee living quarters.

Although we have obtained land use rights certificates and property ownership certificates for properties underlying a majority of our production facilities, as of the date of this annual report, we are still in the process of acquiring the land use right certificates and property ownership certificates underlying certain of our polysilicon production facilities and wafer production facilities as disclosed above. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Our Company and Our Industry — Our operations in China are subject to various governmental approvals, registrations, and reviews, and our failure to obtain necessary approvals, maintain necessary registrations, or pass necessary reviews on a timely basis, or at all, could materially and adversely affect our business, results of operations and financial condition” in this annual report.

Leased property

We currently have leasehold interests in the following real estate properties as our offices in various jurisdictions:

 

   

209 square meters of office space in Shanghai leased from an independent third party, with its current lease term to expire in December 2013;

 

   

2,860 square feet of office space in Sunnyville, California, leased from an independent third party, with its current lease term to expire in November 2013; and

 

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1,617 square feet of office space in Hong Kong leased from an independent third party, with its current lease term to expire in January 2013.

We also currently have the following leasehold interests in real estate properties as our factories, offices and dormitories in two cities in China:

 

   

We currently lease an aggregate of 19,073 square meters of factory space and office space in Nanchang City, Jiangxi Province, from an independent third party. The lease related to the factory space expired in December 2011, and we are currently negotiating with the landlord for its renewal. As a result, we are tenant on a month-by-month basis until we renew the lease agreement. With regard to our office space, the lease related to 100 square meters will expire in September 2012; the lease related to 50 square meters will expire in March 2013; and the lease related to 500 square meters does not have a fixed term. As of the date of this annual report, we have yet to receive the relevant property ownership certificates from the leasing party for these factory and office properties.

 

   

We currently lease an aggregate of 76,856 square meters of factory space in Suzhou City, Jiangsu Province, from an independent third party. The lease expired in December 2011 and we are currently negotiating with the landlord for its renewal. As a result, we are tenant on a month-by-month basis until we renew the lease agreement.

 

   

We currently lease an aggregate of 13,500 square meters of factory, dormitory and office spaces in Shenzhen City, Guangdong Province, from an independent third party, with its current lease term to expire in February 2012. As of the date of this annual report, we have received from the leasing party the relevant usage certificates for the buildings leased to us, as confirmed by the relevant local government authorities, but have yet to receive the relevant property ownership certificates.

Insurance

We maintain property insurance coverage on our facilities, production equipment and inventory in stock, which amounted to approximately $2,894.8 million as of December 31, 2011. We do not have insurance coverage on other assets of ours, such as products in transit, interruption of business or product liabilities. We consider our insurance coverage to be adequate to cover all normal risks associated with our operations in accordance with industry standards and practices in China. We have purchased director and officer liability insurance for our directors and officers.

Production Safety and Environment

We maintain strong environmentally responsible standards across our company. We are committed to building and operating safe and environmentally friendly PV production facilities. We are in compliance with all applicable production safety and environmental protection laws and regulations in China, and our PV production processes conform to the relevant international standards. We emphasize production safety and endeavor to operate our manufacturing facilities in an environmentally responsible manner, and our comprehensive waste management system is compliant with national environmental protection standards.

Safety

Our plants, workstations and various facilities have been designed to maintain a safe working environment. We have engaged Fluor Corporation and its affiliates to provide general engineering, procurement, construction and management services for our Mahong Plant as well as the project design and the general engineering, procurement, construction and management services for our proposed silane production project. We have designated a health, safety and environmental, or HSE, department in each of our plants and facilities, and recently established a corporate HSE department that reports directly to our senior management. We have adopted a set of production safety procedures that we require our employees to follow and we provide related training to our employees. Our team leaders are regularly required to confirm production safety and our managers are accountable for any failure to observe our safety procedures. Incidents are reported according to PRC laws and regulations, and investigations are carried out to determine the root causes and to recommend improvements. To enforce our safety procedures, we have formulated an award and penalty system, awarding those who consistently follow safety procedures and penalizing those who fail to do so.

 

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We experience accidents from time to time at our plants and facilities, as we have disclosed in “Item 3. Key Information — D. Risk Factors — Risks Relating to Our Company and Our Industry — Unexpected equipment failures or accidents, including any accidental release of hazardous gases or materials, may lead to production curtailments or shutdowns, personal injuries, even deaths or damage to properties” in this annual report. We have not, however, encountered accidents in any fiscal year that, individually or collectively, have resulted in costs, damages, penalties or claims against us in excess of $100,000. We experienced an accident at our Xiacun Plant in July 2010, which resulted in serious bodily injuries to a few of our employees and third-party contractors and the shut-down of some of our facilities, due to the non-compliant handling of certain add-on equipment by a third-party contractor during the trial run of such add-on equipment being installed by the third-party contractor. This accident resulted in “very serious bodily injuries,” as described in the Xinyu City government investigation report, to one of our employees and one employee of the third-party contractor as well as a temporary shut-down of the unit with the add-on equipment. Xinyu Municipal Production Safety Supervisory and Administrative Bureau, the local production safety authority in Xinyu City, conducted a formal investigation and concluded that the third-party contractor was primarily responsible for the accident. The unit with the add-on equipment in question was ordered by the Xinyu City government authority to be temporarily shut down, although it resumed operations a month later in August 2010 with the approval of the same local government authority. Since the unit with the add-on equipment did not affect our main production systems, its temporary shut-down did not adversely affect our business operations in any material way. The employee of ours injured in the accident was insured against workplace injuries under our insurance policies, and such insurance has covered most of his medical expenses. We have so far incurred less than $9,000 in medical expenses and other payments in connection with this accident. The accident did not result in any material adverse impact on us or our operations, and we have not had any material liabilities arising from the accident. There have not been any legal proceedings against us as a result of this incident. Our management, however, has subsequently taken various remedial and precautionary measures in order to minimize the chance of occurrence of similar events in the future. The measures include reiterating the workplace safety guidelines in our employee’s manual and introducing additional safety-related best practices to heighten the safety awareness of our employees and to improve our workplace safety environment. We have also engaged an external advisory firm to perform procedures on our internal control over HSE affairs. As part of the ongoing internal control review process, we are in the process of further enhancing our internal controls. Specifically addressing this accident, we will extend oversight over certain procedures handled by contractors, including their equipment safety certification and installation application.

We require our employees who operate special equipment to undergo the necessary training before they are allowed to operate such equipment. We conduct regular mandatory maintenance on our equipment to ensure proper and safe working conditions.

Environment

We have undertaken various measures to reduce pollution and the impact of our manufacturing process on the environment. These measures include monitoring and controlling solid waste, waste water, exhaust fumes and noise. Our advanced closed-loop polysilicon production process also significantly reduces pollution. We believe that we are currently in compliance with all environmental laws and regulations applicable to our operations in China.

Solid waste. We send hazardous solid waste from our production process to licensed hazardous waste disposal companies for further handling, and send harmless solid waste to the common landfill in Xinyu City.

Waste water. We chemically treat the various types of waste water to harmless levels before discharging it to our dedicated sewage network. We currently have an on-site waste water treatment station with a 1,200-cubic-meter daily treatment capacity.

Exhaust fumes. We chemically treat the various types of exhaust fumes to harmless levels before discharging them into the atmosphere.

 

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Noise. We have installed various shock-absorption and sound-reduction devices to lower the noise impact of our production to the environment and neighborhood.

We currently have a team of 122 personnel who are experienced and trained in HSE matters and are in charge of formulating and implementing our HSE measures, of whom 62 hold “Licenses for Safety Management in Hazardous Chemical Enterprises” and 23 are “State-Certified Safety Engineers.” The PRC safety and environmental protection authorities regularly inspect our plants and facilities on both announced and unannounced bases, and we have not received any citations relating to HSE measures.

As a large growing enterprise, we have various projects under construction, with additional expansions planned from time to time. As we have disclosed in “Item 3. Key Information — D. Risk Factors — Risks Relating to Our Company and Our Industry — Compliance with environmental and safety regulations is expensive, and noncompliance may result in adverse publicity and potentially significant monetary damages and fines or suspension of our business operations” in this annual report, the various PRC governmental approval processes may not always be in sync with our construction and production schedules. We perform necessary application procedures and try to obtain the relevant approvals and/or registrations in line with the contemplated progress of the construction and production at each of our projects. Where the construction of a project is complete before we have received the relevant final permits for its full production, we would typically engage in trial productions in compliance with the relevant PRC laws and regulations. To date, there has not been any material adverse effect on our business or results of operations due to our handling of, or the timing in our receiving, the necessary approvals and permits for our current plants and facilities and for those under construction. But we cannot assure that we will always be able to obtain all of the governmental permits and acceptances, and complete all of the registrations and filings with the government, in time for all of our projects currently under construction or our future projects. Although we have not been subject to any penalty, or any threat of such penalty, from any PRC government agencies in this regard, as we have disclosed in the above-mentioned risk factor, it continues to present as a potential risk to us and our operations.

Regulatory Framework

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

Renewable energy law and government directives

In February 2005, China enacted its Renewable Energy Law, which became effective on January 1, 2006. The Renewable Energy Law sets forth national policies to encourage and support the development and use of solar energy and other non-fossil fuel renewable energy and their on-grid application. It authorizes the relevant government authorities to set favorable prices for the purchase of electricity generated by solar and other renewable power generation systems.

The law also encourages the installation and use of solar-powered water-heating systems, solar-powered heating and cooling systems and other solar energy utilization systems. It expressly contemplates and permits financial incentives, such as national funding, preferential loans and tax preferences for the development of renewable energy projects. In January 2006, NDRC promulgated two implementation directives with respect to the Renewable Energy Law. These directives set forth specific measures relating to pricing of electricity generated by solar and other renewal power generation systems and sharing by all utility end-users of certain costs incurred by solar and other renewable power generation systems. The directives further provide specific allocations of administrative and supervisory powers and responsibilities among various relevant government agencies at the national and provincial levels and stipulate relevant responsibilities among electricity grid companies and power generation companies with a view to the implementation of the Renewable Energy Law.

 

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The PRC Ministry of Housing and Urban-Rural Development, formerly the PRC Ministry of Construction, issued a directive in June 2005 to encourage the use of solar energy in residential and commercial buildings and the increased application of solar energy in townships in China. Because China is consuming more and more energy as its economy expands and the related industrial pollution is threatening the environment and livelihood of the nation, the PRC State Council promulgated a directive in July 2005 with specific measures to conserve energy resources.

In December 2006, NDRC issued a notice to announce the PRC government’s support of the development of renewable energy resources in China, including solar power. The government appropriated an aggregate of $330 million in equivalent Renminbi as a grant to support various renewable energy projects, including commercialization of wafer and ingot production at our company.

In September 2009, the PRC government issued the notice on curbing excessive capacity and redundant construction in industries in China. The government listed the polysilicon production capacity as excessive in China, and put forward guidelines relating to the capacity, land usage or power consumption for newly constructed polysilicon projects. The government also prohibit any lending by financial institutions or financing through capital markets by such new polysilicon projects without approval from the relevant governmental agencies including NDRC.

In December 2010, the Ministry of Industry and Information Technology, NDRC and the Ministry of Environmental Protection jointly issued a circular entitled the Conditions of Entry to Polysilicon Industry to curb excessive capacity and redundant construction in the PRC polysilicon industry. According to the circular, these PRC governmental agencies will, in principle, not approve any new polysilicon project until the PRC government has promulgated a new guideline for these types of investment projects, except for projects that have already been approved by the relevant central-government-level investment administration authorities. For existing polysilicon projects, the relevant enterprises must submit an application pursuant to the circular to the relevant provincial authorities responsible for industry and information technology for review. Any enterprise that fails to meet the requirements contained in the circular will be required to withdraw or terminate its polysilicon project. This circular also sets forth specific requirements, including those relating to capital, scale of production, energy consumption and environmental protection.

Environmental regulations

We are subject to a variety of governmental regulations related to the storage, use and disposal of hazardous materials. The major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution, the PRC Implementation Rules of the Law on the Prevention and Control of Water Pollution, the PRC Law on the Prevention and Control of Air Pollution, the PRC Law on the Prevention and Control of Solid Waste Pollution and the PRC Law on the Prevention and Control of Noise Pollution. We believe that we are in compliance with the relevant environmental regulations in all material aspects.

Restriction on foreign investments

The principal regulation governing foreign ownership of solar power businesses in China is the revised Foreign Investment Industrial Guidance Catalog, effective as of January 30, 2012 and subject to amendment and supplement by the government from time to time. Under this guidance currently in force, our solar cell production business and solar farm projects fall within the category of industries in which foreign investment is encouraged.

Tax

The PRC enterprise income tax is calculated based on the taxable income determined under the PRC tax laws and regulations. In accordance with the PRC Income Tax Law for Enterprises with Foreign Investment and

 

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Foreign Enterprises and the related implementation rules effective prior to January 1, 2008, foreign-invested enterprises incorporated in China, such as Jiangxi LDK Solar, Jiangxi LDK Silicon and Jiangxi LDK Polysilicon, were generally subject to a national enterprise income tax at the rate of 30% on their taxable income and a local enterprise income tax at the rate of 3% on their taxable income. This foreign invested enterprise income tax law and its implementation rules provided certain favorable tax treatments to foreign-invested enterprises such as a two-year exemption from the national enterprise income tax from their first profitable year and a 50% reduction of their applicable national enterprise income tax rate for the subsequent three years for manufacturing enterprises with operating terms of more than 10 years. Pursuant to then PRC tax laws relating to foreign-invested enterprises, local preferential enterprise income tax treatment was within the jurisdiction of the applicable local provincial authorities. For example, the Jiangxi Provincial government specified that energy companies that were established for operations in the province for more than 10 years, such as Jiangxi LDK Solar, Jiangxi LDK Silicon and Jiangxi LDK Polysilicon, were eligible for a five-year exemption from the 3% local enterprise income tax from their first profitable year, and a 50% reduction of their local enterprise income tax rate for the succeeding five years.

Since January 1, 2008, the EIT Law became effective. This new tax law imposes a unified income tax rate of 25% on all domestic enterprises and foreign-invested enterprises unless they qualify for preferential tax treatments under certain limited exceptions. The EIT Law and the related regulations permit companies to continue to enjoy their preferential tax treatments under the prior tax regime until such treatments expire in accordance with their terms, on the condition that such preferential tax treatments are available under the grandfather clauses of the EIT Law and the related regulations.

In December 2009, Jiangxi LDK Solar was recognized by the PRC government as an HNTE under the EIT Law and is entitled to the preferential enterprise income tax rate at 15% from 2009 to 2011. Subject to renewal, Jiangxi LDK Solar’s HNTE status will enable it to enjoy the preferencencial income tax rate of 15% from 2012 to 2014. Based on our self-assessment result, our management believes that Jiangxi LDK Solar meets all the criteria for the renewal of its HNTE status. In September 2011, Jiangxi LDK Silicon was recognized by the PRC government as an HNTE and is entitled to the preferential income tax rate of 15% from 2011 to 2013. Based on our prevailing business plan, our management expects Jiangxi LDK Silicon will continue to meet all the critieria for HNTE qualification upon renewal of such status which will enable it to enjoy the preferential income tax rate of 15% from 2014 to 2016.

Pursuant to the PRC Provisional Regulation on the Value Added Tax, or VAT, and its implementation rules, any entity or individual engaged in the sale of goods, provision of specified services and importation of goods in China is generally required to pay VAT at the rate of 17.0% of the gross sales proceeds, less any creditable VAT already paid or borne by such entity or individual. When an entity exports goods from China, the exporter may be entitled to a refund of a portion or all of the VAT paid by the entity. Our imported raw materials used for manufacturing PV products subject to export, to the extent they are placed in government-sanctioned bonded warehouses, are exempt from import VAT.

Pursuant to the EIT Law and its implementation regulations, since January 1, 2008, dividend payments relating to earnings derived since January 1, 2008 to foreign investors made by foreign-invested enterprises, such as our PRC subsidiaries, Jiangxi LDK Solar, Jiangxi LDK Silicon and Jiangxi LDK Polysilicon, are subject to a 10% withholding tax unless any such foreign investor’s jurisdiction of incorporation has a tax treaty or agreement with China that provides for a different withholding arrangement. The Cayman Islands, where we are incorporated, does not have such a tax treaty or agreement with China. In addition, under the EIT Law, enterprises established under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at the rate of 25% as to their worldwide income. Under the implementation regulations issued by the State Council relating to the EIT Law, “de facto management body” is defined as the body that has material and overall management control over the business, personnel, accounts and properties of an enterprise. In April 2009, the PRC State Administration of Taxation promulgated a circular to clarify the definition of “de facto

 

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management body” for enterprises incorporated overseas with controlling shareholders being PRC enterprises. Therefore, it remains unclear how the tax authorities will, in practice, treat an overseas enterprise invested or controlled by another overseas enterprise and ultimately controlled by PRC individual residents as is in our case. We are currently not treated as a PRC resident enterprise by the relevant PRC tax authorities. Since substantially all of our management is currently based in China and may remain in China in the future, we may be treated as a “PRC resident enterprise” for the PRC tax purposes and subject to PRC enterprise income tax at the rate of 25% as to our worldwide income.

Foreign currency exchange

See “Item 10. Additional Information — D. Exchange Controls” in this annual report.

Dividend distribution

The principal regulations governing distribution of dividends by foreign-invested enterprises in China, such as our PRC subsidiaries, include:

 

   

Company Law of 1993, as amended;

 

   

Wholly Foreign-invested Enterprise Law of 1986, as amended;

 

   

Wholly Foreign-invested Enterprise Law Implementation Rules of 1990, as amended;

 

   

Equity Joint Venture Enterprise Law of 1979, as amended; and

 

   

Equity Joint Venture Enterprise Law Implementation Rules of 1983, as amended.

Under the current regulatory regime in China, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with the PRC accounting standards and regulations. After making up for any deficit in prior years pursuant to the PRC laws, a wholly foreign-owned enterprise in China, such as Jiangxi LDK Solar, Jiangxi LDK Silicon and Jiangxi LDK Polysilicon, is required to set aside at least 10% of its after-tax profit calculated in accordance with the PRC accounting standards and regulations each year as its statutory general reserves until the cumulative amount of such reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. A wholly foreign-owned enterprise is also required to allocate a certain percentage of its after-tax profit calculated in accordance with the PRC accounting standards and regulations each year as its employee welfare and bonus fund, and its board of directors has the discretion to determine the percentage of the after-tax profits for such employee welfare and bonus fund, which is likewise not distributable to its equity owners except in the event of a liquidation. A sino-foreign joint venture enterprise, such as LDK Solar Hi-Tech (Nanchang) Co., Ltd., is required to set aside a certain percentage of its after-tax profit calculated in accordance with the PRC accounting standards and regulations each year for its statutory general reserves, employee welfare and bonus fund and enterprise development fund in accordance with the requirements of relevant PRC laws and its articles of associations. The board of directors of a sino-foreign joint venture enterprise has the discretion to determine the respective percentages of its after-tax profits for its statutory general reserves, employee welfare and bonus fund and enterprise development fund, which are not distributable to its equity owners except in the event of a liquidation.

Regulation of overseas investments and listings

SAFE issued a public notice in October 2005 to require all PRC residents, including both legal persons and natural persons, to register with the relevant local SAFE authorities before establishing or gaining control over any company outside China, referred to in such SAFE notice as an “offshore special purpose company,” for the purpose of acquiring any assets of or equity interest in PRC companies and raising funds from overseas. In addition, any PRC resident that is already a shareholder of an offshore special purpose company is required to amend its SAFE registration with the local SAFE authorities with respect to that offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity or

 

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debt investment or creation of any security interest. If any PRC shareholder of any offshore special purpose company fails to make the required SAFE registration or its amendment, the PRC subsidiaries of that offshore special purpose company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the offshore special purpose company. Moreover, failure to comply with such SAFE registration and amendment requirements could result in liabilities under PRC laws for evasion of applicable foreign exchange restrictions.

NDRC promulgated a rule in October 2004, which requires all China-incorporated entities to seek approval from the NDRC authorities for any overseas investment. This NDRC rule also applies to overseas investments by PRC individuals as well.

In August 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, China Securities Regulatory Commission, or CSRC, and SAFE, jointly adopted the Regulation on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A rule. This M&A rule includes provisions that purport to require special purpose companies formed for purposes of overseas listing of equity interest in PRC companies and controlled directly or indirectly by PRC companies or individuals to obtain the approval from CSRC prior to the listing and trading of their securities on any overseas stock exchange. Pursuant to the related procedures CSRC published on its official website in September 2006, CSRC requires the filing of a number of documents and it could take several months to complete the approval process. The application of the M&A rule with respect to overseas listings of special purpose companies remains unclear with no consensus currently among leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement.

Our PRC counsel, Grandall Law Firm (Shanghai), has advised us that, based on their understanding of the current PRC laws, rules and regulations, including the M&A rule and the CSRC approval procedures announced in September 2006:

 

   

CSRC has not issued any definitive rule or interpretation requiring offerings like our IPO to be subject to such procedures; and

 

   

In spite of the above, because we completed our restructuring and established an overseas holding structure before the M&A rule came into effect, neither the M&A rule nor the CSRC approval procedures require an application to be submitted to CSRC for the approval of the listing and trading of our ADSs on the New York Stock Exchange unless we are clearly required to do so by possible later rules of CSRC.

 

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C. ORGANIZATIONAL STRUCTURE

The following chart sets forth our simplified corporate structure as of the date of this annual report:

 

LOGO

  

 

(1) Joint venture, partnership or company established for holding our solar farm projects.
(2) LQ energy GmbH is a jointly controlled entity incorporated under the laws of Germany.

 

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In the ordinary course of our solar farm project development, we have established, and may continue to establish, from time to time, jointly controlled entities, project partnerships or subsidiary companies for the purpose of developing and selling these projects. As of the date of this annual report, we have one jointly controlled entity and sixteen subsidiaries established under the laws of jurisdictions within China and outside China, including Italy, Germany and the United States. We intend to sell these projects by disposing of our interests in these joint ventures, partnerships or subsidiary companies to third parties.

Currently, we are 53.27% beneficially owned by Mr. Peng, without taking into account any securities that any shareholder or option holder has the right to acquire within 60 days after the date of this annual report through the exercise of any option, warrant or right. Mr. Peng maintains effective control over our business and corporate matters that require shareholders’ approval.

 

D. PROPERTY, PLANTS AND EQUIPMENT

For information regarding our material property, plant and equipment, see “— B. Business Overview — Suppliers — Equipment” and “— Property” in this annual report.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A. OPERATING RESULTS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Item 3. Key Information — A. Selected Financial and Operating Data” and our audited consolidated financial statements included in this annual report beginning on page F-1. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information — D. Risk Factors” and elsewhere in this annual report.

Overview

We are a leading vertically integrated manufacturer of PV products. While our historical strength was in the solar wafer business, we have expanded our business to meet the PV industry’s requirements for high-quality and low-cost polysilicon, wafers, cells, modules, systems, power projects and solutions. While we continue to pursue further vertical integration at each step of our PV product value chain, our revenue also includes significant portions of sales of our solar wafers, modules and polysilicon.

Polysilicon. We commenced production and sale of polysilicon in the third quarter of 2009. As of March 31, 2012, our two polysilicon plants, Mahong Plant and Xiacun Plant, located near our wafer production facilities, had an aggregate installed annualized polysilicon production capacity of approximately 17,000 MT. We leverage a modified Siemens process as the basis for our polysilicon production, employ state-of-the-art production facilities at our polysilicon plants, and are able to produce polysilicon that meets the premium quality requirements of international PV and electronics industries. While all of the polysilicon we currently produce is solar-grade, our Mahong Plant is capable of producing electronic-grade polysilicon in accordance with international industry standards and practice, representing approximately 90% of our aggregate polysilicon production capacity. We intend to increase our total installed annualized polysilicon production capacity to 25,000 MT by the year-end of 2012 through the completion of our two plants, technological improvement, process refinement and equipment enhancement. As part of our strategy to reduce wafer production costs, we consume a significant portion of our polysilicon output in our wafer production. For each of the years ended December 31, 2009, 2010 and 2011, we produced approximately 225 MT, 5,052 MT and 10,455 MT of polysilicon, respectively, and consumed 100% and approximately 72.7% and 82.8%, respectively, of our total

 

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polysilicon production, with the rest sold to independent third-party customers. We have delayed the implementation of the $35 million silane gas manufacturing line we announced in April 2011, but intend to resume once market conditions permit in order to supply up to 2,000 MT of silane gas per year to meet the demand from the semiconductor, solar and flat panel display industries.

Solar Wafers. We manufacture solar wafers in our wafer production facilities in Xinyu City Hi-Tech Industrial Park in Jiangxi Province, China. We produce and sell multicrystalline and monocrystalline solar wafers globally to manufacturers of solar cells and solar modules. We also provide wafer processing services, producing wafers for customers who provide polysilicon materials to us. As of March 31, 2012, we had an annualized solar wafer production capacity of approximately 4.3 GW. We plan to expand our annualized solar wafer production capacity to 4.5 GW by the year-end of 2012. As part of our vertical integration strategy to capture opportunities at each value chain in the PV business, we consume a major portion of our solar wafer output in our solar cell production starting from 2010. For each of the years ended December 31, 2010 and 2011, we produced approximately 2.50 GW and 2.23 GW of solar wafers, respectively, and consumed approximately 3.5% and 29.5%, respectively, of our total solar wafer production in our in-house production of solar cells, with the rest sold to independent third-party customers. We have also delayed the implementation of the $40 million LED sapphire wafer manufacturing facility in Nanchang City, Jiangxi Province, we announced in April 2011, but intend to resume once market conditions permit in order to capture the growth opportunities in the LED industry by supplying up to 2.0 million two-inch equivalent pieces of LED sapphire wafers on an annual basis.

Solar Cells. We commenced solar cell production in the third quarter of 2010. We produce solar cells in our production facilities in Hefei City of Anhui Province, and in Xinyu City Hi-Tech Industrial Park in Jiangxi Province, China. As of March 31, 2012, we had an annualized solar cell production capacity of approximately 1.7 GW, and plan to expand our annualized solar cell production capacity to 2.2 GW by the year-end of 2012. For each of the years ended December 31, 2010 and 2011, we produced approximately 30 MW and 590 MW of solar cells, respectively. We have used all the solar cells we produce in our in-house production of solar modules, in addition to outsourcing a significant amount of our cell requirements from third party suppliers.

Solar Modules. We commenced solar module production in 2010 and commenced commercial sales of our solar modules to PV product developers, distributors and system integrators in the third quarter of 2009. We produce solar modules in our production facilities in Nanchang City of Jiangxi Province, Suzhou City of Jiangsu Province, Hefei City of Anhui Province, and Shenzhen City of Guangdong Province, China. As of March 31, 2012, we had an annualized solar module production capacity of approximately 1.7 GW, and plan to expand our annualized solar module production capacity to 2.6 GW by the year-end of 2012. Our modules have been certified in various European countries and the U.S. For each of the years ended December 31, 2010 and 2011, we produced approximately 540 MW and 840 MW of solar modules, respectively, and consumed approximately 4.0% and 9.0%, respectively, of our total solar module production in our solar farm projects, with the rest sold to independent third-party customers.

Solar Farm Projects. We design and develop solar farm projects in China, Europe and the U.S. and may enter additional markets. We develop solar farm projects both on our own and through jointly-controlled entities. We develop these projects with the intent to sell them to third parties upon completion of their development. We also provide EPC services for solar farm projects. We typically enter into a letter of intent to sell our solar farm project prior to, and contingent upon, the completion of such project. We have financed our solar farm projects with bank financings.

Our production facilities are primarily located in Xinyu City, Jiangxi Province, with our cell production facilities also in Hefei City, Anhui Province, and our module production facilities in Nanchang City, Jiangxi Province, Suzhou City, Jiangsu Province, Hefei City, Anhui Province, and Shenzhen City, Guangdong Province, China.

Our principal PV product customers, in terms of net sales for the year ended December 31, 2011, include Jiangxi Risun, Gintech, Shannxi Lu’an, Sumitomo and Solartech.

 

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In the years ended December 31, 2009, 2010 and 2011, we had total net sales of $1,098.0 million, $2,509.3 million and $2,157.8 million, respectively. For the years ended December 31, 2009 and 2011, we recorded a net loss of $234.0 million and $609.0 million. For the year ended December 31, 2010, we had net income of $296.5 million.

Key Factors Affecting Our Results of Operations

The following are key factors that affect our financial condition and results of operations. They are important for understanding our business:

 

   

demand for our PV products, including government incentives to promote the usage of solar energy;

 

   

the pricing of our PV products;

 

   

mix of our PV products;

 

   

our manufacturing and raw material costs; and

 

   

our production capacity and its utilization.

Demand for our PV products

Our business and revenue growth are, in part, a function of the demand for PV products. The PV market remains at a relatively early stage of development and it is uncertain whether solar energy will be widely adopted. Demand for PV products has grown significantly over the past decade, although the global solar power industry experienced a decline in demand in the fourth quarter of 2008 and first quarter of 2009 due to the reduced availability of financing for downstream buyers as a result of the global financial crisis and the rapid slide in petroleum and natural gas prices, which rendered solar energy less cost competitive and less attractive as an alternative source of energy. Demand for our PV products rebounded from the second quarter of 2009 as the global economy gradually recovered. Many of our customers who experienced financing and/or operational difficulties during the global economic slowdown have regained access to credit and resumed performance of their contracts with us that were temporarily suspended or delayed in the fourth quarter of 2008 and first quarter of 2009. Although the demand for our PV products increased in 2010, the solar market has deteriorated starting from the second half of 2011 and there are still significant uncertainties for the sustainability of the growth in the PV market under the current macroeconomic environment, which could lead to fluctuations in the demand for our products.

Demand for PV products is driven, in part, by government incentives that make the economic cost of solar power competitive compared to that of traditional forms of electricity generation. To the extent that government incentives decrease, demand for our solar wafers and modules and our sales and profits may be harmed. Historically, certain European countries, including Spain, Germany and Italy, have represented an important market for PV products due to government incentives for the PV market. However, many of these countries, including Spain, Germany and Italy, have reduced, and are expected to further reduce, such government incentives. Reductions in government incentives, especially those in our target overseas markets, could cause demand for our products and our revenues to decline, and have a material adverse effect on our business, financial condition, results of operations and prospects.

Certain recent developments have adversely affected our results of operations in 2012 to date:

 

   

continual decline in the average selling price across the chain of PV products;

 

   

seasonal slowdown in our business due to the Chinese New Year holiday;

 

   

global PV manufacturing capacity potentially exceeding global demand; and

 

   

international trade related investigations and proceedings and anti-dumping and/or countervailing tariff imposed by the U.S. and other jurisdictions.

There can be no assurance regarding the magnitude or length of time of the effects on our financial results caused by the developments described above.

 

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Pricing of our PV products

PV products, including polysilicon, wafers, cells and modules, systems and solutions are priced based on a variety of factors, including our costs, global PV market prices, supply and demand conditions, and the terms of our customer contracts. We price our PV products on a per-piece and per-watt basis. Prices for PV products that we price on a per-watt basis have fluctuated significantly. While sale prices for PV products are immediately affected by market prices, the costs of our PV products typically do not adjust with the same immediacy, therefore any sudden drop in PV products sale prices will inevitably affect our gross margin. While PV prices increased throughout most of 2010 and into early 2011, prices for most PV products along the value chain have recently declined due to reductions in government incentives in certain major PV markets and capacity expansion of PV players. We expect PV prices to decline further. If PV products prices decline and we are unable to lower our costs in line with the price decline, whether through more cost-effective manufacturing of feedstock, larger ingots or thinner wafers, or through technological advances, our profitability and financial condition would be adversely affected.

Mix of our PV products

As a vertically integrated manufacturer of PV products, we sell polysilicon, wafer, module and PV projects to the market. While polysilicon cost represents a significant portion of our wafer manufacturing costs and we intend to leverage our in-house polysilicon supply to further optimize our wafer cost structure, we have and may continue to sell polysilicon directly to third-party customers to the extent commercially sensible rather than consuming all of it in-house. We also offer wafer and module processing services to our customers who provide us with polysilicon and cells, respectively. We do not sell cells to third-party customers, and we have been increasing the sales of modules to third-party customers. With our expansion into solar farm projects, our revenues and margins will also be affected since we can only recognize revenues from projects once the project is sold or when certain criteria have been met. We also offer related EPC services which carry significantly lower gross margins compared to our historical performance. As the product mix changes, our revenues, gross margins and operating margins may change. If module sales gain a larger portion of our total sales, our margins are expected to decline.

Our manufacturing and raw material costs

Our cost of goods sold consists primarily of the costs of polysilicon feedstock, consumables, materials for cells, modules and projects, other manufacturing costs, and depreciation. Historically, polysilicon costs represented the majority of our overall cost of goods sold. For the years ended December 31, 2009, 2010 and 2011, our costs of polysilicon feedstock consumed for our wafer production accounted for approximately 54.7%, 50.4% and 49.2%, respectively, of our wafer cost of goods sold (excluding inventory write-downs and loss on firm purchase commitments). With the completed construction and the gradual ramp-up of our polysilicon production plants, we have implemented measures to reduce our manufacturing costs in polysilicon production. We also procure external cells for our production of solar modules which contributed to a significant portion of our costs of goods sold. From the first quarter of 2012 onwards, external cell procurement costs should decline as we continue to ramp up our solar cell plants. Furthermore, cell processing and module processing costs have increased as a percentage of our costs of goods sold, and as we increase the vertical integration of our PV product value chain, we expect cell processing and module processing costs to increase. Although we have significantly reduced our manufacturing costs, there still exists much for us to improve. We have made continuous endeavors to reduce our manufacturing costs, through increased production scale, improved production yield, using automatic sorting equipment to reduce wafer breakage, and more skilled manufacturing personnel following their initial learning curve. Effective cost-reduction measures in our polysilicon, wafers, cells and modules production have become critical to our financial condition and results of operations. If we fail to continue to reduce our manufacturing costs, our profitability and competitiveness will be adversely affected.

 

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Our production capacity and its utilization

Demand for our PV products has been fluctuating following a gradual recovery from the global economic slowdown and turmoil in the global financial markets in the second half of 2008 and early 2009. The market has again been adversely affected by the European financial crisis in 2011. To capitalize on the periodic growing demand for our products, we continued to expand our installed annualized polysilicon production capacity from 11,000 MT as of December 31, 2010 to 17,000 MT by March 31, 2012. We also expanded our annualized production capacity of solar wafers from 3.0 GW as of December 31, 2010 to 4.3 GW as of March 31, 2012. In addition, we expanded our solar cell business from 1.5 GW as of December 31, 2010 to 1.7 GW in annualized production capacity as of March 31, 2012 and our module business from 0.2 GW as of December 31, 2010 to 1.7 GW in annualized production capacity as of March 31, 2012. We will continue to monitor market demand to determine the timing for any further expansion.

If we fail or encounter significant impediments in our efforts to match our production capacity with market demand for our products, or if the global economic conditions experience another downturn and we fail to successfully utilize our manufacturing capacity, we will either be unable to increase our sales and profits and capture additional market share, or unable to generate revenue, profit and cash flow from our substantial capital expenditures and be faced with excessive production capacities, and our financial condition and results of operations will be adversely affected.

Net Sales

We derive revenues primarily from the sale of PV products, including wafers and modules. We sell our wafers to cell and module producers, and we sell our modules to developers, distributors and system integrators. We also provide processing services to customers who supply silicon materials and/or multicrystalline or monocrystalline ingots to us for processing into wafers. In addition, we sell polysilicon and silicon materials, which include ingots as well as silicon scraps. For the years ended December 31, 2009, 2010 and 2011, approximately 86.1%, 60.7% and 47.8%, respectively, of our net sales were generated from sales of wafers. Sales of modules accounted for 5.4%, 25.3% and 33.4% respectively, of our net sales during the year ended December 31, 2009, 2010 and 2011. Sales from processing services and silicon materials accounted for 7.3% and 0.7%, respectively, of our net sales during the year ended December 31, 2009, 8.2% and 3.2%, respectively, of our net sales during the year ended December 31, 2010 and 1.3% and 11.1%, respectively, of our net sales during the year ended December 31, 2011. We expect that sales of solar wafers will continue to account for a significant portion of our net sales for the foreseeable future while sales of modules will become a significant component of our net sales as we gradually expand our module manufacturing sales. We also expect our solar farm projects and related EPC business to increase as a proportion of our net sales as we continue to develop our solar farm projects.

During the years ended December 31, 2009, 2010 and 2011, our net sales by product were as follows:

 

     Year Ended December 31,  
     2009     2010     2011  

Product

   Net Sales      % of Total     Net Sales      % of Total     Net Sales      % of Total  
     (In millions)            (In millions)            (In millions)         

Wafers

   $ 945.0         86.1    $ 1,522.9         60.7    $ 1,031.3         47.8

Modules

     58.9         5.4        634.4         25.3        720.9         33.4   

Processing of PV products on behalf of others

     80.6         7.3        204.9         8.2        27.6         1.3   

Silicon and other materials

     8.0         0.7        79.1         3.2        239.9         11.1   

Others

     5.5         0.5        68.0         2.6        138.1         6.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total net sales

   $ 1,098.0         100.0    $ 2,509.3         100.0    $ 2,157.8         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Our net sales are affected by our unit sales volume, average selling prices and product mix. We currently make most of our sales to customers through non-exclusive, short-term purchase order arrangements. Increased sales on a long-term contract rather than spot market basis are likely to lead to a reduction in average selling prices. We have entered into long-term sales arrangements with some of our major customers, including Photovoltech, NEO, Moser Baer, Sumitomo, Mitsubishi and Solartech Energy. Pursuant to these arrangements we have committed to supply each of them with specific quantities of wafers over the next few years, with some subject to periodic negotiations on prices. For the years ended December 31, 2009, 2010 and 2011, our top five customers accounted for 45.5%, 30.6% and 20.3%, respectively, of our net sales, Gintech, Q-Cells and Hyundai contributing 12.5%, 10.7% and 7.5%, respectively, of our net sales for the year ended December 31, 2009, Q-Cells and MEMC contributing approximately 8.5% and 7.2%, respectively, of our net sales for the year ended December 31, 2010, and Jiangxi Risun and Gintech contributing approximately 5.5% and 4.5%, respectively, of our net sales for the year ended December 31, 2011.

We currently have four geographic markets where our customers are located:

 

   

Europe;

 

   

China;

 

   

Asia Pacific ex-China; and

 

   

North America.

During the years ended December 31, 2009, 2010 and 2011, our net sales generated from these geographic regions were as follows:

 

     Year Ended December 31,  
     2009     2010     2011  

Geographic

Region

   Net Sales      % of Total     Net Sales      % of Total     Net Sales      % of Total  
     (In thousands)            (In thousands)            (In thousands)         

Europe

   $ 223,835         20.4    $ 892,803         35.6    $ 619,531         28.7 

China

     274,019         25.0        858,988         34.2        833,387         38.6   

Asia Pacific ex-China

     552,610         50.3        566,172         22.6        571,325         26.5   

North America

     47,574         4.3        191,384         7.6        133,570         6.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net sales

   $ 1,098,038         100.0    $ 2,509,347         100.0    $ 2,157,813         100.0 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

We determine the geographical market of our net sales based on the immediate destination of our goods shipped. We will periodically adjust our geographic market classification on the basis of our sales as our management determines from time to time to be appropriate in reflecting our operations.

Cost of Goods Sold

Our cost of goods sold consists primarily of:

 

   

feedstock for manufacturing polysilicon, including metallurgical-grade silicon feedstock and chemicals;

 

   

polysilicon feedstock, including solar-grade virgin polysilicon, polysilicon ingots, polysilicon powder, scraps, recyclable polysilicon and various feedstock for polysilicon production (with the costs determined using the weighted average method);

 

   

materials for manufacturing wafers, including slurry, crucibles, sawing wires, packaging materials and other auxiliary materials;

 

   

materials for manufacturing cells and modules;

 

   

cells purchased from third parties;

 

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materials for solar farm projects;

 

   

depreciation and amortization of property, plant, equipment and technical know-how;

 

   

factory overhead, including maintenance of production equipment and other support expenses associated with the manufacturing of our solar wafers, modules and ingots;

 

   

utilities, net of government subsidies;

 

   

direct labor, including salaries and benefits of personnel directly involved in manufacturing activities;

 

   

share-based compensation attributable to our manufacturing personnel;

 

   

provisions for inventory write-downs due to product defects or decline in market prices for our inventories;

 

   

provisions for losses on firm purchase commitments; and

 

   

warranty expenses related to our solar module business.

During the years ended December 31, 2009, 2010 and 2011, our cost of goods sold by product/service was as follows:

 

     Year Ended December 31,  
     2009     2010     2011  

Product

   Cost of
Goods Sold
     % of
Total
    Cost of
Goods Sold
     % of
Total
    Cost of
Goods Sold
     % of
Total
 
     (In millions)            (In millions)            (In millions)         

Wafers

   $ 1,089.7         89.9    $ 1,118.6         57.3    $ 983.2         44.8 

Modules

     52.1         4.3        586.8         30.1        885.9         40.3   

Processing of PV products on behalf of others

     62.2         5.2        133.5         6.8        21.7         1.0   

Silicon and other materials

     3.5         0.3        59.0         3.0        209.2         9.5   

Others

     4.1         0.3        53.6         2.8        97.5         4.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total cost of goods sold

   $ 1,211.6         100.0    $ 1,951.5         100.0    $ 2,197.5         100.0 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Our total cost of goods sold is expected to increase as we increase our production volume. Depreciation and amortization of property, plant and equipment will also constitute a significant part of our cost of goods sold.

Operating Expenses

Our operating expenses include selling expenses, general and administrative expenses, and R&D expenses. Our operating expenses have increased substantially as we have expanded our wafer and module operations and ramped up our polysilicon production during the relevant periods.

Selling expenses

Selling expenses consist primarily of salaries and benefits for sales personnel, including share-based compensation attributable to our sales personnel, transportation costs and marketing expenses. Our selling expenses have increased as we endeavored to increase our sales and marketing efforts, hire additional sales personnel and establish overseas sales and support offices to enhance the effectiveness of our direct marketing.

We expect our selling expenses to increase substantially in the near future as we hire additional sales personnel, devote more resources toward sales and marketing of our modules.

General and administrative expenses

General and administrative expenses consist primarily of salaries, bonuses and benefits for our administrative and management personnel, consulting and professional service fees, insurance premiums, travel

 

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and related costs of our administrative and management personnel, and costs of maintaining our information technology systems. General and administrative expenses also include the share-based compensation attributable to our directors, administrative and management personnel and service providers and in 2009, 2010 and 2011, included provisions for doubtful recoveries of accounts receivable and prepayments to our suppliers. Our general and administrative expenses are expected to increase along with our wafer, module and cell production expansion and polysilicon production ramp-up as well as the continued upgrade of our information technology infrastructure.

Research and development expenses

R&D expenses primarily relate to raw materials used in our R&D activities, R&D personnel costs, and other costs related to the design, development, testing and enhancement of our products and processes. R&D expenses also include the share-based compensation attributable to our R&D personnel. Our R&D expenses also include costs incurred in connection with our joint R&D programs with Shanghai Jiaotong University and Nanchang University. We expense R&D costs as incurred.

We expect our R&D expenses to increase substantially in the near future as we hire additional R&D personnel, devote more resources toward improving our manufacturing processes and optimizing our polysilicon use in the production of our PV products and as we continue to research new innovations and technologies in PV production.

Share-based Compensation Expenses

For the years ended December 31, 2009, 2010 and 2011, we recorded share-based compensation expenses of approximately $14,212,000, $11,044,000 and $9,927,000, respectively. We allocated these share-based compensation expenses for the years ended December 31, 2009, 2010 and 2011 as follows:

 

   

approximately $3,381,000 and $2,783,000 and $1,881,000, respectively, to our cost of goods sold;

 

   

approximately $32,000, $57,000 and $126,000, respectively, to our selling expenses;

 

   

approximately $10,478,000, $7,717,000 and $7,260,000, respectively, to our general and administrative expenses; and

 

   

approximately $321,000, $487,000 and $660,000, respectively, to our R&D expenses.

We made the above allocations on the basis of the job functions of grantees to whom we granted the stock options. As of December 31, 2009, 2010 and 2011, there was unrecognized compensation cost in the aggregate of $10.6 million, $37.8 million and $29.6 million, respectively, relating to non-vested stock options. We expect to recognize this stock option compensation cost over the remaining vesting period of the related options. We will incur additional share-based compensation expenses in 2012 and future periods due to amortization of the unrecognized cost as of December 31, 2011 as well as any additional stock option grants after December 31, 2011.

Other Income and Expenses

Our other income and expenses consist mainly of interest income, interest expense, foreign currency exchange gain/(loss), change in fair value of prepaid forward contracts, equity in income of an associate and government subsidies.

Interest income or expense

Our interest income represents interests on our cash balances.

 

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Our interest expense consists primarily of interest expenses with respect to our short-term and long-term borrowings from banks, and interest and amortization of issuance costs of our 2013 convertible notes, less interest expenses capitalized to the extent they relate to our capital expenditures. Our interest income and expense also include our gain or loss on interest rate swap contracts. We have not entered into any interest rate swap contract since the beginning of 2009.

Foreign currency exchange gain/(loss), net

Our foreign currency exchange gain/(loss), net, is derived from our net exchange gains and losses on our monetary assets and liabilities denominated in foreign currencies as well as our foreign exchange forward contracts during the relevant period.

Government subsidy

Government subsidy represents grants and payments by the PRC government to support the PV industry and our R&D efforts. Some of the government subsidies are calculated on the basis of our tax payments, including income tax, if any, value-added tax and stamp duty tax.

Government subsidy to compensate our R&D expenses is recorded as a reduction of R&D expenses. Government subsidy to compensate our electricity costs or production costs is recorded as a reduction of cost of goods sold. Government subsidy not associated with expenses incurred or to be incurred is recognized as income. Subsidies for the acquisition of equipment are recorded as a liability until earned and then offset against the related capital assets. Subsidies for obtaining the rights to use land are recorded as a liability until earned and then amortized over the land use right periods as a reduction of the amortization charges of the related land use rights.

Taxation and Incentives

Under the current laws of the Cayman Islands, we are not subject to any income or capital gains tax. Additionally, dividend payments made by us are not subject to any withholding tax in the Cayman Islands.

Under the PRC tax laws and regulations effective prior to January 1, 2008, a company established in China was typically subject to a national enterprise income tax at the rate of 30% on its taxable income and a local enterprise income tax at the rate of 3% on its taxable income. The PRC government provided various incentives to foreign-invested enterprises to encourage foreign investments. Such incentives included reduced tax rates and other measures. Foreign-invested enterprises that were determined by PRC tax authorities to be manufacturing enterprises with authorized terms of operation for more than ten years were eligible for:

 

   

a two-year exemption from the national enterprise income tax from their first profitable year; and

 

   

a 50% reduction of their applicable national enterprise income tax rate for the succeeding three years.

The local preferential enterprise income tax treatment was within the jurisdiction of the local provincial authorities as permitted under the prior PRC tax laws relating to foreign-invested enterprises. The local tax authorities would decide whether to grant any tax preferential treatment to foreign-invested enterprises on the basis of their local conditions. The Jiangxi provincial government announced that energy companies, including our subsidiary, Jiangxi LDK Solar, with authorized terms of operation for more than ten years were eligible for:

 

   

a five-year exemption from the 3% local enterprise income tax from their first profitable year; and

 

   

a 50% reduction of their local enterprise income tax rate for the succeeding five years.

2006 was the first profitable year of Jiangxi LDK Solar. As a foreign-invested manufacturing enterprise, it was entitled to full exemption from the national and local enterprise income taxes for 2006 and 2007. Due to

 

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these preferential tax treatments, no income tax was incurred by Jiangxi LDK Solar for the years ended December 31, 2006 and 2007. You may find additional information in “Item 3. Key Information — D. Risk Factors — Risks Relating to Business Operations in China — Expiration of, or changes to, current PRC tax incentives that our business enjoys could have a material adverse effect on our results of operations” in this annual report. In March 2007, the PRC National People’s Congress enacted the EIT Law, which became effective on January 1, 2008. The new tax law imposes a unified income tax rate of 25% on all domestic enterprises and foreign-invested enterprises unless they qualify for preferential tax treatments under certain limited exceptions. The new tax law and the related regulations permit companies to continue to enjoy their preferential tax treatments under the prior tax regime until such treatments expire in accordance with their terms, on the condition that such preferential tax treatments are available under the grandfather clauses of the new tax law and the related regulations.

In December 2009, Jiangxi LDK Solar was recognized by the PRC government as an HNTE under the EIT Law and is entitled to the preferential enterprise income tax rate at 15% from 2009 to 2011. As a result, Jiangxi LDK Solar will be subject to income tax at 15% for 2011. Subject to renewal, the HNTE status of Jiangxi LDK Solar will enable it to enjoy the preferencencial income tax rate of 15% from 2012 to 2014. Based on our self-assessment result, we believe that Jiangxi LDK Solar meets all the criteria for the renewal of its HNTE status. In September 2011, Jiangxi LDK Silicon was recognized by the PRC government as an HNTE and is entitled to the preferential income tax rate of 15% from 2011 to 2013. Based on our prevailing business plan, our management expects Jiangxi LDK Silicon will continue to meet all the critieria for HNTE qualification upon renewal of such status which will enable it to enjoy the preferential income tax rate of 15% from 2014 to 2016.

Under the PRC Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises, the total income tax rate applicable to Jiangxi LDK Polysilicon in 2007 was 33%. Effective from January 1, 2008, Jiangxi LDK Polysilicon and our other PRC subsidiaries are subject to the unified income tax rate of 25% pursuant to the EIT Law.

Under the former PRC tax law, dividend payments to foreign investors made by foreign-invested enterprises such as our PRC subsidiaries, Jiangxi LDK Solar, Jiangxi LDK Silicon and Jiangxi LDK Polysilicon, were exempt from PRC withholding tax. Pursuant to the new tax laws and regulations, however, dividends payable for earnings derived since January 1, 2008 by a foreign-invested enterprise to its foreign investors are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty or agreement with China that provides for a different withholding arrangement. The Cayman Islands, where we are incorporated, does not have such a tax treaty or agreement with China. In addition, under the EIT Law, enterprises established under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at the rate of 25% as to their worldwide income. Under the implementation regulations issued by the State Council relating to the new tax law, “de facto management body” is defined as the body that has material and overall management control over the business, personnel, accounts and properties of an enterprise. In April 2009, the PRC State Administration of Taxation promulgated a circular to clarify the definition of “de facto management body” for enterprises incorporated overseas with controlling shareholders being PRC enterprises. Therefore, it remains unclear how the tax authorities will treat an overseas enterprise invested or controlled by another overseas enterprise and ultimately controlled by PRC individual residents as is in our case. We are currently not treated as a PRC resident enterprise by the relevant tax authorities. Since substantially all of our management is currently based in China and may remain in China in the future, we may be considered a “resident enterprise” for the PRC tax purposes, in which case, we will be subject to the uniform 25% enterprise income tax as to our global income.

We recognize deferred income tax assets and liabilities for temporary differences between financial statement and income tax bases of assets and liabilities. Valuation allowances are provided against the carrying amount of our deferred income tax assets on our financial statements when our management cannot conclude that it is more likely than not that some portion or all of the deferred income tax assets will be realized.

 

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Critical Accounting Policies

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

 

   

the reported amounts of our assets and liabilities;

 

   

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

 

   

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

We continually evaluate these estimates based on our own experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application. When reading our consolidated financial statements, you should consider:

 

   

our selection of critical accounting policies;

 

   

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

 

   

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

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

Depreciation and amortization

Our long-lived assets include property, plant and equipment, and intangible assets relating to technical know-how. We amortize our long-lived assets using the straight-line method over the estimated useful lives of the assets, taking into account the assets’ estimated residual values. We estimate the useful lives and residual values at the time we acquire the assets based on our management’s knowledge of the useful lives of similar assets and replacement costs of similar assets having been used for the same useful lives respectively in the market, and taking into account anticipated technological or other changes. On this basis, we have estimated the useful lives of our buildings to be 30 years, our plants and machinery to be 10 years, our furniture and office equipment to be five years and our motor vehicles to be six years. For intangible assets of technical know-how that we acquire from equipment manufacturers in connection with the operation of our acquired production equipment, we amortize them over their estimated useful lives of 10 years. We review the estimated useful life and residual value for each of our long-lived assets on a regular basis. If technological changes are to occur more rapidly than anticipated, we may shorten the useful lives or lower the residual value assigned to these assets, which will result in the recognition of increased depreciation and amortization expense in future periods.

Impairment of long-lived assets

We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable, such as change of business plan, obsolescence, and continuous loss suffered. We assess recoverability of assets by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. In determining estimates of future cash flows, we have to exercise significant judgment in terms of projection of future cash flows and assumptions including average selling prices, shipments and gross profit margin. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds its fair value. We estimate the fair value of an asset based on the best information available, including prices for similar assets and, in the absence of observable market prices, the result of using a present value technique to estimate the fair value of the asset. We recognized an impairment loss of $2.0 million for the year ended December 31, 2009.

 

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Realization of inventory

Our inventories are stated at the lower of cost or market. Market value does not exceed the net realizable value of the inventory, which is the estimated selling price of our inventory in the ordinary course of business, less reasonably predicable costs of completion and disposal. We routinely evaluate the net realizable value of our inventories in light of market conditions and recognize inventory write-downs when considered necessary. The evaluation takes into consideration a number of factors including historical and forecasted consumption of our raw materials, our sales contracts for finished goods on hand, marketability of our inventories, anticipated change in market selling price, risk of obsolescence of our inventories due to change in technology or change in physical properties over time and other factors. Also, the price of polysilicon materials is subject to fluctuation based on global supply and demand, which may have an impact on our ability to recover our inventories costs. Furthermore, when our finished goods products contain defects, either caused by our production or delivery process, as confirmed by our quality control department, our management will decide whether to sell the products at a discounted price or recycle the wafers back to our furnaces as raw materials, the decision of which will impact the amount of inventory write-down required. During the years ended December 31, 2009, 2010 and 2011, total inventory write-downs were $180.2 million, $6.1 million and $305.2 million, respectively. A majority of our total inventory write-down during 2009 and 2011 was to adjust the carrying value of certain inventories to estimated net realizable values to take into account the rapid market selling price decline for solar wafers. Such write-downs negatively impacted our gross profit and income from operations. No significant inventory write-down was made in 2010 with the stabilization of selling price for solar wafers. There have been no significant recoveries in inventories beyond amounts that were previously written down.

Firm purchase commitments

Until the third quarter of 2008, an industry-wide shortage of high purity polysilicon coupled with a growing demand for PV modules caused the increases of polysilicon prices. In order to ensure the adequate supply of polysilicon, we entered into several fixed price supply contracts under which the polysilicon feedstock would be supplied to us from 2009 to 2016. However, since 2009, the polysilicon price has decreased significantly as a result of increased polysilicon manufacturing capacity and the pressure from the decreasing average selling price of PV products. As a result, we recognized provisions for loss or firm purchase commitments of $1.1 million, nil and $27.6 million under these fixed price polysilicon contracts for the year ended December 31, 2009, 2010 and 2011, respectively. The provision was determined by applying the lower of cost or market, a methodology similar to that used with respect to inventory. Given the uncertainty of future polysilicon prices, this loss may or may not be recovered and further losses on the outstanding purchase commitments may be recorded in future periods.

Provision for doubtful recoveries on prepayment to suppliers

We make short-term and long-term prepayments to our raw materials suppliers from time to time in order to secure stable supply of polysilicon feedstock. Consistent with industry practices, we make such prepayments without any collateral. We continuously make assessments on the creditworthiness of these suppliers, primarily based on their historical track records to honor their contractual commitments to us. If there is any indication that the creditworthiness of a supplier is deteriorating, as evidenced by the supplier’s failure to deliver to us the ordered polysilicon feedstock and repay our advances in accordance with the terms of our contract, we will assess and determine the amount of provision for doubtful recoveries required on the prepayments we made with reference to any available internal and external information in respect of financial condition of that supplier. Based on such assessment, we made provision for doubtful recoveries totaling $17.9 million during the year ended December 31, 2009, $4.7 million during the year ended December 31, 2010 and $70.5 million during the year ended December 31, 2011 against the prepayments we made to certain suppliers.

 

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Share-based compensation

We adopted our 2006 stock incentive plan on July 31, 2006 and have outstanding options granted to certain of our officers, directors and employees and certain service providers to purchase an aggregate of 10,348,468 shares as of the date of this annual report. For a description of our stock options granted, including the exercise prices and vesting periods, see “Item 6. Directors, Senior Management and Employees — E. Share Ownership — 2006 Stock Incentive Plan” in this annual report. We recognize share-based compensation as compensation expense in our statement of operations based on the fair value of equity awards on the date of the grant, with the compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. A fair value-based method is used for measuring the compensation expense related to share-based compensation. Our stock option compensation charges may change based on changes in our actual forfeitures. We record compensation expense for the fair value of the options at the grant date. We then amortize share-based compensation expenses over the vesting periods of the related options. The fair value of the shares underlying the options we have granted subsequent to our IPO has been based on the closing price of our ADSs listed on the New York Stock Exchange for the trading day prior to the respective grant dates.

Recently Issued Accounting Standards

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under International Financial Reporting Standards, or IFRS. The new standards are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. We will implement the provisions of ASU 2011-11 for reporting periods starting January 1, 2013 and do not expect the adoption of ASU 2011-11 will result in any material impact on our consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under ASU 2011-05, an entity will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. ASU 2011-05 eliminates the option in U.S. GAAP to present other comprehensive income in the statement of changes in equity. An entity should apply ASU 2011-05 retrospectively. Early adoption is permitted. In December 2011, the FASB decided to defer the effective date of those changes in ASU 2011-05 that relate only to the presentation of reclassification adjustments in the statement of income by issuing ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update 2011-05. We plan to implement the provisions of ASU 2011-05 by presenting a single statement of other comprehensive income following the statement of income in 2012. In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The new standards do not extend the use of fair value but, rather, provide guidance about how fair value should be applied where it already is required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS. We expect that the adoption of ASU 2011-04 in 2012 will not have a material impact on our consolidated financial statements.

 

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Segments Operations

For the years ended December 31, 2009 and 2010, we operated in a single business segment that was the design, development and manufacture of PV products. In June 2011, we sold a minority stake in our upstream polysilicon business. Since then, we have two reportable operating segments:

 

   

Polysilicon segment, which involves the production and sales of polysilicon; and

 

   

Other PV products segment, which involves the manufacture and sales of monocrystalline and multicrystalline solar wafers and PV modules and processing services, manufacture and sales of PV cells and the development of power plant projects.

The two segments are evaluated regularly by our chief executive officer to decide how to allocate resources and to assess performance. We do no allocate operating expenses by segment. See “— Results of Operations” for a discussion of period-to-period comparison among the segments.

Results of Operations

We were incorporated in the Cayman Islands and all of our principal operating subsidiaries were incorporated and operate their businesses in China.

 

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

 

     Year Ended December 31,  
     2010     2011  
     (In thousands)     (% of Net Sales)     (In thousands)     (% of Net Sales)  

Net sales:

        

Wafers

   $ 1,522,925        60.7   $ 1,031,259        47.8

Modules

     634,387        25.3        720,863        33.4   

Processing of PV products on behalf of others

     204,915        8.2        27,589        1.3   

Silicon and other materials

     79,089        3.2        239,897        11.1   

Others

     68,031        2.6        138,205        6.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     2,509,347        100        2,157,813        100.0   

Cost of goods sold:

        

Wafers

     (1,118,605     (44.6     (983,163     (45.6

Modules

     (586,755     (23.4     (885,884     (41.1

Processing of PV products on behalf of others

     (133,513     (5.3     (21,654     (1.0

Silicon and other materials

     (59,028     (2.4     (209,159     (9.7

Others

     (53,611     (2.1     (97,614     (4.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs of goods sold

     (1,951,512     (77.8     (2,197,474     (101.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     557,835        22.2        (39,661     (1.8

Selling expenses

     (21,734     (0.9     (43,192     (2.0

General and administrative expenses

     (90,380     (3.6     (330,883     (15.3

Research and development expenses

     (10,804     (0.4     (46,510     (2.2

Impairment loss for property, plant and equipment

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (122,918     (4.9     (420,585     (19.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     434,917        17.3        (460,246     (21.3

Other income (expenses):

        

Interest income

     4,632        0.2        7,365        0.3   

Interest expense and amortization of debt issuance costs and debt discount

     (95,012     (3.8     (189,938     (8.8

Foreign currency exchange gain (loss), net

     8,327        0.3        (2,040     (0.1

Government subsidy

     5,625        0.2        33,698        1.6   

Equity in income (loss) for associates and a jointly-controlled entity

     3,570        0.1        (787     (0.0

Others, net

     618        0.1        7,135        0.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     362,677        14.4        (604,813     (28.0

Income tax expense

     (66,210     (2.6     (4,141     (0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     296,467        11.8        (608,954     (28.2

Earnings attributable to non-controlling interests

     (5,670     (0.2     (393     (0.0

Earnings attributable to redeemable non-controlling interests

     —          —          (11,522     (0.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to our shareholders

     290,797        11.6        (620,869     (28.8

Accretion to redemption value of redeemable non-controlling interests

     —          —          (34,590     (1.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to our shareholders

   $ 290,797        11.6   $ (655,459     (30.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Net sales. For the year ended December 31, 2011, our net sales were $2,157.8 million, representing a decrease of $351.5 million as compared to our net sales of $2,509.3 million for the year ended December 31, 2010. This decrease was due primarily to a $491.7 million decrease in our wafer sales, a $177.3 million decrease in our processing of PV products for our customers, partially offset by a $86.5 million increase in our module sales and a $231.0 million increase in our sales of silicon and other materials. Wafer sales continued to constitute the largest component of our net sales, 60.7% for the year ended December 31, 2010 and 47.8% for the year ended December 31, 2011.

The decrease in our wafer sales was mainly attributable to a decrease in our shipments to 1,540.7 MW for the year ended December 31, 2011 as compared to 1,717.6 MW for the year ended December 31, 2010 and a decrease in the average selling price of our wafers decreased from $0.89 per watt during the year ended December 31, 2010 to $0.67 per watt during the year ended December 31, 2011. The increase in our module sales was mainly attributable to an increase in our shipments to 551.0 MW for the year ended December 31, 2011 as compared to 346.1 MW for the year ended December 31, 2010, which was partially offset by the decrease in the average selling price of our modules from $1.81 per watt during the year ended December 31, 2010 to $1.31 per watt during the year ended December 31, 2011. The decrease in processing of PV products for our customers was mainly attributable to a significant decrease in our shipments to 66.1MW for the year ended December 31, 2011 as compared to 427.3 MW for the year ended December 31, 2010 as demand from these customers dropped significantly during the year. The increase in our sales of silicon and other materials was mainly attributable to an increase in our polysilicon shipments to 2,563 MT for the year ended December 31, 2011 as compared to 1,326 MT for the year ended December 31, 2010 since our second 5,000 MT train commenced production in August 2010.

Net sales were $145.6 million for our polysilicon segment and $2,012.2 million for our other PV products segment for the year ended December 31, 2011, compared to $83.5 million for our polysilicon segment and $2,425.9 million for our other PV products segment for the year ended December 31, 2010. The above net sales have excluded our inter-segment sales between the polysilicon segment and other PV products segment. The increase in net sales for our polysilicon segment was mainly attributable to the increase in our polysilicon shipments after the commencement of our second 5,000 MT train in August 2010. The decrease in net sales for our other PV products segment was mainly attributable to the decrease in our wafer sales as a result of decrease in our wafer shipment and the corresponding average selling price, which was partially offset by the increase in our module shipment.

During the years ended December 31, 2010 and 2011, our net sales by product were as follows:

 

     Year Ended December 31,  
     2010     2011  

Product

   Net Sales      % of
Total
    Net Sales      % of
Total
 
     (In millions)            (In millions)         

Wafers

   $ 1,522.9         60.7   $ 1,031.3         47.8

Modules

     634.4         25.3        720.9         33.4   

Processing of PV products on behalf of others

     204.9         8.2        27.6         1.3   

Silicon and other materials

     79.1         3.2        239.9         11.1   

Others

     68.0         2.6        138.1         6.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total net sales

   $ 2,509.3