##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE
ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 Commission file number: 1- 33208
 SOLARFUN POWER HOLDINGS CO., LTD.
  Not Applicable
    
    Cayman Islands(Translation of Registrants name into English)
    
    (Jurisdiction of Incorporation or Organization)
 666 Linyang Road, Qidong, Jiangsu Province 226200, Peoples Republic of China
   Title of each class
    
    Exchange on which registeredAmerican Depositary Shares
    
    Nasdaq Global MarketOrdinary Shares, par value US$0.0001 per share
 Securities registered or to be registered pursuant to Section 12(g) of the Act: None
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
 Number of outstanding shares of each of the issuers classes of capital or common stock as of December 31, 2006:
   o þ
  o þ
  þ o
  o þ o
  o þ
  o þ




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##### 



Table of Contents
 PagePart IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    
    
    3ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    3ITEM 3. KEY INFORMATION
    
    
    3ITEM 4. INFORMATION ON THE COMPANY
    
    
    27ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    40ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    60ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    70ITEM 8. FINANCIAL INFORMATION
    
    
    73ITEM 9. THE OFFER AND LISTING
    
    
    74ITEM 10. ADDITIONAL INFORMATION
    
    
    75ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    80ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    80ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    81ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    81ITEM 15. CONTROLS AND PROCEDURES
    
    
    81ITEM
16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    81ITEM
16B. CODE OF ETHICS
    
    
    82ITEM
16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    82ITEM
16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    82ITEM
16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
    
    
    82ITEM 17. FINANCIAL STATEMENTS
    
    
    82ITEM 18. FINANCIAL STATEMENTS
    
    
    82ITEM 19. EXHIBITS
    
    
    83EX-4.33 PRODUCT SUPPLY CONTRACTEX-4.34 PRODUCT SUPPLY CONTRACTEX-8.1 SUBSIDIARIES OF THE SOLARFUN POWER HOLDINGS CO.,LTDEX-12.1 CEO CERTIFICATION TO SECTION 302EX-12.2 CFO CERTIFICATION TO SECTION 302EX-13.1 CEO AND CFO CERTIFICATION TO SECTION 906
  1




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INTRODUCTION
  
    
    ADRs are to the American depositary receipts that evidence our ADSs;
    
    ADSs are to our American depositary shares, each of which represents five ordinary shares;
    
    China or the PRC are to the Peoples Republic of China, excluding, for the purpose
of this annual report only, Taiwan and the special administrative regions of Hong Kong and
Macau;
    
    conversion efficiency are to the ability of photovoltaic, or PV, products to convert
sunlight into electricity, and conversion efficiency rates are commonly used in the PV
industry to measure the percentage of light energy from the sun that is actually converted
into electricity;
    
    cost per watt and price per watt are to the method by which the cost and price of
PV products, respectively, are commonly measured in the PV industry. A PV product is priced
based on the number of watts of electricity it can generate;
    
    GW are to gigawatt, representing 1,000,000,000 watts, a unit of power-generating
capacity or consumption;
    
    MW are to megawatt, representing 1,000,000 watts, a unit of power-generating capacity
or consumption. In this annual report, it is assumed that, based on a yield rate of 95%,
420,000 125mm x 125mm or 280,000 156mm x 156mm silicon wafers are required to produce PV
products capable of generating 1 MW, that each 125mm x 125mm and 156mm x 156mm PV cell
generates 2.4 W and 3.7 W of power, respectively, and that each PV module contains 72 PV
cells;
    
    off-grid system are to the PV system that operates on a stand-alone basis to provide
electricity independent of an electricity transmission grid;
    
    on-grid system are to the PV system that is connected to an electricity transmission
grid and feeds electricity into the electricity transmission grid;
    
    PV are to photovoltaic. The photovoltaic effect is a process by which sunlight is
converted into electricity;
    
    RMB and Renminbi are to the legal currency of China;
    
    series A convertible preference shares are to our series A convertible preference
shares, par value US$0.0001 per share;
    
    shares or ordinary shares are to our ordinary shares, par value US$0.0001 per
share;
    
    thin film technology are to the PV technology that involves depositing several thin
layers of silicon or more complex materials on a substrate such as glass to make a PV cell;
and
    
    US$ and U.S. dollars are to the legal currency of the United States.
    2




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##### Table of Contents



PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 Selected Financial Data
  Period fromAugust 27, 2004(Inception) to
    
    Year Ended December 31,December 31, 2004
    
    2005
    
    2006(RMB)
    
    (RMB)
    
    (RMB)
    
    (US$)(in thousands, except share and per share data)Consolidated Statement of Operations DataNet revenuePV modules
    
    
    
    
    
    
    165,636
    
    
    
    604,317
    
    
    
    77,436PV cells
    
    
    
    
    
    
    542
    
    
    
    7,182
    
    
    
    920PV cells processing
    
    
    
    
    
    
    
    
    
    
    19,408
    
    
    
    2,487Total net revenue
    
    
    
    
    
    
    166,178
    
    
    
    630,907
    
    
    
    80,843Cost of revenuePV modules
    
    
    
    
    
    
    (139,481
    )
    
    
    (434,493
    )
    
    
    (55,675
    )PV cells
    
    
    
    
    
    
    (422
    )
    
    
    (5,983
    )
    
    
    (766
    )PV cells processing
    
    
    
    
    
    
    
    
    
    
    (6,054
    )
    
    
    (776
    )Total cost of revenue
    
    
    
    
    
    
    (139,903
    )
    
    
    (446,530
    )
    
    
    (57,217
    )
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##### Table of Contents



Period fromAugust 27, 2004(Inception) to
    
    Year Ended December 31,December 31, 2004
    
    2005
    
    2006(RMB)
    
    (RMB)
    
    (RMB)
    
    (US$)(in thousands, except share and per share data)Gross profit
    
    
    
    
    
    
    26,275
    
    
    
    184,377
    
    
    
    23,626Operating expensesSelling expenses
    
    
    
    
    
    
    (5,258
    )
    
    
    (11,883
    )
    
    
    (1,523
    )General and administrative expenses
    
    
    (629
    )
    
    
    (4,112
    )
    
    
    (52,214
    )
    
    
    (6,690
    )Research and development expenses
    
    
    
    
    
    
    (750
    )
    
    
    (6,523
    )
    
    
    (836
    )Total operating expenses
    
    
    (629
    )
    
    
    (10,120
    )
    
    
    (70,620
    )
    
    
    (9,049
    )Consolidated Statement of
Operations DataOperating profit (loss)
    
    
    (629
    )
    
    
    16,155
    
    
    
    113,757
    
    
    
    14,577Interest expenses
    
    
    
    
    
    
    (123
    )
    
    
    (8,402
    )
    
    
    (1,077
    )Interest income
    
    
    22
    
    
    
    95
    
    
    
    1,326
    
    
    
    170Exchange losses
    
    
    
    
    
    
    (1,768
    )
    
    
    (4,346
    )
    
    
    (557
    )Other income
    
    
    
    
    
    
    215
    
    
    
    902
    
    
    
    116Other expenses
    
    
    
    
    
    
    (260
    )
    
    
    (836
    )
    
    
    (107
    )Change in fair value of embedded foreign
currency derivative
    
    
    
    
    
    
    
    
    
    
    (163
    )
    
    
    (21
    )Government grant
    
    
    
    
    
    
    
    
    
    
    852
    
    
    
    109Net income (loss) before tax and minority
interests
    
    
    (607
    )
    
    
    14,314
    
    
    
    103,090
    
    
    
    13,210Income tax benefit
    
    
    
    
    
    
    96
    
    
    
    3,132
    
    
    
    401Minority interest
    
    
    
    
    
    
    
    
    
    
    (301
    )
    
    
    (39
    )Net income (loss)
    
    
    (607
    )
    
    
    14,410
    
    
    
    105,921
    
    
    
    13,572Net income (loss) attributable to ordinary
shareholders
    
    
    (607
    )
    
    
    14,410
    
    
    
    98,695
    
    
    
    12,646Net income (loss) per
share Basic
    
    
    (0.01
    )
    
    
    0.26
    
    
    
    0.95
    
    
    
    0.12 Diluted
    
    
    (0.01
    )
    
    
    0.22
    
    
    
    0.74
    
    
    
    0.09Shares used in
computation Basic
    
    
    51,994,399
    
    
    
    54,511,540
    
    
    
    103,631,832
    
    
    
    103,631,832 Diluted
    
    
    51,994,399
    
    
    
    66,366,469
    
    
    
    142,108,460
    
    
    
    142,108,460Net income (loss) per ADS Basic
    
    
    (0.05
    )
    
    
    1.32
    
    
    
    4.76
    
    
    
    0.61 Diluted
    
    
    (0.05
    )
    
    
    1.09
    
    
    
    3.72
    
    
    
    0.48Shares used in computation Basic
    
    
    10,398,880
    
    
    
    10,902,308
    
    
    
    20,726,366
    
    
    
    20,726,366 Diluted
    
    
    10,398,880
    
    
    
    13,273,294
    
    
    
    28,421,692
    
    
    
    28,421,692
 Period fromAugust 27, 2004(Inception) to
    
    Year Ended December 31,December 31, 2004
    
    2005
    
    2006(RMB)
    
    (RMB)
    
    (RMB)
    
    (US$)(in thousands, except margin and other operating data)Other Financial DataGross margin
    
    
    
    
    
    
    15.8
    %
    
    
    
    
    
    
    29.2
    %Operating margin
    
    
    
    
    
    
    9.7
    %
    
    
    
    
    
    
    18.0
    %Net margin
    
    
    
    
    
    
    8.7
    %
    
    
    
    
    
    
    16.8
    %Net cash from (used in)
operating activities
    
    
    (8,180
    )
    
    
    (76,582
    )
    
    
    (523,061
    )
    
    
    (67,024
    )
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Period fromAugust 27, 2004(Inception) to
    
    Year Ended December 31,December 31, 2004
    
    2005
    
    2006(RMB)
    
    (RMB)
    
    (RMB)
    
    (US$)(in thousands, except margin and other operating data)Capital expenditures
    
    
    (295
    )
    
    
    (37,464
    )
    
    
    (190,047
    )
    
    
    (24,352
    )Other Operating DataAmount of PV cells produced
(including PV cell processing)
(in MW)
    
    
    
    
    
    
    1.0
    (1)
    
    
    26.2
    (2)Amount of PV modules produced
(in MW):
    
    
    
    
    
    
    5.5
    
    
    
    19.6Average selling price (in US$/W):PV cells(3)
    
    
    
    
    
    
    3.00
    
    
    
    3.07PV modules(4)
    
    
    
    
    
    
    3.93
    
    
    
    3.99
 
 (1)
    
    Of which 0.9 MW was used in our PV module production.(2)
    
    Of which 19.9 MW was used in our PV module production.(3)
    
    All sales contracts for PV cells are denominated in Renminbi. Translations of Renminbi into
U.S. dollars have been made at period end exchange rates.(4)
    
    Represents the average unit selling price in U.S. dollars specified in the sales contracts
for PV modules.  As of December 31,2004
    
    2005
    
    2006(RMB)
    
    (RMB)
    
    (RMB)
    
    (US$)(in thousands)Consolidated Balance Sheet DataCash and cash equivalents
    
    
    3,525
    
    
    
    7,054
    
    
    
    1,137,792
    
    
    
    145,794Restricted cash
    
    
    
    
    
    
    22,229
    
    
    
    33,822
    
    
    
    4,334Accounts receivable (net of allowance for doubtful
accounts of RMB11,322,000 (US$1,450,775) as of
December 31, 2006)
    
    
    
    
    
    
    
    
    
    
    147,834
    
    
    
    18,943Inventories
    
    
    4,511
    
    
    
    76,819
    
    
    
    372,504
    
    
    
    47,732Advance to suppliers
    
    
    4,850
    
    
    
    61,312
    
    
    
    238,178
    
    
    
    30,520Other current assets
    
    
    762
    
    
    
    20,705
    
    
    
    75,525
    
    
    
    9,677Amount due from related parties
    
    
    18,000
    
    
    
    
    
    
    
    153
    
    
    
    20Fixed assets, net
    
    
    292
    
    
    
    55,146
    
    
    
    207,449
    
    
    
    26,582Intangible assets, net
    
    
    
    
    
    
    
    
    
    
    12,897
    
    
    
    1,653Total assets
    
    
    31,940
    
    
    
    243,361
    
    
    
    2,230,432
    
    
    
    285,803Short-term bank borrowings
    
    
    
    
    
    
    20,000
    
    
    
    379,900
    
    
    
    48,680Long-term bank borrowings, current portion
    
    
    
    
    
    
    
    
    
    
    16,000
    
    
    
    2,050Accounts payable
    
    
    2,221
    
    
    
    18,794
    
    
    
    51,452
    
    
    
    6,593Notes payable
    
    
    
    
    
    
    20,000
    
    
    
    14,020
    
    
    
    1,796Accrued expenses and other liabilities
    
    
    301
    
    
    
    22,920
    
    
    
    33,619
    
    
    
    4,308Customer deposits
    
    
    
    
    
    
    55,319
    
    
    
    17
    
    
    
    2Amount due to related parties
    
    
    25
    
    
    
    32,658
    
    
    
    24,486
    
    
    
    3,138Long-term bank borrowings, non- current portion
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    1,922Total liabilities
    
    
    2,547
    
    
    
    169,691
    
    
    
    542,066
    
    
    
    69,459Minority interests
    
    
    
    
    
    
    
    
    
    
    10,151
    
    
    
    1,301Total shareholders equity
    
    
    29,393
    
    
    
    73,670
    
    
    
    1,678,215
    
    
    
    215,043Total liabilities, preference shares and
shareholders equity
    
    
    31,940
    
    
    
    243,361
    
    
    
    2,230,432
    
    
    
    285,803
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Exchange Rate Information
   Renminbi per U.S. Dollar Noon Buying RatePeriod End
    
    Average(1)
    
    Low
    
    High2001
    
    
    8.2766
    
    
    
    8.2772
    
    
    
    8.2709
    
    
    
    8.27862002
    
    
    8.2800
    
    
    
    8.2772
    
    
    
    8.2700
    
    
    
    8.28002003
    
    
    8.2767
    
    
    
    8.2771
    
    
    
    8.2765
    
    
    
    8.28002004
    
    
    8.2765
    
    
    
    8.2768
    
    
    
    8.2764
    
    
    
    8.27742005
    
    
    8.0702
    
    
    
    8.1826
    
    
    
    8.0702
    
    
    
    8.27652006
    
    
    7.8041
    
    
    
    7.9723
    
    
    
    7.8041
    
    
    
    8.0702December
    
    
    7.8041
    
    
    
    7.8219
    
    
    
    7.8041
    
    
    
    7.83502007January
    
    
    7.7714
    
    
    
    7.7876
    
    
    
    7.7705
    
    
    
    7.8127February
    
    
    7.7410
    
    
    
    7.7502
    
    
    
    7.7410
    
    
    
    7.7632March
    
    
    7.7232
    
    
    
    7.7369
    
    
    
    7.7232
    
    
    
    7.7454April
    
    
    7.7090
    
    
    
    7.7248
    
    
    
    7.7090
    
    
    
    7.7345May
    
    
    7.6516
    
    
    
    7.6772
    
    
    
    7.6463
    
    
    
    7.7065June
(through June 29, 2007)
    
    
    7.6120
    
    
    
    7.6333
    
    
    
    7.6120
    
    
    
    7.6680
 
 (1)
    
    Annual averages are calculated from month-end rates. Monthly averages are calculated using
the average of the daily rates during the relevant period. Capitalization and Indebtedness
  Reasons for the Offer and Use of Proceeds
  Risk Factors
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Risks Related to Our Company and Our Industry
 Evaluating our business and prospects may be difficult because of our limited operating history,
and our past results may not be indicative of our future performance.
  Our future success substantially depends on our ability to significantly expand both our
manufacturing capacity and output, which is subject to significant risks and uncertainties. If we
fail to achieve this expansion, we may be unable to grow our business and revenue, reduce our costs
per watt, maintain our competitive position or improve our profitability.
  7




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
    
    the need for additional funding to purchase and prepay for raw materials or to build
manufacturing facilities, which we may be unable to obtain on reasonable terms or at all;
    
    delays and cost overruns as a result of a number of factors, many of which may be
beyond our control, such as increases in raw materials prices and problems with equipment
vendors;
    
    the inability to obtain or delays in obtaining required approvals by relevant government authorities;
    
    diversion of significant management attention and other resources; and
    
    failure to execute our expansion plan effectively.
   We depend on a limited number of customers for a high percentage of our revenue and the loss of, or
a significant reduction in orders from, any of these customers, if not immediately replaced, would
significantly reduce our revenue and decrease our profitability.
  
    
    reduction, delay or cancellation of orders from one or more of our significant customers;
    
    selection by one or more of our significant distributor customers of our competitors products;
    
    loss of one or more of our significant customers and our failure to identify additional
or replacement customers;
    
    any adverse change in the bilateral or multilateral trade relationships between China
and European countries, particularly Germany; and
    
    failure of any of our significant customers to make timely payment for our products.
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We are currently experiencing an industry-wide shortage of silicon wafers. The prices that we pay
for silicon wafers have increased in the past and we expect prices may continue to increase in the
future, which may materially and adversely affect our revenue growth and decrease our gross profit
margins and profitability.
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Our dependence on a limited number of suppliers for a substantial majority of silicon and silicon
wafers could prevent us from delivering our products in a timely manner to our customers in the
required quantities, which could result in order cancellations, decreased revenue and loss of
market share.
  Our ability to adjust our materials costs may be limited as a result of entering into prepaid,
fix-priced arrangements with our suppliers, and it therefore may be difficult for us to respond
appropriately in a timely manner to market conditions, which could materially and adversely affect
our revenue and profitability.
  We require a significant amount of cash to fund our operations as well as meet future capital
requirements. If we cannot obtain additional capital when we need it, our growth prospects and
future profitability may be materially and adversely affected.
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
    
    our future financial condition, results of operations and cash flows;
    
    general market conditions for financing activities by manufacturers of PV and related products; and
    
    economic, political and other conditions in the PRC and elsewhere.
  We face risks associated with the marketing, distribution and sale of our PV products
internationally, and if we are unable to effectively manage these risks, they could impair our
ability to expand our business abroad.
  
    
    fluctuations in currency exchange rates of the U.S. dollar, Euro and other foreign
currencies against the Renminbi;
    
    difficulty in engaging and retaining distributors and agents who are knowledgeable
about, and can function effectively in, overseas markets;
    
    increased costs associated with maintaining marketing and sales activities in various
countries;
    
    difficulty and costs relating to compliance with different commercial and legal
requirements in the jurisdictions in which we offer our products;
    
    inability to obtain, maintain or enforce intellectual property rights; and
    
    trade barriers, such as export requirements, tariffs, taxes and other restrictions and
expenses, which could increase the prices of our products and make us less competitive in
some countries.
  If we are unable to compete in the highly competitive solar energy market, our revenue and profits
may decrease.
  
    
    manufacturing capacity;
    
    power efficiency;
    
    range and quality of products;
    
    price;
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
    
    strength of supply chain and distribution network;
    
    after-sales services; and
    
    brand image.
    Our profitability depends on our ability to respond to rapid market changes in the solar energy
industry, including by developing new technologies and offering additional products and services.
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Our future success depends in part on our ability to make strategic acquisitions and investments
and to establish and maintain strategic alliances, and failure to do so could have a material
adverse effect on our market penetration, revenue growth and profitability. In addition, such
strategic acquisitions, alliances and investments themselves entail significant risks that could
materially and adversely affect our business.
   Problems with product quality or product performance could result in a decrease in customers and
revenue, unexpected expenses and loss of market share. In addition, product liability claims
against us could result in adverse publicity and potentially significant monetary damages.
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If PV technology is not suitable for widespread adoption, or sufficient demand for PV products does
not develop or takes longer to develop than we anticipated, our sales may not continue to increase
or may even decline, and our revenue and profitability would be reduced.
  
    
    cost-effectiveness of PV products compared to conventional and other non-solar energy
sources and products;
    
    performance and reliability of PV products compared to conventional and other non-solar
energy sources and products;
    
    availability of government subsidies and incentives to support the development of the
PV industry or other energy resource industries;
    
    success of other alternative energy generation technologies, such as fuel cells, wind
power and biomass;
    
    fluctuations in economic and market conditions that affect the viability of
conventional and non-solar alternative energy sources, such as increases or decreases in
the prices of oil and other fossil fuels;
    
    capital expenditures by end users of PV products, which tend to decrease when the
overall economy slows down; and
    
    deregulation of the electric power industry and the broader energy industry.
 Existing regulations and policies governing the electricity utility industry, as well as changes to
these regulations and policies, may adversely affect demand for our products and materially reduce
our revenue and profits.
  14




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##### Table of Contents



The reduction or elimination of government subsidies and economic incentives for on-grid solar
energy applications could have a materially adverse effect on our business and prospects.
   The lack or inaccessibility of financing for off-grid solar energy applications could cause our
sales to decline.
  Our failure to protect our intellectual property rights may undermine our competitive position, and
litigation to protect our intellectual property rights may be costly.
  15




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##### Table of Contents



We may be exposed to infringement or misappropriation claims by third parties, particularly in
jurisdictions outside China which, if determined adversely against us, could disrupt our business
and subject us to significant liability to third parties, as well as have a material adverse effect
on our financial condition and results of operations.
  
    
    pay damage awards;
    
    seek licenses from third parties;
    
    pay ongoing royalties;
    
    redesign our products; or
    
    be restricted by injunctions,
  We may not be able to obtain sufficient patent protection on the technology embodied in the PV
products we currently manufacture and sell, which could reduce our competitiveness and increase our
expenses.
  16




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##### Table of Contents



We depend on our key personnel, and our business and growth may be severely disrupted if we lose
their services.
   Our
independent auditors, in the course of auditing our consolidated
financial statements for the year ended December 31, 2006 noted
significant deficiencies in our internal controls that collectively
were deemed to constitute a material
weakness. If we fail to maintain an effective system of internal control over financial
reporting, our ability to accurately and timely report our financial results or prevent fraud may
be adversely affected. In addition, investor confidence and the market price of our ADSs may be
adversely impacted if we or our independent auditors are unable to attest to the adequacy of the
internal control over financial reporting of our company in accordance with the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002.
  17




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##### Table of Contents



We have very limited insurance coverage and we are subject to the risk of damage due to fires or
explosions because some materials we use in our manufacturing processes are highly flammable.
 18




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##### Table of Contents



Any environmental claims or failure to comply with any present or future environmental regulations
may require us to spend additional funds and may materially and adversely affect our financial
condition and results of operations.
   Our business benefits from certain PRC government incentives. Expiration of, or changes to, these
incentives could have a material adverse effect on our results of operations.
  19




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##### Table of Contents



Fluctuations in exchange rates could adversely affect our business as well as result in foreign
currency exchange losses.
    20




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##### Table of Contents



One of our existing shareholders has substantial influence over our company and his interests may
not be aligned with the interests of our other shareholders.
  If we grant employee share options and other share-based compensation in the future, our net income
could be adversely affected.
  We may become a passive foreign investment company, which could result in adverse U.S. tax
consequences to U.S. investors.
  Risks Related to Doing Business in China
 Adverse changes in political and economic policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could reduce the demand for our
products and materially and adversely affect our competitive position.
  21




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##### Table of Contents




    
    the amount of government involvement;
    
    the level of development;
    
    the growth rate;
    
    the control of foreign exchange; and
    
    the allocation of resources.
    Uncertainties with respect to the PRC legal system could have a material adverse effect on us.
  We rely principally on dividends and other distributions on equity paid by our operating subsidiary
to fund cash and financing requirements, and limitations on the ability of our operating subsidiary
to pay dividends or other distributions to us could have a material adverse effect on our ability
to conduct our business.
 22




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##### Table of Contents



Restrictions on currency exchange may limit our ability to receive and use our revenue effectively.
   Recent 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 subsidiary, limit our PRC subsidiarys
ability to distribute profits to us, or otherwise materially and adversely affect us.
  23




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##### Table of Contents



Our failure to obtain the prior approval of the China Securities Regulatory Commission, or the
CSRC, of the listing and trading of our ADSs on the Nasdaq Global Market could have a material
adverse effect on our business, operating results, reputation and trading price of our ADSs.
  We face risks related to health epidemics and other outbreaks.
  Risks Related to Our Ordinary Shares and ADSs
 The market price for our ADSs may be volatile.
 24




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##### Table of Contents




    
    announcements of technological or competitive developments;
    
    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 conversion efficiencies of our
products or those of our competitors;
    
    actual or anticipated fluctuations in our quarterly operating results;
    
    changes in financial estimates by securities research analysts;
    
    changes in the economic performance or market valuations of other PV technology companies;
    
    additions or departures of our directors, executive officers and key research personnel; and
    
    release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs.
  Substantial future sales or perceived sales of our ADSs or ordinary shares in the public market
could cause the price of our ADSs to decline.
  Our articles of association contain anti-takeover provisions that could have a material adverse
effect on the rights of holders of our ordinary shares and ADSs.
  25




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##### Table of Contents



Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise
those rights.
  You may be subject to limitations on transfers of your ADSs.
  Your right to participate in any future rights offerings may be limited, which may cause dilution
to your holdings, and you may not receive distributions with respect to the underlying ordinary
shares if it is impractical to make them available to you.
   26




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##### Table of Contents



We are a Cayman Islands company and, because judicial precedent regarding the rights of
shareholders is more limited under Cayman Islands law than under U.S. law, you may have less
protection for your shareholder rights than you would under U.S. law.
   
    
    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.
   
 ITEM 4. INFORMATION ON THE COMPANY
 History and Development of the Company
   27




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##### Table of Contents



www.solarfun.com.cn. The information
contained on our website does not constitute a part of this annual report.
 Business Overview
 Overview
     28




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##### Table of Contents



Our Products and Services
  Year Ended December 31,2005
    
    2006Products and Services
    
    Net Revenue
    
    %
    
    Net Revenue
    
    %(In thousands of Renminbi, except percentages)PV cells
    
    
    542
    
    
    
    0.3
    %
    
    
    7,182
    
    
    
    1.1
    %PV modules
    
    
    165,636
    
    
    
    99.7
    %
    
    
    604,317
    
    
    
    95.8
    %PV cell processing
    
    
    
    
    
    
    
    
    
    
    19,408
    
    
    
    3.1
    %
 Our Products
 PV Cells
  Dimensions
    
    Conversion
    
    Thickness
    
    MaximumPV Cell Type
    
    (mm×mm)
    
    Efficiency (%)
    
    (em)
    
    Power (W)Monocrystalline silicon cell
    
    
    125 × 125
    
    
    
    15.0 - 17.2
    %
    
    
    200 - 220
    
    
    
    2.23 - 2.56156 × 156
    
    
    
    15.0 - 16.8
    %
    
    
    200 - 220
    
    
    
    3.60 - 4.03Multicrystalline silicon cell
    
    
    125 × 125
    
    
    
    14.5 - 16.0
    %
    
    
    220 - 240
    
    
    
    2.19 - 2.50156 × 156
    
    
    
    14.5 - 15.8
    %
    
    
    220 - 240
    
    
    
    3.41 - 3.85
   PV Modules
   Dimensions
    
    WeightPV Module Manufactured with:
    
    (mm)
    
    (Kg)
    
    Power (W)Monocrystalline silicon
    
    
    1580 ×  808 × 45
    
    
    
    15
    
    
    
    160 - 1851494 × 1000 × 45
    
    
    
    18
    
    
    
    190 - 210Multicrystalline silicon
    
    
    1580 ×  808 × 45
    
    
    
    15
    
    
    
    155 - 1801494 × 1000 × 45
    
    
    
    18
    
    
    
    185 - 205
  29




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##### Table of Contents



Our Services
 PV Cell Processing
  Solar System Integration
  Raw Materials Supply Management
   Silicon Wafers
  30




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31




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##### Table of Contents







Other Raw Materials




Production




Quality Control and Certifications




32




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##### Table of Contents



Capacity Expansion and Technology Upgrade Plans
   December 31,2007
    
    2008PV cell production lines completed or under construction
    
    
    8
    
    
    
    12Annual PV cell production capacity (in MW)(1)
    
    
    240
    
    
    
    360Annual PV cell production capacity including lines under construction (in MW)
    
    
    240
    
    
    
    360Annual PV module production capacity (in MW)(1)(2)
    
    
    180
    
    
    
    300Average conversion efficiency rate of monocrystalline silicon cells
    
    
    16.7
    %
    
    
    17.2
    %Average conversion efficiency rate of multicrystalline silicon cells
    
    
    15.5
    %
    
    
    16.0
    %Minimum PV
cell thickness (in μm)(3)
    
    
    200
    
    
    
    180
 
 (1)
    
    Maximum manufacturing capacity assuming 24 hours of operation per day for 350 days per year.(2)
    
    Excludes capacity of Sichuan Jiayang.(3)
    
    Represents the minimum cell thickness that can be mass-produced as of the end of that period.   Sales and Distribution
   33




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##### Table of Contents



Year Ended December 31,2005
    
    2006Revenue
    
    %
    
    Revenue
    
    %(in thousands, except percentages)S.E. Project S.R.L
    
    
    
    
    
    
    
    
    
    
    203,133
    
    
    
    32.2Social Capital S.L
    
    
    
    
    
    
    
    
    
    
    175,939
    
    
    
    27.9Solar Projekt Energysystem GmbH
    
    
    13,140
    
    
    
    7.9
    %
    
    
    70,409
    
    
    
    11.2Suntaics
    
    
    84,438
    
    
    
    50.8
    %
    
    
    54,856
    
    
    
    8.7
      Year Ended December 31,2005
    
    2006Net
    
    
    
    
    
    NetRegion
    
    Revenue
    
    %
    
    Revenue
    
    %(In thousands of Renminbi, except percentages)Germany
    
    
    126,555
    
    
    
    76.2
    %
    
    
    197,728
    
    
    
    31.4
    %Italy
    
    
    5,946
    
    
    
    3.6
    
    
    
    204,715
    
    
    
    32.4
    %Spain
    
    
    
    
    
    
    
    
    
    
    179,139
    
    
    
    28.4
    %PRC
    
    
    33,667
    
    
    
    20.2
    
    
    
    36,219
    
    
    
    5.7
    %Others
    
    
    10
    
    
    
    
    
    
    
    13,106
    
    
    
    2.1
    %Total
    
    
    166,178
    
    
    
    100.0
    %
    
    
    630,907
    
    
    
    100.0
    %
 34




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##### Table of Contents



After-Sales Services and Warranties
  Intellectual Property and Proprietary Rights
     Competition
   35




---



##### Table of Contents



Environmental Matters
  Insurance
  Regulation
  Renewable Energy Law and Other Government Directives
    36




---



##### Table of Contents



Environmental Regulations
  Restriction on Foreign Businesses
  Tax
   37




---



##### Table of Contents



Foreign Currency Exchange
  
    
    Foreign Exchange Administration Rules (1996), as amended; and
    
    Regulations of Settlement, Sale and Payment of Foreign Exchange (1996)
   Dividend Distribution
  
    
    Wholly Foreign-Owned Enterprise Law (1986), as amended; and
    
    Wholly Foreign-Owned Enterprise Law Implementation Rules (1990), as amended.
  38




---



##### Table of Contents



Organizational Structure
 
 
 (1)
    
    The other shareholders of Shanghai Linyang Solar Technology Co., Ltd. are three individuals:
Mr. Yongliang Gu, Mr. Rongqiang Cui, and Mr. Cuis spouse. Mr. Gu and Mr. Cui are our
shareholders.(2)
    
    The other shareholders of Sichuan Leshan Jiayang New Energy Co., Ltd., or Sichuan Jiayang,
are Sichuan Jianengjia Electric Power Co., Ltd., or Sichuan Jianengjia, which holds a 30%
equity interest, and a member of Sichuan Jiayangs management team, Mr. Wei Gu, who holds a
15% equity interest on behalf of Mr. Yonghua Lu, our chairman and chief executive officer,
pursuant to an entrustment agreement entered into in November 2006. Under this entrustment
agreement, Mr. Lu provided RMB3.0 million (US$0.4 million) to Mr. Gu to acquire the 15% equity
interest in Sichuan Jiayang. Under the entrustment agreement, all the rights enjoyed by Mr.
Gu as the holder of record of the 15% equity interest in Sichuan Jiayang, including economic
rights, belong to Mr. Lu. Mr. Gu may only exercise rights relating to this equity interest in
Sichuan Jiayang, such as voting and transfer rights, pursuant to written instructions from Mr.
Lu. Mr. Lu also has the right to transfer all or a portion of the 15% equity interest to the
management of Sichuan Jiayang or other third parties. This entrustment arrangement was
originally contemplated at the time of establishment of Sichuan Jiayang, but was not
formalized in writing until November 2006, and was meant to serve as a transitional step in
advance of potentially fully transferring these equity interests to Mr. Gu and other members
of Sichuan Jiayangs management team as performance incentives. 39




---



##### Table of Contents



Property, Plant and Equipment
   
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 The following discussion should be read in conjunction with the rest of this annual report,
including the consolidated financial statements and notes thereto contained elsewhere in this
annual report. The results discussed below are not necessarily indicative of the results to be
expected in any future periods.
 Operating Results
 Overview
    40




---



##### Table of Contents



Limited Operating History
  Key Factors Affecting Our Financial Performance
  
    
    availability and price of silicon wafers;
    
    average selling price of our PV products;
    
    manufacturing capacity;
    
    process technologies; and
    
    industry demand.
 Availability and Price of Silicon Wafers
   41




---



##### Table of Contents




    
    supply agreements entered into in March and July 2006 with ReneSola Co., Ltd., or
ReneSola, under which ReneSola has agreed to supply us with an aggregate of 20.3 MW of
silicon wafers through the end of 2007, with the majority of the deliveries to be made in
2007;
    
    supply agreement entered into in January 2007 with Shanghai Jiu Jing Electronic
Material Ltd., under which Shanghai Jiu Jing Electronic agreed to provide us approximately
12.0 MW silicon wafers in 2007; and
    
    supply and framework supply agreements entered into with Jiangxi LDK Solar Hi-Tech Co.,
Ltd., or LDK, a wafer manufacturer located in Jiangxi Province, China. Under an amendment
to prior supply agreements with LDK that we entered into in November 2006, LDK will provide
9.3 MW of silicon wafers to us from December 2006 to July 2007 based on a fixed price.
Furthermore, we entered into a framework supply agreement with LDK, under which product
purchase prices and delivery schedules for the contracted periods are not fixed. Under this
agreement, LDK will provide 56.4 MW of silicon wafers from July 2007 to June 2008. The
actual product purchase prices will be negotiated between us and LDK in good faith during
the contracted periods based on market prices. In March 2007, we also entered into another
supply agreement with LDK, under which LDK agreed to provide us approximately 10.0 MW of
silicon wafers from March to December 2007;
   42




---



##### Table of Contents



Average Selling Price of Our PV Products
    43




---



##### Table of Contents



Manufacturing Capacity
    Process Technologies
   Industry Demand
  Net Revenue
  44




---



##### Table of Contents



Year Ended December 31,2005
    
    2006Percentage of
    
    
    
    
    
    
    
    
    
    Percentage ofAmount
    
    Net Revenue
    
    Amount
    
    Net Revenue(RMB)
    
    
    
    
    
    (RMB)
    
    (US$)(In thousands, except percentages)Net Revenue:PV modules
    
    
    165,636
    
    
    
    99.7
    %
    
    
    604,317
    
    
    
    77,436
    
    
    
    95.8
    %PV cells
    
    
    542
    
    
    
    0.3
    
    
    
    7,182
    
    
    
    920
    
    
    
    1.1PV cell processing
    
    
    
    
    
    
    
    
    
    
    19,408
    
    
    
    2,487
    
    
    
    3.1Total
    
    
    166,178
    
    
    
    100.0
    %
    
    
    630,907
    
    
    
    80,843
    
    
    
    100.0
    %
      Costs of Revenue and Operating Expenses
 Cost of Revenue
 45




---



##### Table of Contents



Year Ended December 31,2005
    
    2006Percentage of
    
    
    
    
    
    
    
    
    
    Percentage ofAmount
    
    Net Revenue
    
    Amount
    
    Net Revenue(RMB)
    
    
    
    
    
    (RMB)
    
    (US$)(In thousands, except percentages)Cost of revenue
    
    
    (139,903
    )
    
    
    84.2
    %
    
    
    (446,530
    )
    
    
    (57,217
    )
    
    
    70.8
    %Operating expenses:Selling expenses
    
    
    (5,258
    )
    
    
    3.2
    
    
    
    (11,883
    )
    
    
    (1,523
    )
    
    
    1.9General and
administrative
expenses
    
    
    (4,112
    )
    
    
    2.5
    
    
    
    (52,214
    )(1)
    
    
    (6,690
    )
    
    
    8.3Research and
development
expenses
    
    
    (750
    )
    
    
    0.4
    %
    
    
    (6,523
    )
    
    
    (836
    )
    
    
    1.0
    %Total
    
    
    (10,120
    )
    
    
    6.1
    %
    
    
    (70,620
    )
    
    
    (9,049
    )
    
    
    11.2
    %
 
 (1)
    
    In 2006, we recorded a share compensation charge of RMB10.3 million (US$1.3 million), which
related to a sale of our ordinary shares to Linyang Electronics, a company controlled by our
chairman and chief executive officer, at less than fair market value by other shareholders of
our company , a share compensation charge of RMB12.1 million (US$1.5 million) as a result of
the issuance of series A convertible preference shares to Good Energies Investments Limited
and a share compensation charge of RMB2.9 million (US$0.4 million) which related to stock
options granted on November 30, 2006 under the companys employee stock option plan.     46




---



##### Table of Contents



Operating Expenses
  Selling Expenses
   General and Administrative Expenses
   Research and Development Expenses
  47




---



##### Table of Contents



Share Compensation Expenses
   Taxation
 PRC Enterprise Income Tax
   48




---



##### Table of Contents



Critical Accounting Policies and Estimates
  Revenue Recognition
    49




---



##### Table of Contents



Fixed Assets, Net
  Buildings
    
    20 yearsPlant and machinery
    
    10 yearsFurniture, fixtures and office equipment
    
    5 yearsComputer software
    
    5 yearsMotor vehicles
    
    5 years
    Warranty Costs
  Impairment of Long-Lived Assets
  50




---



##### Table of Contents



Stock Compensation
     51




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##### Table of Contents



Consolidated Results of Operations
 Year Ended December 31,2004
    
    2005
    
    2006(in RMB
    
    (in RMB
    
    % of net
    
    (in RMB
    
    % of netthousands)
    
    thousands)
    
    revenues
    
    thousands)
    
    revenuesConsolidated Statement
of Operations DataNet revenuePV modules
    
    
    
    
    
    
    165,636
    
    
    
    99.7
    
    
    
    604,317
    
    
    
    95.8PV cells
    
    
    
    
    
    
    542
    
    
    
    0.3
    
    
    
    7,182
    
    
    
    1.1PV system integrations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,408
    
    
    
    3.1Total net revenue
    
    
    
    
    
    
    166,178
    
    
    
    100.0
    
    
    
    630,907
    
    
    
    100.0Cost of revenuePV modules
    
    
    
    
    
    
    (139,481
    )
    
    
    (83.9
    )
    
    
    (434,493
    )
    
    
    (68.9
    )PV cells
    
    
    
    
    
    
    (422
    )
    
    
    (0.3
    )
    
    
    (5,983
    )
    
    
    (0.9
    )PV system integrations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,054
    )
    
    
    (1.0
    )Total cost
of revenue
    
    
    
    
    
    
    (139,903
    )
    
    
    (84.2
    )
    
    
    (446,530
    )
    
    
    (70.8
    )Gross profit
    
    
    
    
    
    
    26,275
    
    
    
    15.8
    
    
    
    184,337
    
    
    
    29.2Operating expensesSelling expenses
    
    
    
    
    
    
    (5,258
    )
    
    
    (3.2
    )
    
    
    (11,883
    )
    
    
    (1.9
    )General and administrative
expenses
    
    
    (629
    )
    
    
    (4,112
    )
    
    
    (2.5
    )
    
    
    (52,214
    )
    
    
    (8.3
    )Research and development
expenses
    
    
    
    
    
    
    (750
    )
    
    
    (0.4
    )
    
    
    (6,523
    )
    
    
    (1.0
    )Total operating expenses
    
    
    (629
    )
    
    
    (10,120
    )
    
    
    (6.1
    )
    
    
    (70,620
    )
    
    
    (11.2
    )Income from operations
    
    
    
    
    
    
    16,155
    
    
    
    9.7
    
    
    
    113,757
    
    
    
    18.0Interest expenses
    
    
    22
    
    
    
    (123
    )
    
    
    (0.1
    )
    
    
    (8,402
    )
    
    
    (1.3
    )Interest income
    
    
    
    
    
    
    95
    
    
    
    0.1
    
    
    
    1,326
    
    
    
    0.2Exchange losses
    
    
    
    
    
    
    (1,768
    )
    
    
    (1.1
    )
    
    
    (4,346
    )
    
    
    (0.7
    )Other income
    
    
    
    
    
    
    215
    
    
    
    0.1
    
    
    
    902
    
    
    
    0.1Other expenses
    
    
    
    
    
    
    (260
    )
    
    
    (0.1
    )
    
    
    (836
    )
    
    
    (0.1
    )Changes in fair value of
embedded foreign currency
derivative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (163
    )
    
    
    Government grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    852
    
    
    
    0.1(Loss) income before
income taxes and minority
interest
    
    
    (607
    )
    
    
    14,314
    
    
    
    8.6
    
    
    
    103,090
    
    
    
    16.3Income tax benefit
    
    
    
    
    
    
    96
    
    
    
    0.1
    
    
    
    3,132
    
    
    
    0.5Minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (301
    )
    
    
    Net (loss) income
    
    
    (607
    )
    
    
    14,410
    
    
    
    8.7
    
    
    
    105,921
    
    
    
    16.8Deemed dividend on Series A
redeemable convertible
preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,226
    )
    
    
    (1.1
    )Net income attributable
to holders of ordinary
shares
    
    
    (607
    )
    
    
    14,410
    
    
    
    8.7
    
    
    
    98,695
    
    
    
    15.7
 52




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2006 Compared to 2005
  Net Revenue
  Cost of Revenue and Gross Profit
  53




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Operating Expenses and Operating Profit
      Interest Expenses and Other Income (Expenses)
  Net Income Before Tax and Income Tax Benefit
  Net Income
  54




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Period from August 27, 2004 (Inception) to December 31, 2004
   Liquidity and Capital Resources
 Liquidity and Capital Resources
  Liquidity
  Period fromAugust 27, 2004(Inception) to
    
    Year Ended December 31,December 31, 2004
    
    2005
    
    2006(RMB)
    
    (RMB)
    
    (RMB)
    
    (US$)(in thousands)Net cash used in operating activities
    
    
    (8,180
    )
    
    
    (76,582
    )
    
    
    (523,061
    )
    
    
    (67,024
    )Net cash used in investing activities
    
    
    (295
    )
    
    
    (37,464
    )
    
    
    (190,047
    )
    
    
    (24,352
    )Net cash generated from financing
activities
    
    
    12,000
    
    
    
    117,575
    
    
    
    1,843,846
    
    
    
    236,266Net increase in cash and cash equivalents
    
    
    3,525
    
    
    
    3,529
    
    
    
    1,130,738
    
    
    
    144,890
 Net Cash Used in Operating Activities
   55




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##### Table of Contents




    
    an increase of RMB159.2 million (US$20.4 million) in accounts receivable, primarily due
to increased sales on credit in the fourth quarter of 2006;
    
    an increase of RMB176.9 million (US$22.7 million) in advances to suppliers, primarily
due to increased prepayments to our suppliers for purchases of silicon and silicon wafers;
    
    an increase of RMB295.7 million (US$37.9 million) in inventories principally as a
result of increased purchases of silicon and silicon wafers; and
    
    a decrease of RMB55.3 million (US$7.1 million) in deposits received from customers,
primarily due to our provision of more preferential credit terms to our customers.
  
    
    an increase of RMB72.3 million in inventories principally as a result of an increase of
RMB60.5 million in the purchase of raw materials;
    
    an increase of RMB56.5 million in advances to suppliers;
    
    an increase of RMB16.6 million in accounts payable mainly due to raw materials purchases;
    
    an increase of RMB22.2 million in restricted cash relating to customer deposits; and
    
    an increase of RMB55.3 million in deposits received from customers.
   Net Cash Used in Investing Activities
     56




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Net Cash Generated from Financing Activities
     Capital Resources
  Capital Expenditures
   57




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Research and Development
      Trend Information
  58




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Off-Balance Sheet Arrangements
  Tabular Disclosure of Contractual Obligations
  Payment Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    1 Year
    
    1 to 3 Years
    
    3 to 5 Years
    
    5 Years(in thousands of Renminbi)Purchase obligations relating to
machinery and equipment
    
    
    119,874
    
    
    
    119,874
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations relating to raw materials
    
    
    1,039,564
    
    
    
    1,029,564
    
    
    
    10,000
    
    
    
    
    
    
    
    Operating
lease obligations
    
    
    2,782
    
    
    
    1,326
    
    
    
    1,152
    
    
    
    304
    
    
    
    Total
    
    
    1,162,220
    
    
    
    1,150,764
    
    
    
    11,152
    
    
    
    304
    
    
    
    
 Safe Harbor
  
    
    our expectations regarding the worldwide demand for electricity and the market for
solar energy;
    
    our beliefs regarding the effects of environmental regulation, lack of infrastructure
reliability and long-term fossil fuel supply constraints;
    
    our beliefs regarding the inability of traditional fossil fuel-based generation
technologies to meet the demand for electricity;
    
    our beliefs regarding the importance of environmentally friendly power generation;
    
    our expectations regarding governmental support for the deployment of solar energy;
    
    our beliefs regarding the acceleration of adoption of solar technologies;
    
    our expectations with respect to advancements in our technologies;
    
    our beliefs regarding the competitiveness of our solar products;
    
    our expectations regarding the scaling of our manufacturing capacity;
    
    our expectations with respect to increased revenue growth and our ability to achieve
profitability resulting from increases in our production volumes;
    
    our expectations with respect to our ability to secure raw materials, especially silicon wafers, in the future;
    
    our future business development, results of operations and financial condition; and
    
    competition from other manufacturers of PV products and conventional energy suppliers.
 59




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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 Directors and Senior Management
 Directors and Executive Officers
  Name
    
    Age
    
    Position/TitleYonghua Lu
    
    
    44
    
    
    Chairman and Chief Executive OfficerHanfei Wang
    
    
    43
    
    
    Director and Chief Operating OfficerXihong Deng
    
    
    42
    
    
    Director and Executive Vice PresidentSven Michael Hansen
    
    
    42
    
    
    DirectorTerry McCarthy
    
    
    63
    
    
    Independent DirectorErnst A. Bütler
    
    
    62
    
    
    Independent DirectorThomas J. Toy
    
    
    52
    
    
    Independent DirectorKevin Wei
    
    
    39
    
    
    Chief Financial OfficerJianping Zhang
    
    
    41
    
    
    Vice PresidentFei Yun
    
    
    44
    
    
    Director of TechnologyYuting Wang
    
    
    65
    
    
    Chief EngineerRu Cai
    
    
    35
    
    
    Principal Accounting Officer
 Directors
 Mr. Yonghua Lu
 Mr. Hanfei Wang
 60




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##### Table of Contents



Ms. Xihong Deng
 Dr. Sven Michael Hansen
 Mr. Terry McCarthy
 Mr. Ernst A. Bütler
 Mr. Thomas J. Toy
 61




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##### Table of Contents



Executive Officers
 Mr. Kevin C. Wei cum laude
 Mr. Jianping Zhang
 Mr. Fei Yun
 Mr. Yuting Wang
 Ms. Ru Cai
 62




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##### Table of Contents



Compensation of Directors and Executive Officers
 Compensation
   Termination of Awards.
 Administration.
 Option Exercise.
 Share Split or Combination.
 Amendment and Termination of Plan.
  OrdinarySharesUnderlyingOutstanding
    
    ExerciseName
    
    Option
    
    Price
    
    Grant Date
    
    Expiration Date(US$/Share)Terry McCarthy
    
    
    150,000
    
    
    
    1.80
    
    
    November 30, 2006
    
    November 29, 2016Thomas J. Toy
    
    
    180,000
    
    
    
    1.80
    
    
    November 30, 2006
    
    November 29, 2016Verena Maria Bütler
(wife of Ernst A.
Bütler)
    
    
    180,000
    
    
    
    1.80
    
    
    November 30, 2006
    
    November 29, 2016Kevin Wei
    
    
    1,799,998
    
    
    
    1.80
    
    
    November 30, 2006
    
    November 29, 2016Jianping Zhang
    
    
    300,000
    
    
    
    1.80
    
    
    November 30, 2006
    
    November 29, 2016Fei Yun
    
    
    800,000
    
    
    
    1.80
    
    
    November 30, 2006
    
    November 29, 2016Ru Cai
    
    
    313,000
    
    
    
    1.80
    
    
    November 30, 2006
    
    November 29, 2016Other employees as a
group
    
    
    4,260,000
    
    
    
    1.80
    
    
    November 30, 2006
    
    November 29, 2016150,000
    
    
    
    2.44
    
    
    March 19, 2007
    
    November 29, 2016660,000
    
    
    
    2.87
    
    
    May 10, 2007
    
    November 29, 2016100,000
    
    
    
    2.11
    
    
    June 28, 2007
    
    November 29, 2016Total
    
    
    8,892,998
 63




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Board Practices
 Audit Committee
  
    
    selecting our independent auditors and pre-approving all auditing and non-auditing
services permitted to be performed by our independent auditors;
    
    reviewing with our independent auditors any audit problems or difficulties and
managements response;
    
    reviewing and approving all proposed related party transactions, as defined in Item 404
of Regulation S-K under the Securities Act;
    
    discussing the annual audited financial statements with management and our independent
auditors;
    
    reviewing major issues as to the adequacy of our internal control and any special audit
steps adopted in light of material control deficiencies;
    
    annually reviewing and reassessing the adequacy of our audit committee charter;
    
    such other matters that are specifically delegated to our audit committee by our board
of directors from time to time;
    
    meeting separately and periodically with management and our internal and independent auditors; and
    
    reporting regularly to our board of directors.
   Compensation Committee
  64




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##### Table of Contents




    
    approving and overseeing the compensation package for our executive officers;
    
    reviewing and making recommendations to our board of directors with respect to the
compensation of our directors;
    
    reviewing and approving corporate goals and objectives relevant to the compensation of
our chief executive officer, evaluating the performance of our chief executive officer in
light of those goals and objectives, and setting the compensation level of our chief
executive officer based on this evaluation; and
    
    reviewing periodically and making recommendations to our board of directors regarding
any long-term incentive compensation or equity plans, programs or similar arrangements,
annual bonuses, employee pension and welfare benefit plans.
  Corporate Governance and Nominating Committee
  
    
    identifying and recommending nominees for election or re-election to our board of
directors, or for appointment to fill any vacancy;
    
    reviewing annually with our board of directors its current composition in light of the
characteristics of independence, age, skills, experience and availability of service to us;
    
    identifying and recommending to our board the directors to serve as members of
committees;
    
    advising the board periodically with respect to significant developments in the law and
practice of corporate governance as well as our compliance with applicable laws and
regulations, and making recommendations to our board of directors on all matters of
corporate governance and on any corrective action to be taken; and
    
    monitoring compliance with our code of business conduct and ethics, including reviewing
the adequacy and effectiveness of our procedures to ensure proper compliance.
  Duties of Directors
   
    
    convening shareholders annual general meetings and reporting its work to shareholders at such meetings;
    
    declaring dividends and distributions;
 65




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##### Table of Contents




    
    appointing officers and determining the term of office of officers;
    
    exercising the borrowing powers of our company and mortgaging the property of our company; and
    
    approving the transfer of shares of our company, including the registering of such
shares in our share register.
 Terms of Directors and Executive Officers
  Employment Agreements
   Employees
 Employees
  As of December 31,2004
    
    2005
    
    2006Manufacturing and engineering
    
    
    72
    
    
    
    169
    
    
    
    535General and administration
    
    
    3
    
    
    
    30
    
    
    
    65Quality control
    
    
    3
    
    
    
    17
    
    
    
    41Research and development
    
    
    2
    
    
    
    11
    
    
    
    49Purchasing and logistics
    
    
    1
    
    
    
    6
    
    
    
    31Marketing and sales
    
    
    3
    
    
    
    8
    
    
    
    15Total
    
    
    84
    
    
    
    241
    
    
    
    736
   66




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##### Table of Contents



Share Ownership
  
    
    each of our directors and executive officers; and
    
    each person known to us to own beneficially more than 5.0% of our ordinary shares.
 Shares Beneficially Owned (1)(2)Number
    
    %Directors and Executive Officers:Yonghua Lu(3)
    
    
    77,269,500
    
    
    
    32.19%Hanfei Wang(4)
    
    
    12,543,750
    
    
    
    5.23%Xihong Deng(5)
    
    
    14,050,537
    
    
    
    5.85%Yuting Wang(6)
    
    
    501,750
    
    
    
    0.21%Terry McCarthy
    
    
    30,000
    
    
    
    0.01%Ernst A. Butler(7)
    
    
    30,000
    
    
    
    0.01%Thomas J. Toy(8)
    
    
    30,000
    
    
    
    0.01%Kevin Wei(9)
    
    
    466,666
    
    
    
    0.19%Ru Cai(10)
    
    
    77,667
    
    
    
    0.03%All Directors and Executive Officers as a Group(11)
    
    
    104,999,870
    
    
    
    43.75%Major Shareholders:Yonghua Solar Power Investment Holding Ltd(12)
    
    
    77,269,500
    
    
    
    32.19%WHF Investment Co., Ltd(13)
    
    
    12,543,750
    
    
    
    5.23%Citigroup Venture Capital International Growth
Partnership, L. P.(14)
    
    
    37,761,742
    
    
    
    15.73%Citigroup Venture Capital International Co-Investment,
L.P.(15)
    
    
    2,060,635
    
    
    
    0.86%Hony Capital II, L.P. (16)
    
    
    14,050,537
    
    
    
    5.85%LC Fund III, L. P.(17)
    
    
    10,519,118
    
    
    
    4.38%Good Energies Investments Limited(18)
    
    
    15,027,312
    
    
    
    6.26%
  
 (1)
    
    Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as amended, and includes voting
or investment power with respect to the securities. 67




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##### Table of Contents



(2)
    
    The number of ordinary shares outstanding in calculating the percentages for each
listed person includes the ordinary shares underlying options exercisable by such person
within 60 days of the date of this annual report on Form 20-F. Percentage of beneficial
ownership of each listed person is based on 240,024,754 ordinary shares outstanding as of
June 30, 2007, as well as the ordinary shares underlying share options exercisable by such
person within 60 days of the date of this annual report on Form 20-F. Under the Series A
Share Ownership Adjustment, depending on the amount of our audited net profit for 2006,
our existing ordinary shareholders may be required to transfer on a pro rata basis up to
an aggregate of 15,928,951 shares to the series A convertible preference shareholders or the series A
convertible preference shareholders may be required to transfer on a pro rata basis up to an aggregate
of 10,886,693 shares to our existing ordinary shareholder for nil consideration.(3)
    
    Owns Yonghua Solar Power Investment Holding Ltd, a British Virgin Islands company,
which held 77,269,500 ordinary shares in our company as of June 30, 2007. Mr. Lu is the
sole director of Yonghua Solar Power Investment Holding Ltd and has the right to cast the
vote for such company regarding all matters of our company requiring shareholder approval.
Mr. Lus business address is 666 Linyang Road, Qidong, Jiangsu Province, 226200, Peoples
Republic of China.(4)
    
    Owns WHF Investment Co., Ltd, a British Virgin Islands company, which held 12,543,750
ordinary shares in our company as of June 30, 2007. Mr. Wang is the sole director of
WHF Investment Co., Ltd and has the right to cast the vote for such company regarding all
matters of our company requiring shareholder approval. Mr. Wangs business address is 666
Linyang Road, Qidong, Jiangsu Province, 226200, Peoples Republic of China.(5)
    
    Includes 14,050,537 ordinary shares held by Hony Capital II, L.
P. as of June 30, 2007. Ms. Deng is managing director of Hony Capital II, GP Limited,
the general partner of Hony Capital II, L. P. Ms. Deng disclaims beneficial ownership of
all of our shares held by investment entities affiliated with Hony Capital II, L.P. except
to the extent of her pecuniary interest therein. The business address of Ms. Deng is c/o
7th Floor, Tower A, Raycom Info Tech Park, No. 2 Kexueyuan Nanlu, Haidian District,
Beijing, 100080, Peoples Republic of China.(6)
    
    Owns YongGuan Solar Power Investment Holding Ltd, a British Virgin Islands company,
which held 501,750 ordinary shares in our company as of June 30, 2007. Mr. Wang is the
sole director of YongGuan Solar Power Investment Holding Ltd and has the right to cast the
vote for such company regarding all matters of our company requiring shareholder approval.
Mr. Wangs business address is 666 Linyang Road, Qidong, Jiangsu Province, 226200, Peoples
Republic of China.(7)
    
    Includes 30,000 ordinary shares underlying share options exercisable by Mr. Ernst A.
Butler within 60 days of this annual report on Form 20-F.(8)
    
    Includes 30,000 ordinary shares underlying share options exercisable by Mr. Thomas J.
Toy within 60 days of this annual report on Form 20-F.(9)
    
    Includes 466,666 ordinary shares underlying share options exercisable by Mr. Kevin Wei
within 60 days of this annual report on Form 20-F.(10)
    
    Includes 77,677 ordinary shares underlying share options exercisable by Ms. Ru Cai
within 60 days of this annual report on Form 20-F.(11)
    
    Includes ordinary shares held by all of our
directors and senior executive officers as a group, as well as the
ordinary shares underlying share options held by such directors and
senior executive officers exercisable within 60 days of the date
of this annual report on Form 20-F.(12)
    
    Yonghua Solar Power Investment Holding Ltd, a British Virgin Islands company, is owned
by Mr. Yonghua Lu. Mr. Lu is the sole director of Yonghua Solar Power Investment Holding
Ltd. The address of Yonghua Solar Power Investment Holding Ltd is PO Box 173, Kingston
Chambers, Road Town, Tortola, British Virgin Islands.(13)
    
    WHF Investment Co., Ltd, a British Virgin Islands company, is owned by Mr. Hanfei Wang.
Mr. Wang is
the sole director of WHF Investment Co., Ltd. The address of WHF Investment Co., Ltd is
PO Box 173, Kingston Chambers, Road Town, Tortola, British Virgin Islands. 68




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##### Table of Contents



(14)
    
    Held 37,761,742 ordinary shares as of June 30, 2007. The
address of Citigroup Venture Capital International Growth Partnership, L.P. is c/o
Citigroup Venture Capital International Partnership G.P. Limited, 26 New Street, St.
Helier, Jersey, Channel Islands JE4 8PP. We have been informed that voting and investment
control over our shares held by Citigroup Venture Capital International Growth Partnership,
L.P. is held by the four directors of its general partner, Citigroup Venture Capital
International Partnership G.P. Limited, a company formed in Jersey, Channel Islands, who
are Dipak Kumar Rastogi, Susan Johnson, Michael Richardson and Deryk Haithwaite. Citigroup
Venture Capital International Partnership G.P. Limited is a wholly owned Citigroup
subsidiary.(15)
    
    Held 2,060,635 ordinary shares as of June 30, 2007. The
address of Citigroup Venture Capital International Co-Investment, L.P. is c/o Citigroup
Venture Capital International Partnership G.P. Limited, 26 New Street, St. Helier, Jersey,
Channel Islands JE4 8PP. We have been informed that voting and investment control over our
shares held by Citigroup Venture Capital International Co-Investment, L.P. is held by the
four directors of its general partner, Citigroup Venture Capital International Partnership
G.P. Limited, a company formed in Jersey, Channel Islands, who are Dipak Kumar Rastogi,
Susan Johnson, Michael Richardson and Deryk Haithwaite. Citigroup Venture Capital
International Partnership G.P. Limited is a wholly owned Citigroup subsidiary.(16)
    
    Held 14,050,537 ordinary shares as of June 30, 2007 through
its wholly owned subsidiary Brilliant Orient International Limited, a British Virgin
Islands company. The address of Hony Capital II, L. P. is 7th Floor, Tower A, Raycom Info
Tech Park, No. 2 Kexueyuan Nanlu, Haidian District, Beijing, 100080, Peoples Republic of
China. We have been informed that voting and investment control over our shares held by
Hony Capital II, L.P. is held by its five-seat investment committee. Among the five
representatives of such committee, three of them, Mr. Chuanzhi Liu, Mr. Linan Zhu and Mr.
John Huan Zhao, are nominees of Hony Capital II, L.P.s general partner, Hony Capital II,
GP Limited, a company incorporated in the Cayman Islands, and the other two representatives
are nominees of The Goldman Sachs Group, Inc. and Sun Hung Kai Properties Limited, which
are two of the limited partners of Hony Capital II, L.P. On November 18, 2006, Linyang
China entered into a management consulting service agreement with Hony Capital II, L.P.
under which, for a period of one year, Hony Capital II, L.P. agreed to provide certain
management consulting services to Linyang China and to second Ms. Xihong Deng, managing
director of Hony Capital II, GP Limited, the general partner of Hony Capital II, L.P., to
our company to serve as executive vice president in charge of international business
development. Linyang China agreed to pay an aggregate of RMB4 million to Hony Capital II,
L.P. as consideration for these services under this agreement.(17)
    
    Held 10,519,118 ordinary shares as of June 30, 2007. The
address of LC Fund III, L.P. is c/o Legend Capital Limited, 10th Floor, Tower A, Raycom
Info. Tech Center, No. 2 Kexueyuan Nanlu, Haidian District, Beijing, 100080, Peoples
Republic of China. We have been informed that voting and investment control over our shares
held by LC Fund III, L.P. is held by Mr. Chuanzhi Liu, Mr. Linan Zhu, Mr. John Huan Zhao,
Mr. Hao Chen, Mr. Nengguang Wang and Mr. Xiangyu Ouyang, the partners and investment
committee members of LC Fund III, L.P.(18)
    
    Held 15,027,312 ordinary shares as of June 30, 2007. The
address of Good Energies Investments Limited is 9 Hope Street, St., Helier, Jersey, Channel
Islands, JE 2 3 NS. We have been informed that voting and investment control over our
shares beneficially owned by Good Energies Investments Limited is maintained by the board
of directors of Good Energies Investments Limited, consisting of Mr. John Barrett, Mr. Paul
Bradshaw, Mr. John Drury, Mr. John Hammill and Mr. Gert-Jan Pieters. Good Energies
Investments Limited has entered into an advisory services contract with Good
Energies Inc. Under the terms of this agreement, Good Energies Inc. provides investment
advice to Good Energies Investments Limited in respect of voting and investment of securities
held by Good Energies Investments Limited. The address of Good Energies Inc. is Baumleingasse
22, 4001 Basel, Switzerland. Good Energies Investments Limited and Good Energies Inc. are
wholly owned subsidiaries of Cofra Holding AG, a company incorporated in Switzerland, with
the business address of Grafenauweg 10, Zug CH 6301, Switzerland. We have been informed that
voting and investment control over securities beneficially owned by Cofra Holding AG is
maintained by the board of directors of Cofra Holding AG, which consists of Mr. Erik
Brenninkmeijer, Mr. Stan Brenninkmeijer, Mr. Hans Brenninkmeijer, Mr. Wolter Brenninkmeijer,
Mr. Richard Hayden and Mr. Vernon Sankey. 69




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##### Table of Contents



ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 Major Shareholders
 3⁄4
 Related Party Transactions
  Series A Convertible Preference Shares
  Registration Rights
  
    
    Demand Registrations.On and after the earlier of (a) June 27, 2008 or (b) six months
after the date the registration statement covering the ordinary shares underlying the ADSs
to be sold in our initial public offering becomes effective, upon request of any of the
non-individual holders of series A convertible preference shares, we shall effect
registration with respect to the registrable securities held by such holders on a form
other than Form F-3 (or any comparable form for a registration for an offering in a
jurisdiction other than the United States), provided we shall only be obligated to effect
three such registrations.
    
    Piggyback Registrations.The holders of series A convertible preference shares and
their permitted transferees are entitled to piggyback registration rights, whereby they
may require us to register all or any part of the registrable securities that they hold at
the time when we register any of our ordinary shares.
    
    Registrations onForm F-3.We have granted the holders of series A convertible
preference shares and their permitted transferees of the registrable securities the right
to an unlimited number of registrations under Form F-3 (or any comparable form for a
registration in a jurisdiction other than the United States) to the extent we are eligible
to use such form to offer securities.
 Post-Offering Lock-Up
  70




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##### Table of Contents



Equity Incentive Plan
  Transactions with Certain Shareholders
 
    
    During the period from August 27, 2004 to December 31, 2004, Linyang China made
advances of RMB10.0 million to Linyang Electronics, its parent company until June 2006, and
RMB8.0 million to Huaerli Electronics, a company of which the equity holder and chairman
and chief executive officer of our company, Mr. Yonghua Lu, had a beneficial interest as an
equity holder. These amounts were unsecured, interest-free and were fully repaid in 2005.
In the three months ended March 31, 2006, Linyang China made cash advances of RMB0.1
million (US$0.01 million) and RMB2.1 million (US$0.3 million) to Mr. Yonghua Lu, our
chairman and chief executive officer, and Mr. Hanfei Wang, our director and chief operating
officer, respectively, and a housing loan of RMB2.9 million (US$0.4 million) to Mr.
Longxing Huang, our purchasing director. These amounts were unsecured, interest-free and
repayable upon demand. All the advances and the housing loan were fully repaid in April and
May 2006. We do not intend to make such cash advances or loans to any of our directors or
shareholders in the future.
    
    Linyang Electronics made advances to Linyang China in an aggregate amount of RMB119.4
million in 2005. We repaid RMB89.1 million and RMB30.2 million (US$3.8 million) of these
amounts in 2005 and 2006, respectively. Linyang Electronics paid certain operating
expenses of RMB0.7 million (US$0.1 million) and RMB0.5 (US$0.1 million) on behalf of
Linyang China in 2005 and 2006, respectively, and Linyang China repaid RMB0.06 million
(US$0.01 million) and RMB0.2 million (US$0.03 million) in the same period. As of December
31, 2005, the amount due to Linyang Electronics was approximately RMB30.9 million. The
amount due to Linyang Electronics was unsecured, interest-free and had no fixed terms of
repayment. In 2006, Linyang Electronics and Linyang Agricultural Development (Nantong) Co.,
Ltd., a company of which the shareholder, chairman and chief executive officer of our
company, Mr. Yonghua Lu, had a beneficial interest as an equity holder, made cash advances
to Linyang China of RMB105.9 million (US$13.4 million) and RMB9.0 million (US$1.1 million),
respectively, both of which were fully repaid in the same period. During the same period,
Linyang Electronics paid approximately RMB0.5 million (US$0.06 million) of operating
expenses on behalf of Linyang China, RMB0.2 million (US$0.03 million) of which have been
subsequently reimbursed by Linyang China. In addition, Linyang China purchased silicon
wafers and other materials from Linyang Electronics in the amount of RMB2.6 million in
2006, out of which RMB1.0 million has been paid by Linyang China in the same period. The
purchase was made according to the published prices and conditions offered by Linyang
Electronics to its customers. As of December 31, 2006, the amount due to Linyang
Electronics was approximately RMB2.3 million (US$0.3 million), which was unsecured,
interest-free and had no fixed terms of repayment. In October and November 2006, Linyang
China entered into entrusted loan agreements with Linyang Electronics under which Linyang
Electronics lent to Linyang China an aggregate of RMB80.0 million (US$10.1 million) through
a third party PRC bank. Under current PRC laws and regulations, PRC companies other than
licensed financial institutions are not permitted to make loans to each other directly. As
a result, companies commonly use indirect entrusted loan arrangements under which funds are
first deposited by the lending company with a PRC commercial bank, and the PRC commercial
bank then loans the corresponding amount of funds to the borrower pursuant to the
instruction of the lending company. As the principal and interest of the loan are repaid to
the bank, the bank
makes corresponding repayments to the lending company after deducting service fees. These
loans bear 6.138% annual interest, are unsecured and repayable within six months.
 71




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
    
    In September 2006, Sichuan Jiayang entered into a PV module purchase agreement with Linyang
Electronics in the amount of RMB0.3 million. The purchase was made according to the
published prices and conditions offered by Linyang Electronics to its customers. As of
December 31, 2006, the amount due to Linyang Electronics was RMB0.3 million.
    
    Linyang China entered into a number of agreements with Huaerli (Nantong) to purchase
silicon and silicon wafers in the aggregate amounts of RMB15.9 million and RMB23.8 million
(US$3.0 million), respectively, in 2005 and 2006. The purchase was made according to the
published prices and conditions offered by Huaerli (Nantong) to its customers. As of
December 31, 2005 and 2006, the amount due to Huaerli (Nantong) under these purchase
agreements was approximately RMB1.7 million and nil, respectively. The amount due to
Huaerli (Nantong) was unsecured, interest-free and repayable on demand. In 2006, Huaerli
(Nantong) paid approximately RMB7.6 million (US$1.0 million) of operating expenses on
behalf of Linyang China, all of which have been subsequently reimbursed by Linyang China in
the same period.
    
    In 2005, Huaerli (Nantong) made advances to Linyang China of RMB27.0 million (US$3.4
million), which was subsequently repaid by Linyang China in the same period.
    
    As of December 31, 2006, Linyang Chinas bank borrowings were guaranteed by Linyang
Electronics for up to RMB280.0 million (US$35.9 million) for nil consideration; RMB20.0
million (US$2.6 million) were jointly guaranteed by Linyang Electronics and Mr. Yonghua Lu,
our chairman, chief executive officer and his wife; RMB59.9 million (US$7.7 million) was
jointly guaranteed by Linyang Electronics and Huaerli (Nantong); and
RMB20.0 million
(US$2.6 million) was secured by land use rights and guaranteed by Linyang Electronics,
Qidong Huahong and our chairman and chief executive officer and his wife.
    
    As of December 31, 2005, for nil consideration, Linyang Electronics had pledged RMB10.0
million to a commercial bank for notes payable granted to Linyang China of RMB10.0 million.
    
    In 2005, Linyang China paid RMB81,000 for raw material purchases from Linyang
Electronics according to the published prices and conditions offered by Linyang Electronics
to its customers.
    
    In 2005 and the three months ended March 31, 2006, Qidong Huahong granted to Linyang
China the use of a parcel of land with a total area of 24,671 square meters for nil
consideration. As a result, in 2005 and the three months ended March 31, 2006, we recorded
a rental charge of RMB70,000 (US$8,856) and RMB23,000 (US$2,910), respectively, based on
the fair value of the rental cost incurred by Qidong Huahong and a corresponding credit to
additional paid-in capital. In April 2006, Qidong Huahong entered into a Land Use Rights
Transfer Agreement to transfer the use rights of this land until December 23, 2054 to
Linyang China for consideration of RMB4.6 million (US$0.6 million). The full price of the
contract has been paid. In November 2006, Qidong Huahong entered into two Land Use Rights
Transfer Agreements to transfer the use rights of two parcels of land with a total area of
36,841 square meters and a manufactory facility for a consideration of RMB21.9 million
(US$2.8million).
    
    On August 30, 2004 and March 16, 2005, Linyang China entered into two facility lease
agreements with Qidong Huahong. Linyang China incurred rental expenses of RMB25,000 in the
period from August 27, 2004 to December 31, 2004 and RMB58,000 (US$7,338) in 2005. The
rental agreement was entered into with reference to market rental rates. The amounts due to
Qidong Huahong under this agreement were RMB25,000, RMB83,000 (US$10,501) and nil as of
December 31, 2004, December 31, 2005 and December 31, 2006, respectively. These amounts
were unsecured, interest-free and payable on demand. In November 2005, the parties entered
into a new agreement to terminate the above two leases.
    
    In 2006, Nantong Linyang Ecological Cultural Co., Ltd., a company controlled
by our chairman and chief executive officer, paid approximately RMB0.1 million of operating
expenses on behalf of Linyang China, all of which have been subsequently reimbursed by
Linyang China.
    
    In September 2006, Linyang China entered into a PV module sales agreement with Shanghai
Linyang Electronics Technology Co., Ltd., a company controlled by our chairman and chief
executive officer. The amount for 20 modules was RMB0.15 million. The sales was made
according to the published prices and
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conditions offered by Linyang China to its customers.
As of December 31, 2006, the amount due from Linyang Technology was RMB0.15 million.
    
    On June 2, 2006, Linyang BVI agreed to pay US$6.6 million to Linyang Electronics for
the purchase of the equity interests held by Linyang Electronics in Linyang China and made
such payment in August 2006. The price of the transfer was based on the estimated net asset
value of Linyang China. This transaction was accounted for as a recapitalization.
    
    On November 18, 2006, Linyang China entered into a management consulting service
agreement with Hony Capital II, L.P. under which, for a period of one year, Hony Capital
II, L.P. agreed to provide certain management consulting services to Linyang China and to
second Ms. Xihong Deng, managing director of Hony Capital II, GP Limited, the general
partner of Hony Capital II, L.P., to our company to serve as executive vice president in
charge of international business development. Linyang China agreed to pay an aggregate of
RMB4 million to Hony Capital II, L.P. as consideration for these services under this
agreement.
 Interests of Experts and Counsel
  
 ITEM 8. FINANCIAL INFORMATION
 Consolidated Statements and Other Financial Information
  Legal and Administrative Proceedings
   Dividend Policy
  73




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Significant Changes
  
 ITEM 9. THE OFFER AND LISTING
 Offering and Listing Details.
    Share PriceHigh
    
    LowQuarterly High and LowFourth Quarter 2006 (from December 20, 2006)
    
    
    12.50
    
    
    
    9.90First Quarter 2007
    
    
    17.69
    
    
    
    10.21Monthly Highs and LowsDecember 2006 (from December 20, 2006)
    
    
    12.50
    
    
    
    9.90January 2007
    
    
    15.60
    
    
    
    10.21February 2007
    
    
    17.10
    
    
    
    13.23March 2007
    
    
    14.00
    
    
    
    11.88April 2007
    
    
    17.69
    
    
    
    12.15May 2007
    
    
    15.29
    
    
    
    9.02June 2007
(through June 29, 2007)
    
    
    11.16
    
    
    
    8.22
 Plan of Distribution
  Markets
 74




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##### Table of Contents



Selling Shareholders
  Dilution
  Expenses of the Issue
  
 ITEM 10. ADDITIONAL INFORMATION
 Share Capital
  Memorandum and Articles of Association
  Material Contracts
  Exchange Controls
 Foreign Currency Exchange
  
    
    Foreign Exchange Administration Rules (1996), as amended; and
    
    Regulations of Settlement, Sale and Payment of Foreign Exchange (1996)
   Taxation
 75




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##### Table of Contents



Cayman Islands Taxation
  United States Federal Income Taxation
   
    
    banks;
    
    certain financial institutions;
    
    insurance companies;
    
    broker dealers;
    
    U.S. expatriates;
    
    traders that elect to mark-to-market;
    
    tax-exempt entities;
    
    persons liable for alternative minimum tax;
    
    persons holding an ADS or ordinary share as part of a straddle, hedging, conversion or
integrated transaction;
    
    persons that actually or constructively own 10% or more of our voting stock; or
    
    persons holding ADSs or ordinary shares through partnerships or other pass-through entities.
  
    
    a citizen or resident of the United States;
    
    a corporation (or other entity taxable as a corporation for U.S. federal income tax
purposes) organized under the laws of the United States, any State or the District of
Columbia;
    
    an estate whose income is subject to U.S. federal income taxation regardless of its
source; or
    
    a trust that (1) is subject to the primary supervision of a court within the United
States and one or more U.S. persons have the authority to control all substantial decisions
of the trust or (2) was in existence on August 20,
 76




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##### Table of Contents



1996, was treated as a U.S. person under
the Internal Revenue Code on the previous day and has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a U.S. person.
   Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
     Taxation of Disposition of Shares
  77




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##### Table of Contents



Passive Foreign Investment Company
  
    
    at least 75% of its gross income is passive income; or
    
    at least 50% of the value of its assets (based on an average of the quarterly values of
the assets during a taxable year) is attributable to assets that produce or are held for
the production of passive income.
    
    
    the excess distribution or gain will be allocated ratably over your holding period for
the ADSs or ordinary shares;
    
    the amount allocated to the current taxable year, and any taxable year prior to the
first taxable year in which we became a PFIC, will be treated as ordinary income; and
    
    the amount allocated to each other year will be subject to the highest tax rate in
effect for that year and the interest charge generally applicable to underpayments of tax
will be imposed on the resulting tax attributable to each such year.
   78




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##### Table of Contents



de minimis
    Information Reporting and Backup Withholding
   Dividends and Paying Agents
  Statement by Experts
 79




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##### Table of Contents



Documents on Display
   Subsidiary Information
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Exchange Risk
   Interest Rate Risk
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  80




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PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    approximately US$50 million to purchase or prepay for raw materials;
    
    approximately US$40 million to expand our manufacturing capacity; and
    
    approximately US$10 million to invest in our research and development
activities.
  
 ITEM 15. CONTROLS AND PROCEDURES
     
 Item 16A. Audit Committee Financial Expert
  81




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Item 16B. Code of Ethics
 www.solarfun.com.cn
 
 Item 16C. Principal Accountant Fees and Services
  For the year ended December 31,2005
    
    2006
    
    2006(RMB)
    
    (RMB)
    
    (US$)Audit fees(1)
    
    
    
    
    
    
    1,560,000
    
    
    
    199,895All other fees(2)
    
    
    
    
    
    
    13,114,990
    
    
    
    1,680,526
 
 (1)
    
    Audit fees means the aggregate fees billed for professional
services rendered by our principal auditors for the interm
review/ audit of our quarterly/ annual financial statements for
the period from August 27, 2004 to December 31, 2006.(2)
    
    All other fees means the aggregate fees for services rendered
in connection with our public offering in 2006. 
 Item 16D. Exemptions from the Listing Standards for Audit Committees
  
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers.
  PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  
    
    Report of Independent Registered Public Accounting Firm
 82




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##### Table of Contents




    
    Consolidated Balance Sheets as of December 31, 2005 and 2006
    
    Consolidated Statements of Operations for the Period from August
27, 2004 (Date of Inception) to December 31, 2004, and for the
Years Ended December 31, 2005 and 2006
    
    Consolidated Statements of Cash Flows for the Period from August
27, 2004 (Date of Inception) to December 31, 2004, and for the
Years Ended December 31, 2005 and 2006
    
    Consolidated Statements of Changes in Shareholders Equity for
the Period from August 27, 2004 (Date of Inception) to December
31, 2004, and for the Years Ended December 31, 2005 and 2006
    
    Notes to the Consolidated Financial Statements
 
 ITEM 19. EXHIBITS
  ExhibitNumber
    
    Description of Document1.1
    
    Memorandum and Articles of Association of Solarfun Power Holdings Co.,
Ltd. (incorporated by reference to Exhibit 3.1 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 11, 2006)1.2
    
    Form of Second Amended and Restated Memorandum and Articles of Solarfun
Power Holdings Co., Ltd. (incorporated by reference to Exhibit 3.2 from
our F-1 registration statement (File No. 333-139258), as amended,
initially filed with the Commission on December 11, 2006)2.1
    
    Specimen Certificate for Ordinary Shares of Solarfun Power Holdings Co.,
Ltd. (incorporated by reference to Exhibit 4.2 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 11, 2006)2.2
    
    Form of American Depositary Receipt of Solarfun Power Holdings Co., Ltd.
(incorporated by reference to Exhibit 4.1 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 11, 2006)2.3
    
    Form of Deposit Agreement Form of Deposit Agreement, among Solarfun Power
Holdings Co., Ltd., the depositary and owners and holders of the American
Depositary Shares (incorporated by reference to Exhibit 4.3 from our F-1
registration statement (File No. 333-139258), as amended, initially filed
with the Commission on December 11, 2006)4.1
    
    Share Purchase Agreement, dated as of June 6, 2006, in respect of the
issue of series A convertible preference shares of Solarfun Power Holdings
Co., Ltd. (incorporated by reference to Exhibit 4.4 from our F-1
registration statement (File No. 333-139258), as amended, initially filed
with the Commission on December 11, 2006)4.2
    
    Shareholders Agreement, dated as of June 27, 2006, among Solarfun Power
Holdings Co., Ltd. and other parties therein (incorporated by reference to
Exhibit 4.5 from our F-1 registration statement (File No. 333-139258), as
amended, initially filed with the Commission on December 11, 2006)4.3
    
    Registration Rights Agreement, dated as of June 27, 2006, among Solarfun
Power Holdings Co., Ltd. and other parties therein (incorporated by
reference to Exhibit 4.6 from our F-1 registration statement (File No.
333-139258), as amended, initially filed with the Commission on December
11, 2006)4.4
    
    Agreement Concerning the Limitations on Post-IPO Sale of Shares, dated
June 20, 2006, among certain holders of ordinary shares (incorporated by
reference to Exhibit 4.7 from our F-1 registration statement (File No.
333-139258), as amended, initially filed with the Commission on December
11, 2006)
 83




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ExhibitNumber
    
    Description of Document4.5
    
    2006 Share Incentive Plan (incorporated by reference to Exhibit 10.1 from
our F-1 registration statement (File No. 333-139258), as amended,
initially filed with the Commission on December 11, 2006)4.6
    
    Form of Employment Agreement between Solarfun Power Holdings Co., Ltd. and
a Senior Executive Officer of the Registrant (incorporated by reference to
Exhibit 10.2 from our F-1 registration statement (File No. 333-139258), as
amended, initially filed with the Commission on December 11, 2006)4.7
    
    Silicon Supply Agreement, dated as of November 11, 2006, between Jiangsu
Linyang Solarfun Co., Ltd. and Jiangxi LDK Solar Hi-Tech Co., Ltd.
(incorporated by reference to Exhibit 10.3 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 11, 2006)4.8
    
    Silicon Supply Cooperation Agreement, dated as of November 14, 2006,
between Jiangsu Linyang Solarfun Co., Ltd and Jiangxi LDK Solar Hi-Tech
Co., Ltd. (incorporated by reference to Exhibit 10.4 from our F-1
registration statement (File No. 333-139258), as amended, initially filed
with the Commission on December 11, 2006)4.9
    
    Silicon Supply Agreement, dated as of July 6, 2006, between Jiangsu
Linyang Solarfun Co., Ltd. and ReneSola Co., Ltd. (incorporated by
reference to Exhibit 10.5 from our F-1 registration statement (File No.
333-139258), as amended, initially filed with the Commission on December
11, 2006)4.11
    
    Silicon Supply Agreement, dated as of March 26, 2006, between Jiangsu
Linyang Solarfun Co., Ltd. and ReneSola Co., Ltd. (incorporated by
reference to Exhibit 10.6 from our F-1 registration statement (File No.
333-139258), as amended, initially filed with the Commission on December
11, 2006)4.12
    
    Silicon Supply Agreement, dated as of October 8, 2006, between Jiangsu
Linyang Solarfun Co., Ltd. and E-mei Semiconductor Material Factory
(incorporated by reference to Exhibit 10.7 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 11, 2006)4.13
    
    Silicon Supply Agreement, dated as of June 2, 2006, and Amendments No. 1,
No. 2 and No. 3 thereto, dated as of June 9, 2006, October 8, 2006 and
November 17, 2006, respectively, between Jiangsu Linyang Solarfun Co.,
Ltd. and E-mei Semiconductor Material Factory (incorporated by reference
to Exhibit 10.8 from our F-1 registration statement (File No. 333-139258),
as amended, initially filed with the Commission on December 11, 2006)4.14
    
    Sales Contract, dated as of November 19, 2006, between Jiangsu Linyang
Solarfun Co., Ltd. and Scatec AS (incorporated by reference to Exhibit
10.10 from our F-1 registration statement (File No. 333-139258), as
amended, initially filed with the Commission on December 11, 2006)4.15
    
    Sales Contract, dated as of November 19, 2006, between Jiangsu Linyang
Solarfun Co., Ltd. and Scatec AS (incorporated by reference to Exhibit
10.11 from our F-1 registration statement (File No. 333-139258), as
amended, initially filed with the Commission on December 11, 2006)4.16
    
    Agreement of Transfer of Land Use Rights, dated as of April 8, 2006,
between Jiangsu Linyang Solarfun Co., Ltd. and Qidong Huahong Electronics
Co., Ltd. (incorporated by reference to Exhibit 10.12 from our F-1
registration statement (File No. 333-139258), as amended, initially filed
with the Commission on December 11, 2006)4.17
    
    Summary of Share Transfer Agreements, dated May 27, 2006 and effective as
of June 2, 2006, between Linyang Solar Power Investment Holding Ltd. and
the shareholders of Jiangsu Linyang Solarfun Co., Ltd. (incorporated by
reference to Exhibit 10.13 from our F-1 registration statement (File No.
333-139258), as amended, initially filed with the Commission on December
11, 2006)4.18
    
    Share Transfer Agreement, dated June 9, 2006, among Linyang Solar Power
Investment Holding Ltd. and various other parties (incorporated by
reference to Exhibit 10.14 from our F-1 registration statement (File No.
333-139258), as amended, initially filed with the Commission on December
11, 2006)
 84




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##### Table of Contents



ExhibitNumber
    
    Description of Document4.19
    
    Share Issue and Transfer Agreement, dated June 12, 2006, among Solarfun
Power Holdings Co., Ltd., Linyang Solar Power Investment Holding Ltd. and
various other parties (incorporated by reference to Exhibit 10.15 from our
F-1 registration statement (File No. 333-139258), as amended, initially
filed with the Commission on December 11, 2006)4.20
    
    Deed of Share Transfer, effective as of July 15, 2006, among Linyang Solar
Power Investment Holding Ltd. and various other parties (incorporated by
reference to Exhibit 10.16 from our F-1 registration statement (File No.
333-139258), as amended, initially filed with the Commission on December
11, 2006)4.21
    
    Management Consulting Service Agreement, dated as of November 18, 2006,
between Jiangsu Linyang Solarfun Co., Ltd. and Hony Capital II, L.P.
(incorporated by reference to Exhibit 10.17 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 11, 2006)4.22
    
    Bid Invitation and Letter of Acceptance for Shanghai Chongming Qianwei
Village 960kW Solar PV Power Generation Model Project, dated September 28,
2006 and November 9, 2006, respectively (incorporated by reference to
Exhibit 10.18 from our F-1 registration statement (File No. 333-139258),
as amended, initially filed with the Commission on December 11, 2006)4.23
    
    Letter of Acceptance for Suyuan Group 74kW On-Grid Application System
Project, dated September 12, 2006 (incorporated by reference to Exhibit
10.19 from our F-1 registration statement (File No. 333-139258), as
amended, initially filed with the Commission on December 11, 2006)4.24
    
    Contract between Jiangsu Linyang Solarfun Co., Ltd. and ISC Konstanz,
dated September 5, 2006 (incorporated by reference to Exhibit 10.20 from
our F-1 registration statement (File No. 333-139258), as amended,
initially filed with the Commission on December 11, 2006)4.25
    
    Entrusted Loan Contract, dated as of October 13, 2006, among Jiangsu
Linyang Electronics Co., Ltd., Bank of China Co., Ltd., Qidong Subbranch
and Jiangsu Linyang Solarfun Co., Ltd. (incorporated by reference to
Exhibit 10.21 from our F-1 registration statement (File No. 333-139258),
as amended, initially filed with the Commission on December 11, 2006)4.26
    
    Entrusted Loan Contract, dated as of October 18, 2006, among Jiangsu
Linyang Electronics Co., Ltd., Bank of China Co., Ltd., Qidong Subbranch
and Jiangsu Linyang Solarfun Co., Ltd. (incorporated by reference to
Exhibit 10.22 from our F-1 registration statement (File No. 333-139258),
as amended, initially filed with the Commission on December 11, 2006)4.27
    
    Entrusted Loan Contract, dated as of October 25, 2006, among Jiangsu
Linyang Electronics Co., Ltd., Bank of China Co., Ltd., Qidong Subbranch
and Jiangsu Linyang Solarfun Co., Ltd. (incorporated by reference to
Exhibit 10.23 from our F-1 registration statement (File No. 333-139258),
as amended, initially filed with the Commission on December 11, 2006)4.28
    
    Entrusted Loan Contract, dated as of November 20, 2006, among Jiangsu
Linyang Electronics Co., Ltd., Bank of China Co., Ltd., Qidong Subbranch
and Jiangsu Linyang Solarfun Co., Ltd. (incorporated by reference to
Exhibit 10.24 from our F-1 registration statement (File No. 333-139258),
as amended, initially filed with the Commission on December 11, 2006)4.29
    
    Silicon Purchase Agreement, dated as of May 15, 2005, between Jiangsu
Linyang Solarfun Co., Ltd. and Huaerli (Nantong) Electronics Co., Ltd.
(incorporated by reference to Exhibit 10.25 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 11, 2006)4.30
    
    Silicon Purchase Agreement, dated as of January 12, 2006, between Jiangsu
Linyang Solarfun Co., Ltd. and Huaerli (Nantong) Electronics Co., Ltd.
(incorporated by reference to Exhibit 10.26 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 11, 2006)4.31
    
    Silicon Purchase Agreement, dated as of July 2, 2006, between Jiangsu
Linyang Solarfun Co., Ltd. and Huaerli (Nantong) Electronics Co., Ltd.
(incorporated by reference to Exhibit 10.27 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 11, 2006)
 85




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##### Table of Contents



ExhibitNumber
    
    Description of Document4.33*
    
    Silicon Purchase Agreement, dated as of January 8, 2007, between Jiangsu
Linyang Solarfun Co., Ltd. and Shanghai Jiu Jing Electronic Material Co.,
Ltd.4.34*
    
    Silicon Purchase Agreement, dated as of March 6, 2007, between Jiangsu
Linyang Solarfun Co., Ltd. and Jiangxi LDK Solar Hi-Tech Co., Ltd.8.1*
    
    Subsidiaries of Solarfun Power Holdings Co., Ltd.99.1
    
    Code of Business Conduct and Ethics of Solarfun Power Holdings Co.,
Ltd.(incorporated by reference to Exhibit 99.1 from our F-1 registration
statement (File No. 333-139258), as amended, initially filed with the
Commission on December 5, 2006)12.1*
    
    CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2*
    
    CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1*
    
    CEO and CFO Certification Pursuant to Section 906
 
 *
    
    Filed with this Annual Report on Form 20-F 86




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##### Table of Contents



SIGNATURE
  SOLARFUN POWER HOLDINGS CO., LTD./s/ Yonghua Lu

Yonghua LuChairman and Chief Executive Officer




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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageFinancial StatementsReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2005 and 2006
    
    
    F-3Consolidated Statements of Operations for the Period from August
27, 2004 (Date of Inception) to December 31, 2004 and for the Years
Ended December 31, 2005 and 2006
    
    
    F-4Consolidated Statements of Cash Flows for the Period from August
27, 2004 (Date of Inception) to December 31, 2004 and for the Years
Ended December 31, 2005 and
2006
    
    
    F-5Consolidated Statements of Changes in Shareholders Equity for the
Period from August 27, 2004 (Date of Inception) to December 31,
2004 and for the Years Ended December 31, 2005 and
2006
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-7  F-44
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
  F-2




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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 
 CONSOLIDATED BALANCE SHEETS
 
 December 31,Note
    
    2005
    
    2006
    
    2006(RMB)
    
    (RMB)
    
    (US$)AssetsCurrent assets:Cash and cash equivalents
    
    
    
    
    
    
    7,054
    
    
    
    1,137,792
    
    
    
    145,794Restricted cash
    
    
    
    
    
    
    22,229
    
    
    
    33,822
    
    
    
    4,334Accounts receivable (net of allowance for
doubtful accounts of RMB11,322,000 as of
December 31, 2006 (2005: Nil))
    
    
    
    
    
    
    
    
    
    
    147,834
    
    
    
    18,943Inventories
    
    
    3
    
    
    
    76,819
    
    
    
    372,504
    
    
    
    47,732Advance to suppliers
    
    
    4
    
    
    
    61,312
    
    
    
    238,178
    
    
    
    30,520Other current assets
    
    
    5
    
    
    
    20,705
    
    
    
    75,525
    
    
    
    9,677Deferred tax assets
    
    
    19
    
    
    
    96
    
    
    
    3,400
    
    
    
    436Amount due from related parties
    
    
    20
    
    
    
    
    
    
    
    153
    
    
    
    20Amount due from shareholders
    
    
    20
    
    
    
    
    
    
    
    578
    
    
    
    74Total current assets
    
    
    
    
    
    
    188,215
    
    
    
    2,009,786
    
    
    
    257,530Non-current assets:Fixed assets  net
    
    
    6
    
    
    
    55,146
    
    
    
    207,449
    
    
    
    26,582Intangible assets  net
    
    
    7
    
    
    
    
    
    
    
    12,897
    
    
    
    1,653Investments
    
    
    8
    
    
    
    
    
    
    
    300
    
    
    
    38Total non-current assets
    
    
    
    
    
    
    55,146
    
    
    
    220,646
    
    
    
    28,273Total assets
    
    
    
    
    
    
    243,361
    
    
    
    2,230,432
    
    
    
    285,803LIABILITIES, PREFERENCE SHARES AND SHAREHOLDERS
EQUITYCurrent liabilities:Short-term bank borrowings
    
    
    9
    
    
    
    20,000
    
    
    
    379,900
    
    
    
    48,680Long-term bank borrowings, current portion
    
    
    9
    
    
    
    
    
    
    
    16,000
    
    
    
    2,050Accounts payable
    
    
    
    
    
    
    18,794
    
    
    
    51,452
    
    
    
    6,593Notes payable
    
    
    10
    
    
    
    20,000
    
    
    
    14,020
    
    
    
    1,796Accrued expenses and other liabilities
    
    
    11
    
    
    
    22,920
    
    
    
    33,619
    
    
    
    4,308Customer deposits
    
    
    13
    
    
    
    55,319
    
    
    
    17
    
    
    
    2Amount due to related parties
    
    
    20
    
    
    
    32,658
    
    
    
    24,486
    
    
    
    3,138Amount due to shareholders
    
    
    20
    
    
    
    
    
    
    
    7,572
    
    
    
    970Total current liabilities
    
    
    
    
    
    
    169,691
    
    
    
    527,066
    
    
    
    67,537Non-current liabilities:Long-term bank borrowings, non-current portion
    
    
    9
    
    
    
    
    
    
    
    15,000
    
    
    
    1,922Commitments and contingencies
    
    
    22Minority interests
    
    
    
    
    
    
    
    
    
    
    10,151
    
    
    
    1,301Shareholders EquityOrdinary shares(par value US$0.0001 per share; 400,000,000
shares authorized; 50,175,000 shares,100,350,000
shares and 239,994,754 shares issued and
outstanding at December 31, 2004, 2005 and 2006,
respectively)
    
    
    
    
    
    
    84
    
    
    
    193
    
    
    
    25Additional paid-in capital
    
    
    
    
    
    
    59,783
    
    
    
    1,565,524
    
    
    
    200,604Statutory reserves
    
    
    15
    
    
    
    1,496
    
    
    
    16,024
    
    
    
    2,053Retained earnings
    
    
    
    
    
    
    12,307
    
    
    
    96,474
    
    
    
    12,361Total shareholders equity
    
    
    
    
    
    
    73,670
    
    
    
    1,678,215
    
    
    
    215,043Total liabilities and shareholders equity
    
    
    
    
    
    
    243,361
    
    
    
    2,230,432
    
    
    
    285,803
 The accompanying notes are an integral part of the consolidated financial statements. F-3




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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 
 For the periodfrom August27, 2004 (dateof inception) toDecember 31,
    
    
    For the year ended December 31,Note
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2006(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (US$)Net revenue:Photovoltaic modules
    
    
    
    
    
    
    
    
    
    
    165,636
    
    
    
    604,317
    
    
    
    77,436Photovoltaic cells
    
    
    
    
    
    
    
    
    
    
    542
    
    
    
    7,182
    
    
    
    920Photovoltaic cells processing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,408
    
    
    
    2,487Total net revenue
    
    
    
    
    
    
    
    
    
    
    166,178
    
    
    
    630,907
    
    
    
    80,843Cost of revenue:Photovoltaic modules
    
    
    
    
    
    
    
    
    
    
    (139,481
    )
    
    
    (434,493
    )
    
    
    (55,675
    )Photovoltaic cells
    
    
    
    
    
    
    
    
    
    
    (422
    )
    
    
    (5,983
    )
    
    
    (766
    )Photovoltaic cells processing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,054
    )
    
    
    (776
    )Total cost of revenue
    
    
    
    
    
    
    
    
    
    
    (139,903
    )
    
    
    (446,530
    )
    
    
    (57,217
    )Gross profit
    
    
    
    
    
    
    
    
    
    
    26,275
    
    
    
    184,377
    
    
    
    23,626Operating expenses:Selling expenses
    
    
    
    
    
    
    
    
    
    
    (5,258
    )
    
    
    (11,883
    )
    
    
    (1,523
    )General and administrative expenses
    
    
    16
    
    
    
    (629
    )
    
    
    (4,112
    )
    
    
    (52,214
    )
    
    
    (6,690
    )Research and development expenses
    
    
    
    
    
    
    
    
    
    
    (750
    )
    
    
    (6,523
    )
    
    
    (836
    )Total operating expenses
    
    
    
    
    
    
    (629
    )
    
    
    (10,120
    )
    
    
    (70,620
    )
    
    
    (9,049
    )Operating (loss) profit
    
    
    
    
    
    
    (629
    )
    
    
    16,155
    
    
    
    113,757
    
    
    
    14,577Interest expenses
    
    
    
    
    
    
    
    
    
    
    (123
    )
    
    
    (8,402
    )
    
    
    (1,077
    )Interest income
    
    
    
    
    
    
    22
    
    
    
    95
    
    
    
    1,326
    
    
    
    170Exchange losses
    
    
    
    
    
    
    
    
    
    
    (1,768
    )
    
    
    (4,346
    )
    
    
    (557
    )Other income
    
    
    
    
    
    
    
    
    
    
    215
    
    
    
    902
    
    
    
    116Other expenses
    
    
    
    
    
    
    
    
    
    
    (260
    )
    
    
    (836
    )
    
    
    (107
    )Changes in fair value of embedded
foreign currency derivative
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    (163
    )
    
    
    (21
    )Government grant
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    852
    
    
    
    109(Loss) income before income taxes
and minority interest
    
    
    
    
    
    
    (607
    )
    
    
    14,314
    
    
    
    103,090
    
    
    
    13,210Income tax benefit
    
    
    19
    
    
    
    
    
    
    
    96
    
    
    
    3,132
    
    
    
    401Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (301
    )
    
    
    (39
    )Net (loss) income
    
    
    
    
    
    
    (607
    )
    
    
    14,410
    
    
    
    105,921
    
    
    
    13,572Net (loss) income attributable to
ordinary shareholders
    
    
    
    
    
    
    (607
    )
    
    
    14,410
    
    
    
    98,695
    
    
    
    12,646Net (loss) income per share:Basic
    
    
    25
    
    
    
    (0.01
    )
    
    
    0.26
    
    
    
    0.95
    
    
    
    0.12Diluted
    
    
    25
    
    
    
    (0.01
    )
    
    
    0.22
    
    
    
    0.74
    
    
    
    0.09Shares used in computation:Basic net (loss) income per share
    
    
    25
    
    
    
    51,994,399
    
    
    
    54,511,540
    
    
    
    103,631,832
    
    
    
    103,631,832Diluted net (loss) income per share
    
    
    25
    
    
    
    51,994,399
    
    
    
    66,366,469
    
    
    
    142,108,460
    
    
    
    142,108,460Net (loss) income per ADS:Basic
    
    
    25
    
    
    
    (0.05
    )
    
    
    1.32
    
    
    
    4.76
    
    
    
    0.61Diluted
    
    
    25
    
    
    
    (0.05
    )
    
    
    1.09
    
    
    
    3.72
    
    
    
    0.48Shares used in computation:Basic net (loss) income per ADS
    
    
    25
    
    
    
    10,398,880
    
    
    
    10,902,308
    
    
    
    20,726,366
    
    
    
    20,726,366Diluted net (loss) income per ADS
    
    
    25
    
    
    
    10,398,880
    
    
    
    13,273,294
    
    
    
    28,421,692
    
    
    
    28,421,692
 The accompanying notes are an integral part of the consolidated financial statements. F-4




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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  For the periodfrom August27, 2004 (dateof inception) toDecember 31,
    
    
    For the year ended December 31,Note
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2006(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (US$)Cash flows from operating activities:Net (loss) income attributable to holders of
ordinary shares
    
    
    
    
    
    
    (607
    )
    
    
    14,410
    
    
    
    98,695
    
    
    
    12,646Dividends on Series A redeemable convertible
preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,226
    
    
    
    926Net (loss) income
    
    
    
    
    
    
    (607
    )
    
    
    14,410
    
    
    
    105,921
    
    
    
    13,572Adjustments to reconcile net (loss) income to
net cash used in operating activities:Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    301
    
    
    
    39Depreciation and amortization
    
    
    
    
    
    
    3
    
    
    
    781
    
    
    
    6,562
    
    
    
    841Stock compensation expenses
    
    
    16, 17
    
    
    
    
    
    
    
    501
    
    
    
    25,307
    
    
    
    3,243Provision for doubtful receivables
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,323
    
    
    
    1,451Deferred tax benefit
    
    
    19
    
    
    
    
    
    
    
    (96
    )
    
    
    (3,304
    )
    
    
    (423
    )Warranty provision
    
    
    
    
    
    
    
    
    
    
    1,520
    
    
    
    6,030
    
    
    
    773Others
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    197
    
    
    
    25Changes in operating assets and liabilities:Restricted cash
    
    
    
    
    
    
    
    
    
    
    (22,229
    )
    
    
    (11,593
    )
    
    
    (1,486
    )Accounts receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (159,157
    )
    
    
    (20,394
    )Inventories
    
    
    
    
    
    
    (4,511
    )
    
    
    (72,308
    )
    
    
    (295,685
    )
    
    
    (37,888
    )Advance to suppliers
    
    
    
    
    
    
    (4,850
    )
    
    
    (56,462
    )
    
    
    (176,866
    )
    
    
    (22,664
    )Other current assets
    
    
    
    
    
    
    (762
    )
    
    
    (19,943
    )
    
    
    (54,820
    )
    
    
    (7,024
    )Amount due from related parties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,889
    
    
    
    3,701Accounts payable
    
    
    
    
    
    
    2,221
    
    
    
    16,573
    
    
    
    26,678
    
    
    
    3,418Accrued expenses and other liabilities
    
    
    
    
    
    
    301
    
    
    
    2,928
    
    
    
    22,458
    
    
    
    2,878Amount due to related parties
    
    
    
    
    
    
    25
    
    
    
    2,354
    
    
    
    
    
    
    
    Customer deposits
    
    
    
    
    
    
    
    
    
    
    55,319
    
    
    
    (55,302
    )
    
    
    (7,086
    )Net cash used in operating activities
    
    
    
    
    
    
    (8,180
    )
    
    
    (76,582
    )
    
    
    (523,061
    )
    
    
    (67,024
    )Cash flows from investing activities:Acquisition of fixed assets
    
    
    
    
    
    
    (295
    )
    
    
    (37,464
    )
    
    
    (177,872
    )
    
    
    (22,793
    )Acquisition of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,988
    )
    
    
    (1,664
    )Investment in affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (300
    )
    
    
    (38
    )Proceeds from disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,113
    
    
    
    143Net cash used in investing activities
    
    
    
    
    
    
    (295
    )
    
    
    (37,464
    )
    
    
    (190,047
    )
    
    
    (24,352
    )Cash flows from financing activities:Capital contributed by minority interest
shareholder
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,850
    
    
    
    1,262Net proceeds from issuance of preference
shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    420,028
    
    
    
    53,821Net proceeds from issuance of ordinary shares
    
    
    
    
    
    
    30,000
    
    
    
    29,296
    
    
    
    1,060,515
    
    
    
    135,892Proceeds from short-term borrowings
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    475,720
    
    
    
    60,958Payment of short-term borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99,820
    )
    
    
    (12,791
    )Proceeds from long-term borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    1,922Utilization of notes payables
    
    
    10
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    Payment of notes payables
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    (7,226
    )
    
    
    (926
    )Advances to related parties
    
    
    20
    
    
    
    (18,000
    )
    
    
    
    
    
    
    
    
    
    
    Repayment of advances to related parties
    
    
    20
    
    
    
    
    
    
    
    18,000
    
    
    
    
    
    
    
    Advances from related parties
    
    
    20
    
    
    
    
    
    
    
    146,400
    
    
    
    114,900
    
    
    
    14,723Repayment of advances from related parties
    
    
    20
    
    
    
    
    
    
    
    (116,121
    )
    
    
    (145,121
    )
    
    
    (18,595
    )Net cash provided by financing activities
    
    
    
    
    
    
    12,000
    
    
    
    117,575
    
    
    
    1,843,846
    
    
    
    236,266Net increase in cash and cash equivalents
    
    
    
    
    
    
    3,525
    
    
    
    3,529
    
    
    
    1,130,738
    
    
    
    144,890Cash and cash equivalents at the beginning of
period/year
    
    
    
    
    
    
    
    
    
    
    3,525
    
    
    
    7,054
    
    
    
    904Cash and cash equivalents at the end of
period/ year
    
    
    
    
    
    
    3,525
    
    
    
    7,054
    
    
    
    1,137,792
    
    
    
    145,794Supplemental disclosure of cash flow
information:Interest paid
    
    
    
    
    
    
    
    
    
    
    123
    
    
    
    8,048
    
    
    
    1,031Supplemental schedule of non-cash activitiesAcquisition of fixed assets included in
accrued expenses and other liabilities
    
    
    
    
    
    
    33
    
    
    
    18,171
    
    
    
    
    
    
    
    Expense paid by a shareholder on behalf of
the Group
    
    
    20
    
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    Stock compensation expense
    
    
    16,17
    
    
    
    
    
    
    
    501
    
    
    
    25,307
    
    
    
    3,243
 The accompanying notes are an integral part of the consolidated financial statements. F-5




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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 
 Retained
    
    
    
    
    
    
    TotalNumber of
    
    
    Ordinary
    
    
    Additional
    
    
    Statutory
    
    
    earnings
    
    
    
    
    
    
    shareholdersNote
    
    
    ordinary shares
    
    
    shares
    
    
    paid-in capital
    
    
    reserves
    
    
    (deficits)
    
    
    Put options
    
    
    equity(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)Balance as of August 27,
2004 (date of inception)
    
    
    
    
    
    
    50,175,000
    
    
    
    42
    
    
    
    29,958
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000Net loss for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (607
    )
    
    
    
    
    
    
    (607
    )Balance as of December 31,
2004
    
    
    
    
    
    
    50,175,000
    
    
    
    42
    
    
    
    29,958
    
    
    
    
    
    
    
    (607
    )
    
    
    
    
    
    
    29,393Stock compensation expenses
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    501
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    501Expenses paid on behalf of
the Group by a shareholder
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70Proceeds from issuance of
common stock
    
    
    
    
    
    
    50,175,000
    
    
    
    42
    
    
    
    29,254
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,296Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,410
    
    
    
    
    
    
    
    14,410Appropriation of statutory
reserves
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,496
    
    
    
    (1,496
    )
    
    
    
    
    
    
    Balance as of December 31,
2005
    
    
    
    
    
    
    100,350,000
    
    
    
    84
    
    
    
    59,783
    
    
    
    1,496
    
    
    
    12,307
    
    
    
    
    
    
    
    73,670Stock compensation expenses
    
    
    14,16
    
    
    
    
    
    
    
    
    
    
    
    22,425
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,425Share-based compensation
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    2,882
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,882Acquisition of put option
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    668
    
    
    
    668Exercise of put option
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (668
    )
    
    
    (668
    )Proceeds from issuance of
common stock upon IPO
    
    
    
    
    
    
    60,000,000
    
    
    
    47
    
    
    
    1,060,468
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,060,515Conversion of preference
shares
    
    
    14
    
    
    
    79,644,754
    
    
    
    62
    
    
    
    419,966
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    420,028Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105,921
    
    
    
    
    
    
    
    105,921Cumulative dividends 
preference shares
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,226
    )
    
    
    
    
    
    
    (7,226
    )Appropriation of statutory
reserves
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,528
    
    
    
    (14,528
    )
    
    
    
    
    
    
    Balance as of December 31,
2006
    
    
    
    
    
    
    239,994,754
    
    
    
    193
    
    
    
    1,565,524
    
    
    
    16,024
    
    
    
    96,474
    
    
    
    
    
    
    
    1,678,215Balance as of December 31,
2006, in US$
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    200,604
    
    
    
    2,053
    
    
    
    12,361
    
    
    
    
    
    
    
    215,043
 The accompanying notes are an integral part of the consolidated financial statements. F-6




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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
    
    ORGANIZATION AND BASIS OF PRESENTATIONJiangsu Linyang Solarfun Co., Ltd. (Linyang Solarfun), a company established in the Peoples
Republic of China (the PRC) on August 27, 2004, is engaged in the development, manufacturing
and sales of photovoltaic (PV) products to customers in the PRC and overseas markets. On
June 2, 2006, the shareholders of Linyang Solarfun transferred their entire equity interest in
Linyang Solarfun in exchange for all the shares in Linyang Solar Power Investment Holding Ltd.
(Linyang Solar Power), a British Virgin Islands company, on a pro-rata basis. As a result
of the exchange, the shareholders respective interest in Linyang Solar Power was identical to
their respective interest in Linyang Solarfun immediately prior to the share exchange. The
share exchange was accounted for at historical cost.On June 12, 2006, the shareholders of Linyang Solar Power transferred their entire equity
interest in Linyang Solar Power in exchange, on a pro-rata basis, for all the shares in
Solarfun Power Holdings Co., Ltd. (the Company), a Cayman Islands company. As a result of
the exchange, the shareholders respective interest in the Company was identical to their
respective interest in Linyang Solar Power immediately prior to the share exchange. The
Company accounted for the issuance of shares in connection with this transaction as a
reorganization of entities under common control in a manner similar to a pooling-of-interests.
Accordingly these financial statements reflect the financial position and operating results
of the Company and its subsidiaries (together, the Group) as if the above transactions were
completed on August 27, 2004 (date of inception). All share and per share data presented have
been presented to give retroactive effect to these exchanges.On December 20, 2006, the Company completed its initial public offering of 12,000,000 American
Depositary Shares (ADS) at US$12.5 per ADS. Each ADS comprises five ordinary shares. The net
proceeds to the Company from the offering amounted to
RMB1,060,515,000 (US$135,892,031) net of issuance costs
paid and payable.As of December 31, 2006, the Companys subsidiaries include the following entities:
 Date of
    
    Place of
    
    Percentage ofincorporation/
    
    incorporation/
    
    shareholding/Subsidiary
    
    establishment
    
    establishment
    
    ownership
    
    Principal activitiesLinyang Solar Power
Investment Holding
Ltd. 
(Linyang
Solar Power)
    
    May 17, 2006
    
    British Virgin Islands
    
    100%
    
    Investment holdingJiangsu Linyang
Solarfun Co., Ltd.

(Linyang
Solarfun)
    
    Aug 27, 2004
    
    PRC
    
    100%
    
    Development, manufacturing and sales of PV productsShanghai Linyang
Solar Technology
Co., Ltd.

(Shanghai
Linyang)
    
    March 29, 2006
    
    PRC
    
    83%
    
    Research and development, design, and provision services in solar energy related productsSichuan Leshan
Jiayang New Energy
Co., Ltd. 
(Sichuan
Leshan Jiayang)
    
    April 22, 2006
    
    PRC
    
    55%
    
    Research and development, manufacturing and sales of solar energy related products
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
    
    ORGANIZATION AND BASIS OF PRESENTATION (Contd)In March 2006, the Group injected RMB 4.15 million in return for an 83%
controlling interest in Shanghai Linyang, a newly established entity in the PRC. The other
17% minority interest is held by a group of individuals comprising of two directors of the
Company and the spouse of one of the directors. Shanghai Linyang commenced operation in April
2006.In April 2006, the Group injected RMB11 million in return for a 55% controlling interest in
Sichuan Leshan Jiayang, a newly established entity in the PRC. At the same time, an
independent third party injected RMB6 million in return for a 30% interest. The remaining 15%
was subscribed for by an individual, who at the time was senior manager of Jiangsu Linyang
Electronics Co., Ltd. (Linyang Electronics), a PRC company whose controlling equity holder
is also the chairman and significant shareholder of the Company. The 15% interest was held on
behalf of the chairman of the Company. Sichuan Leshan Jiayang commenced operation in June 2006.The consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles (US GAAP).2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples of ConsolidationThe consolidated financial statements include the financial statements of the Company and its
subsidiaries. All significant inter-company transactions and balances between the Company and
its subsidiaries are eliminated upon consolidation.InvestmentsThe Group applies Accounting Principles Board No. 18  The Equity Method of Accounting for
Investments in Common Stock (APB No. 18) in accounting for its investments. Under APB No.
18, equity method is used for investments in entities in which the Group has the ability to
exercise significant influence but does not own a majority equity interest or otherwise
controls. Cost method is used for investments over which the Group does not have the ability
to exercise significant influence.The Group monitors its investments for other-than-temporary impairment by considering factors
including, but not limited to, current economic and market conditions, the operating
performance of the investee companies including current earnings trends and other
company-specific information.
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)Foreign CurrencyThe functional currency of the Company and each of its subsidiaries is RMB as determined based
on the criteria of Statement of Financial Accounting Standard (SFAS) No. 52 Foreign
Currency Translation. The reporting currency of the Company is also RMB. Transactions
denominated in foreign currencies are remeasured into the functional currency at the exchange
rates prevailing on the transaction dates. Foreign currency denominated financial assets and
liabilities are remeasured at the balance sheet date exchange rate. Exchange gains and losses
are included in foreign exchange gains and losses in the consolidated statements of
operations.Convenience TranslationAmounts in United States dollars are presented for the convenience of the reader and are
translated at the noon buying rate of US$1.00 to RMB7.8041 on December 29, 2006 in the City of
New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve
Bank of New York. No representation is made that the RMB amounts could have been, or could
be, converted into United States dollars at such rate.Use of EstimatesThe preparation of financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results could differ
from these estimates. Significant estimates reflected in the Companys financial statements
include, but are not limited to, provision for doubtful accounts receivable, provision for
warranty, provision for advances to suppliers, useful lives of fixed assets, valuation
allowance of deferred tax assets and stock compensation expense.Cash and Cash EquivalentsCash and cash equivalents consist of cash on hand and bank deposits, which are unrestricted as
to withdrawal and use.Restricted cashRestricted cash represents amounts held by a bank which are not available for the Groups use
as security for letters of credit facilities, notes payable and PRC Custom deposits. The
restriction on cash is expected to be released within the next twelve months.
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)Accounts ReceivableAn allowance for doubtful accounts is recorded in the period in which collection is determined
to be not probable based on an assessment of specific evidence indicating troubled collection,
historical experience, account balance aging and prevailing economic conditions. An accounts
receivable is charged off after all collection efforts have ceased. As of December 31, 2006,
RMB11,322,000 (equivalent to approximately US$1,450,775) of specific allowance for doubtful
accounts had been provided.InventoriesInventories are stated at the lower of cost or market value. Cost is determined by the
weighted average method. Raw material cost is based on purchase costs while work-in-progress
and finished goods, comprise direct materials, direct labor and an allocation of manufacturing
overhead costs.Fixed AssetsFixed assets are stated at cost and are depreciated using the straight-line method over the
estimated useful lives of the assets, as follows:
 Buildings
    
    20 yearsPlant and machinery
    
    10 yearsFurniture, fixtures and office equipment
    
    5 yearsComputer software
    
    5 yearsMotor vehicles
    
    5 years
 Repair and maintenance costs are charged to expense when incurred, whereas the cost of
renewals and betterment that extend the useful life of fixed assets are capitalized as
additions to the related assets. Retirement, sale and disposals of assets are recorded by
removing the cost and accumulated depreciation with any resulting gain or loss reflected in
the consolidated statements of operations.Cost incurred in constructing new facilities, including progress payment, interest and other
costs relating to the construction are capitalized and transferred to fixed assets on
completion. Total interest costs incurred during the period ended December 31, 2004, the
years ended December 31, 2005 and 2006 amounted to approximately RMB Nil, RMB123,000 and
RMB8,756,041 (US$1,121,979) respectively. Interest capitalized at
December 31, 2005 and 2006
amounted to RMB Nil and RMB354,502 (US$45,425), respectively.
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)Intangible AssetLand use rightsLand use rights represent amounts paid for the right to use land in the PRC and are recorded
at purchase cost less accumulated amortization. Amortization is provided on a straight-line
basis over the term of the agreement.Impairment of Long-Lived AssetsThe Group evaluates its long-lived assets or asset group for impairment whenever events or
changes in circumstances (such as a significant adverse change to market conditions that will
impact the future use of the assets) indicate that the carrying amount of a group of
long-lived asset may not be recoverable. When these events occur, the Group evaluates the
impairment by comparing the carrying amount of the assets to future undiscounted net cash
flows expected to result from the use of the assets and their eventual disposition. If the
sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the
Group would recognize an impairment loss based on the excess of the carrying amount of the
asset group over its fair value.Fair Value of Financial InstrumentsThe carrying amounts of accounts receivable, accounts and notes payable, other liabilities,
customer deposits, short-term bank borrowings and amounts due to/from related companies and
shareholders approximate their fair value due to the short-term maturity of these instruments.The long-term bank borrowings approximate their fair value since interest rate approximates
market interest rates.Financial Instruments  Embedded Foreign Currency DerivativeCertain of the Groups sales contracts are denominated in a currency which is not the
functional currency of either of the parties to the contract nor the currency in which the
products being sold are routinely denominated in international commerce. Accordingly, the
contracts contain embedded foreign currency forward contracts subject to bifurcation in
accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities.
The embedded foreign currency derivatives are separately accounted for and measured at fair
value with changes in such value recorded to the statements of operations and reflected in the
statements of cash flows as an operating activity. Embedded foreign currency derivatives are
presented as current assets or liabilities with the changes in their fair value recorded as a
separate line item in the statements of operations. The Group does not enter into derivative
contracts for speculative purposes and hedge accounting has not been applied.
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)Revenue RecognitionThe Groups primary business activity is to produce and sell PV modules. The Group
periodically, upon special request from customers, sells an insignificant amount of PV cells.
The Group records revenue related to the sale of PV modules or PV cells when the criteria of
Staff Accounting Bulletin No. 104 Revenue Recognition are met. These criteria include all
of the following: persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable and collectibility is reasonably assured.More specifically, the Groups sales arrangements are evidenced by either framework sales
agreements and/or by individual sales agreements for each transaction. The shipping terms of
the Groups sales arrangements are generally free-on-board shipping point whereby the
customer takes title and assumes the risks and rewards of ownership of the products upon
delivery to the shipper. Other than warranty obligations, the Group does not have
any commitments or obligations to deliver additional products or services to the customers.
The product sales price agreed to at the sales order/ sales agreement date is final and not subject
to adjustment. The Group does not accept sales returns and does not provide customers with price
protection. Historically, the Groups customers pay a portion of the product sales price prior to
shipment. The Group assesses customers creditworthiness before
accepting sales orders. Based on the above, the Group records revenue related to product sales upon delivery of the
product to the shipper.In the event the Group pays the shipping costs for the convenience of the customer, the
shipping costs are included in the amount billed to the customer. In these cases, sales
revenue includes the amount of shipping costs passed on to the customer. The Group records
the shipping costs incurred as cost of revenue.The Group periodically enters into arrangements to process raw material into PV cells, the
Group views these arrangements as service arrangements. For these service arrangements, the
Group purchases raw material from a customer and contemporaneously agrees to sell a
specified quantity of PV cells back to the same customer. The quantity of PV cells sold back
to the customers under these processing arrangements is consistent with the amount of raw
materials purchased from the customer based on current production conversion rates. In
accordance with Emerging Issues Task Force (EITF) Issue No. 04-13, the Group records the
amount of revenue on these processing transactions based on the amount received for PV cells
sold less the amount paid for the raw materials purchased from the customer. The revenue
recognized is recorded as PV cells processing revenue and the production costs incurred
related to providing the processing services are recorded as PV cells processing costs within
cost of revenue. These sales are subject to all of the above-noted accounting policy
disclosures relating to revenue recognition.Revenue is recognized net of all value-added taxes imposed by governmental authorities and
collected from customers concurrent with revenue-producing transactions.
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)Cost of RevenueCost of revenue includes direct and indirect production costs, as well as shipping and
handling costs for products sold.Research and Development CostsResearch and development costs are expensed as incurred.Advertising ExpenditureAdvertising costs are expensed when incurred and are included in selling expenses.
Advertising expenses were RMB Nil for the period from August 27, 2004 (date of inception) to
December 31, 2004; RMB166,000 and RMB152,000 (US$19,477) for the years ended December 31, 2005
and 2006.Warranty CostThe Group only provides standard warranty coverage on its PV modules sold to customers. The
standard warranty provides for a 2-year unlimited warranty against technical defects, a
10-year warranty against a decline from initial power generation capacity of more than 10% and
a 20 to 25-year warranty against a decline from initial power generation capacity of more than
20%. The Group considers various factors when determining the likelihood of product defects
including an evaluation of its quality controls, technical analysis, industry information on
comparable companies and its own experience. Based on the above considerations and
managements ability and intention to provide refunds for defective products, the Group has
accrued for warranty costs for the 2-year unlimited warranty against technical defects based
on 1% of revenue for PV modules. No warranty cost accrual has been recorded for the 10-year
and 20 to 25-year warranties because the Group has determined the likelihood of claims arising
from these warranties to be remote based on internal and external testing of the PV modules
and strong quality control procedures in place in the production process. The basis for the
warranty accrual will be reviewed periodically based on actual experience. The Group does not
sell extended warranty coverage that is separately priced or optional.Government GrantGovernment grants are recognized as other income upon receipt and when all the conditions
attached to the grants have been met. Conditions attached to the grants include increase in
the amount of capital investment and net assets, number of employees, sales and tax payments.
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)Income TaxesThe Group follows the liability method of accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on the difference between the
financial reporting and tax bases of assets and liabilities using enacted tax rates that will
be in effect in the period in which the differences are expected to reverse. The Group
records a valuation allowance to offset deferred tax assets if based on the weight of
available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax
assets will not be realized. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.Value-Added Tax (VAT)In accordance with the relevant tax laws in the PRC, VAT is levied on the invoiced value of
sales and is payable by the purchaser. The Group is required to remit the VAT it collects to
the tax authority, but may deduct the VAT it has paid on eligible purchases. To the extent
the Group paid more than collected, the difference represents net VAT recoverable balance at
the balance sheet date.LeasesLeases are classified at the inception date as either a capital lease or an operating lease.
For the lessee, a lease is a capital lease if any of the following conditions exist: a)
ownership is transferred to the lessee by the end of the lease term, b) there is a bargain
purchase option, c) the lease term is at least 75% of the propertys estimated remaining
economic life or d) the present value of the minimum lease payments at the beginning of the
lease term is 90% or more of the fair value of the leased property to the lessor at the
inception date. A capital lease is accounted for as if there was an acquisition of an asset
and an incurrence of an obligation at the inception of the lease. All other leases are
accounted for as operating leases wherein rental payments are expensed on a straight-line
basis over the periods of their respective leases. The Group has no capital lease for any of
the periods stated herein.
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)Net (Loss) Income Per ShareNet (loss) income per share is calculated in accordance with SFAS No. 128, Earnings Per
Share. Basic (loss) income per ordinary share is computed by dividing income attributable to
holders of ordinary shares by the weighted average number of ordinary shares outstanding
during the period. Diluted income per ordinary share reflects the potential dilution that
could occur if securities or other contracts to issue ordinary shares were exercised or
converted into ordinary shares. Ordinary shares issuable upon the
conversion of convertible, redeemable preference shares are included
in the computation of diluted income per ordinary share on an
if-converted basis, when the impact is dilutive. Unpaid ordinary shares that do not share in dividends until
fully paid are considered the equivalent of warrants and have been included in the computation
of diluted income (loss) per ordinary share using of the treasury stock method. Ordinary share equivalents are excluded from the computation of
diluted earnings (loss) per share if their effects would be anti-dilutive. For rights
offerings made to all shareholders, a bonus element exists when the subscription price is less
than the fair value of the shares. This bonus element is treated as a stock dividend for
reporting earnings (loss) per ordinary share for all periods presented.Stock CompensationStock awards granted to employees and non-employee are accounted for under SFAS No. 123(R)
Share-Based Compensation and EITF Issue No. 96-18 Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)In November 2006, the Group adopted a stock option scheme (the Option Plan) (see Note 17 for
details of the Option Plan).In accordance with SFAS No. 123(R) Share-Based Compensation, all grants of share options to
employees are recognized in the financial statements based on their grant date fair values.
The Group has elected to recognize compensation expense using the straight-line method for all
share options granted with service conditions that have a graded
vesting schedule.SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from initial estimates.
Share-based compensation expense was recorded net of estimated forfeitures such that expense
was recorded only for those share-based awards that are expected to vest.Under SFAS No. 123(R), the Group, with the assistance of an independent third party valuation
done by Censere Holdings Limited, applied the Black-Scholes Option Price valuation model in
determining the fair value of the options granted. Risk-free interest rates are based on zero
coupon US risk free rate for the terms consistent with the expected life of award at the time
of grant. The Company has no historical exercise patterns as reference, expected life is based
on managements estimation, which the Company believes are representative of future behavior.
Expected dividend yield is determined based on the Groups historical dividend payout rate.
The Company estimates expected volatility at the date of grant based on a combination of
historical and implied volatilities from the comparable listed companies. Forfeiture rate is
estimated based on historical forfeiture patterns and adjusted to reflect future change in
circumstances and facts, if any.
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)Recent Accounting PronouncementsIn June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FAS109, Accounting for Income
Taxes (FIN 48), to create a single model to address accounting for uncertainty in tax
positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum
recognition threshold a tax position is required to meet before being recognized in the
financial statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Group
will adopt FIN 48 as of January 1, 2007, as required. The cumulative effect of adopting FIN 48
will be recorded in retained earnings (or other appropriate components of equity or net assets
in the statement of financial position as applicable) in the year of
adoption. The Group is currently assessing the impact, if any, that
FIN 48 will have on its financial statements.In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements. SFAS No. 157
establishes a framework for measuring fair value in generally accepted accounting principles,
clarifies the definition of fair value within that framework, and expands disclosures about
the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. The provisions are to be applied prospectively as of the beginning
of the fiscal year in which SFAS No. 157 is initially applied, except as it pertains to a
change in accounting principles related to (i) large positions previously accounted for using
a block discount and (ii) financial instruments (including derivatives and hybrids) that were
initially measured at fair value using the transaction price in accordance with guidance in
footnote 3 of EITF 02-3 or similar guidance in SFAS No. 155 Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and 140. For these
transactions, differences between the amounts recognized in the statement of financial
position prior to the adoption of SFAS No. 157 and the amounts recognized after adoption
should be accounted for as a cumulative-effect adjustment to the opening balance of retained
earnings in the year of adoption. The Company is currently assessing the impact, if any, that
SFAS No. 157 will have on its financial statements.In October 2006, the FASB issued SFAS No. 158 Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS
158 requires an entity to (i) recognize in its statement of financial position an asset for a
defined benefit postretirement plans overfunded status or a liability for a plans underfunded
status (ii) measure a defined benefit postretirement plans assets and obligations that determine
its funded status as of the end of the employers fiscal year and (iii) recognize changes in the
funded status of a defined benefit postretirement plan in comprehensive income in the year in which
the changes occur. SFAS 158 does not change the amount of net periodic benefit cost included in net
income or address the various measurement issues associated with postretirement benefit plan
accounting. The requirement to recognize the funded status of a defined benefit postretirement plan
and the disclosure requirements are effective for fiscal years ending after December 15, 2006, for
public entities, and at the end of fiscal years ending after June 15, 2007, for all other entities.
The requirement to measure plan assets and benefit obligations as of the date of the employers
fiscal year-end statement of financial position is effective for fiscal years ending after December
15, 2008. The accounting is not expected to have any impact on the Company.In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115, (SFAS
159). This Statement permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured at fair
value. SFAS 159 is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company is currently
assessing the impact of this new standard on its financial statements.In March 2007, EITF Topic D-109, Determining the Nature of a Host Contract Related to a hybrid
Financial Instrument Issued in the Form of a Share under FASB Statement No. 133 was released. EITF
Topic D-109 provides the SEC staffs view as to how one must evaluate whether a preferred stock
host contract is a debt host or an equity host. It states that the determination of the nature
of the host contract for a hybrid financial instrument issued in the form of a share should be
based on a consideration of economic characteristics and risks, and that the consideration of the
economic characteristics and risks of the host contract should be based on all the stated and
implied substantive terms and features of the hybrid financial instrumentincluding the same
features that have to be evaluated for bifurcation once the nature of the host instrument is
determined. EITF Topic D-109 is effective at the beginning of the first fiscal quarter beginning
after June 15, 2007, even if that period is other than the first fiscal quarter of the registrants
fiscal year. The accounting is not expected to have any impact on the Company.
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SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)Concentration of RisksConcentration of credit riskAssets that are potentially subject the Group to significant concentration of credit risk are
primarily cash and cash equivalents, advances made to suppliers and accounts receivable.As of December 31, 2006, substantially all of the Groups cash and cash equivalents were
deposited with four financial institutions. The Group places its cash and cash equivalents
with reputable financial institutions.Advances made to suppliers are typically unsecured and arise from deposits paid in advance for
purchases of raw materials from companies based in the PRC. As a percentage of total
advances, the top five suppliers accounted for 97.1% as of December 31, 2004; 93.6% as of
December 31, 2005; and 96.3% as of December 31, 2006. Due to the Groups concentration of
advances made to a limited number of suppliers, any negative events or deterioration in
financial strength with respect to the Groups suppliers may cause material loss to the Group
and have a material adverse effect on the Groups financial condition and results of
operations. The risk with respect to advances made to suppliers is mitigated by credit
evaluations that the Group performs on suppliers and ongoing monitoring processes on
outstanding balances.The Group conducts credit evaluations of its customers but does not require collateral or
other security from its customers. The Group makes an allowance for doubtful accounts
primarily based on the age of receivables and factors surrounding the credit risk specific
customers.Concentration of customersThe Group currently sells a substantial portion of its PV products to a limited number of
customers. As a percentage of revenues, the top five customers accounted for 78.8% and 85.4%
for the years ended December 31, 2005 and 2006, respectively. The loss of sales from any of
these customers would have a significant negative impact on the Groups business. Sales to
customers are mostly made through non-exclusive, short-term arrangements. Due to the Groups
dependence on a limited number of customers, any negative events with respect to the Groups
customers may cause material fluctuations or declines in the Groups revenue and have a
material adverse effect on the Groups financial condition and results of operations.
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SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)Concentration of Risks (Contd)Concentration of suppliersA significant portion of the Groups raw materials are sourced from five largest suppliers who
collectively accounted for 95.9% for the period from August 27, 2004 (date of inception) to
December 31, 2004; 71.3% and 50.9% for the years ended December 31, 2005 and 2006, of our
total raw material purchases. Failure to develop or maintain the relationships with these
suppliers may cause the Group to be unable to manufacture its products. Any disruption in the
supply of raw materials to the Group may adversely affect the Groups business, financial
condition and results of operations.Current vulnerability due to certain other concentrationsThe Group participates in a dynamic high technology industry and believes that changes in any
of the following areas could have a material adverse effect on the Groups future financial
position, results of operations or cash flows; changes in the overall demand for services and
products; competitive pressures due to excess capacity or price reductions; advances and new
trends in new technologies and industry standards; changes in certain strategic relationships
or customer relationships; regulatory or other factors; risks associated with the ability to
obtain necessary raw materials; and risks associated with the Groups ability to attract and
retain employees necessary to support its growth.The Groups operations may be adversely affected by significant political, economic and social
uncertainties in the PRC. Although the PRC government has been pursuing economic reform
policies for more than 20 years, no assurance can be given that the PRC government will
continue to pursue such policies or that such policies may not be significantly altered,
especially in the event of a change in leadership, social or political disruption or
unforeseen circumstances affecting the PRCs political, economic and social conditions. There
is also no guarantee that the PRC governments pursuit of economic reforms will be consistent
or effective.The Group transacts part of its business in RMB, which is not freely convertible into foreign
currencies. On January 1, 1994, the PRC government abolished the dual rate system and
introduced a single rate of exchange as quoted daily by the Peoples Bank of China (PBOC).
However, the unification of the exchange rates does not imply the RMB may be readily
convertible into United States dollars or other foreign currencies. All foreign exchange
transactions continue to take place either through the PBOC or other banks authorized to buy
and sell foreign currencies at the exchange rates quoted by the PBOC. Approval of foreign
currency payments by the PBOC or other institutions requires submitting a payment application
form together with suppliers invoices, shipping documents and signed contracts.Additionally, the value of the RMB is subject to changes in central government policies and to
international economic and political developments affecting supply and demand in the PRC
foreign exchange trading system market.
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SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 3.
    
    INVENTORIESInventories consist of the following:
 December 31,2005
    
    2006
    
    2006(RMB000)
    
    (RMB000)
    
    (US$000)Raw materials
    
    
    64,975
    
    
    
    295,087
    
    
    
    37,812Work-in-progress
    
    
    5,736
    
    
    
    56,921
    
    
    
    7,294Finished goods
    
    
    6,108
    
    
    
    20,496
    
    
    
    2,62676,819
    
    
    
    372,504
    
    
    
    47,732
 As of December 31, 2005 and 2006, raw materials of RMB4,296,000 and RMB13,522,000
(US$1,732,675), respectively, of the Group were held in custody by other parties for
processing. No provision for inventory was made at December 31, 2006 (2005: Nil).
 4.
    
    ADVANCE TO SUPPLIERSThe advance to suppliers represent interest-free cash deposits paid to suppliers for future
purchase of raw materials. These deposits are required in order to secure supply of silicon
due to limited availability. The risk of loss arising from non-performance by or bankruptcy
of the suppliers is assessed prior to making the deposits and monitored on a regular basis by
management. A charge to cost of revenue will be recorded in the period in which a loss has
been incurred. To date, the Group has not experienced any loss of supplier advances.
However, as there is currently an industry-wide shortage of silicon and silicon wafers,
certain of the Groups raw materials suppliers have been delaying delivery or failed to
deliver raw materials to the Group under these supply contracts. Consequently, in November
2006, the Group canceled one of its raw materials purchase contract with its raw materials
supplier amounting to approximately RMB1,297,039,000 (US$ 166,199,670). Upon termination of the contract,
outstanding advances to this supplier amounted to RMB31,609,000 (US$
4,050,307) of which RMB10,000,000 (US$ 1,281,377) was
refunded in November 2006. The remaining advances to this supplier has been transferred to
newly renegotiated contracts.
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SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 4.
    
    ADVANCE TO SUPPLIERS (Contd)In November 2006, the Group has also renegotiated certain of its raw materials supply
contracts with its suppliers. Supply contracts of silicon wafers and silicon ingots with
purchase commitment of RMB213,313,000 (US$27,333,453) and
RMB25,230,000 (US$3,232,916) were
renegotiated to RMB300,000,000 (US$38,441,332) and
RMB6,898,000 (US$883,894), respectively.
As a result of such renegotiation, the average purchase price of silicon wafers in these
renegotiated contracts decreased by 5.8%, while the average purchase price of silicon ingots
increased by 18.1%.Other commitments under supply contract may be subject to renegotiation
or cancellation in the future.5.
    
    OTHER CURRENT ASSETSOther current assets consist of the following:
 December 31,2005
    
    
    2006
    
    
    2006(RMB000)
    
    
    (RMB000)
    
    
    (US$000)VAT recoverable
    
    
    14,033
    
    
    
    48,773
    
    
    
    6,250Other receivables
    
    
    6,576
    
    
    
    21,908
    
    
    
    2,806Prepaid expenses
    
    
    96
    
    
    
    4,844
    
    
    
    62120,705
    
    
    
    75,525
    
    
    
    9,677
 VAT recoverable represents the excess of VAT expended on purchases over the VAT collected
from sales. This amount can be applied against future VAT collected from customers or may be
reimbursed by the tax authorities under certain circumstances.
 Other receivables as of December 31, 2005 included a deposit held by a government agency to be
used for capital subscription upon the establishment of the Groups new subsidiary, Shanghai
Linyang, in March 2006 (see Note 1). The balance as of December 31, 2006 included a deposit of
RMB9,558,000 (US$1,224,741) held by the Custom office of Qidong city for raw materials
imported for processing, and a receivable of RMB9,605,000 (US$1,230,763) from Bank of New York
arising from reimbursement of partial IPO transaction costs.
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SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 
 6.
    
    FIXED ASSETS  NETFixed assets consist of the following:
 December 31,2005
    
    2006
    
    2006(RMB000)
    
    (RMB000)
    
    (US$000)Buildings
    
    
    15,988
    
    
    
    37,913
    
    
    
    4,858Plant and machinery
    
    
    36,750
    
    
    
    87,204
    
    
    
    11,174Furniture, fixtures and office equipment
    
    
    1,517
    
    
    
    3,218
    
    
    
    412Computer software
    
    
    
    
    
    
    196
    
    
    
    25Motor vehicles
    
    
    262
    
    
    
    2,224
    
    
    
    285Construction in progress
    
    
    1,413
    
    
    
    83,949
    
    
    
    10,75855,930
    
    
    
    214,704
    
    
    
    27,512Less: Accumulated depreciation
    
    
    (784
    )
    
    
    (7,255
    )
    
    
    (930
    )55,146
    
    
    
    207,449
    
    
    
    26,582
 Depreciation expense was RMB781,000 for the year ended December 31, 2005 and RMB6,471,000
(US$830,000) for the year ended December 31, 2006.
 7.
    
    INTANGIBLE ASSET  NET
 Amortized intangible asset, net consists of the following:
 December 31,2005
    
    
    2006
    
    
    2006(RMB000)
    
    
    (RMB000)
    
    
    (US$000)Land use
rightsCost
    
    
    
    
    
    
    12,988
    
    
    
    1,664Less: Accumulated amortization
    
    
    
    
    
    
    (91
    )
    
    
    (11
    )
    
    
    
    12,897
    
    
    
    1,653
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SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 7.
    
    INTANGIBLE ASSET  NET (Contd)Land use rights represent amounts paid for the rights to use four parcels of land in the PRC
where the Groups premises are located. Three land use rights
were acquired from Qidong Huahong Electronics Co., Ltd., a company whose controlling owner is also a significant
shareholder of the Company (see Note 20) and the remaining one was acquired from Bureau of
Economic Development for Qidong city. The remaining periods of these land use rights ranging
from 48 to 49 years as of December 31, 2006.As of December 31, 2006, land use rights with net book value of RMB4,595,000 (US$601,607) was
pledged for a short-term bank borrowings of RMB20,000,000 (US$2,562,755) (see Note 9).For each of the next five years, annual amortization expenses of the land use rights will be
approximately RMB267,000 (US$34,213).8.
    
    INVESTMENTSInvestments represent equity ownership in Shanghai Yangneng New Energy Technology Co., Ltd.
(Shanghai Yangneng), a joint venture company established by Shanghai Linyang and a third
party company on October 20, 2006. The registered capital of Shanghai Yangneng is
RMB3,000,000 and Shanghai Linyang will contribute RMB900,000
(US$115,324) in cash as capital contribution
for its 30% share of equity ownership. As of December 31, 2006, the capital contribution from
Shanghai Linyang to Shanghai Yangneng amounted to RMB300,000
(US$38,441). Shanghai Yangneng is
principally engaged in the manufacturing and selling of PV products. As of December 31, 2006,
Shanghai Yangneng was still in the pre-operating stage.9.
    
    BANK BORROWINGS
 December 31,2005
    
    2006
    
    2006(RMB000)
    
    (RMB000)
    
    (US$000)Total bank borrowings
    
    
    20,000
    
    
    
    410,900
    
    
    
    52,652Comprised of:Short-term
    
    
    20,000
    
    
    
    379,900
    
    
    
    48,680Long-term,
current portion
    
    
    
    
    
    
    16,000
    
    
    
    2,05020,000
    
    
    
    395,900
    
    
    
    50,730Long-term,
non-current portion
    
    
    
    
    
    
    15,000
    
    
    
    1,92220,000
    
    
    
    410,900
    
    
    
    52,652
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SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 9.
    
    BANK BORROWINGS (Contd)The short-term bank borrowings outstanding at December 31, 2006 bore an average interest rate
of 5.96% (2005: 5.859%) per annum and were denominated in RMB. These borrowings were obtained
from financial institutions which had terms of six months to one year and expire at various
times throughout the year.As of December 31, 2006, short-term bank borrowings were secured/ guaranteed by the following:
 Amount
    
    
    Secured/guaranteed by(RMB000)60,000
    
    
    Land use rights of RMB4,695,000 (US$601,607) (see Note 7) and
guaranteed by Linyang Electronics, Qidong Huahong Electronics
Co., Ltd., (companies whose controlling owner is also a
significant shareholder and chairman of the Company), a
significant shareholder and chairman of the Company and his
spouse.59,900
    
    
    Jointly guaranteed by Linyang Electronics and Huaerli (Nantong)
Electronics Co., Ltd., a company whose controlling owner is also
a significant shareholder of the Company.20,000
    
    
    Jointly guaranteed by Linyang Electronics, a significant
shareholder and chairman of the Company and his spouse.240,000
    
    
    Guaranteed by Linyang Electronics.379,900
 The Group paid no service charges for the provision of the above guarantees.As of December 31, 2006, unused short-term bank loan facilities amounted to RMB70,000,000
(US$8,969,644).
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 9.
    
    BANK BORROWINGS (Contd)The long-term bank borrowings outstanding at December 31, 2006 bore an average interest rate
of 5.76% per annum and were denominated in RMB. These borrowings were obtained from a
financial institution and represented the maximum amount of the facility. These borrowings
were guaranteed by Linyang Electronics. The Group paid no service charges for the provision
of the guarantee. As of December 31, 2006, the maturity of these long-term bank borrowings
was as follows:
 December 31,2006
    
    2006(RMB000)
    
    (US$000)Within one year
    
    
    16,000
    
    
    
    2,050Between one
to two years
    
    
    15,000
    
    
    
    1,92231,000
    
    
    
    3,972
 10.
    
    NOTES PAYABLEAs of December 31, 2006, notes payable were non-interest bearing and were secured by
RMB14,020,000 (US$1,796,492) of the Companys restricted cash. The Group paid a commission of
RMB7,010 (US$898) to the banks to obtain the notes payable facilities. These notes payable
would become payable on February 27, 2007.11.
    
    ACCRUED EXPENSES AND OTHER LIABILITIESThe components of accrued expenses and other liabilities are as follows:
 December 31,2005
    
    2006
    
    2006(RMB000)
    
    (RMB000)
    
    (US$000)Accrued fixed asset purchases
    
    
    18,171
    
    
    
    
    
    
    
    Accrued professional service fees
    
    
    800
    
    
    
    16,311
    
    
    
    2,090Accrued warranty cost (see Note 12)
    
    
    1,520
    
    
    
    7,550
    
    
    
    967Other accrued expenses
    
    
    1,603
    
    
    
    5,369
    
    
    
    688Other liabilities
    
    
    826
    
    
    
    4,226
    
    
    
    542Embedded foreign currency derivatives
    
    
    
    
    
    
    163
    
    
    
    2122,920
    
    
    
    33,619
    
    
    
    4,308
 As of December 31, 2006, the fair value of embedded foreign currency derivatives related
to sales contracts (see Note 2) amounting to RMB163,000 (US$20,886) are recorded as current
liabilities. For the year ended December 31, 2006, a loss of RMB163,000 (US$20,886) relating
to the embedded foreign currency derivatives has been recorded to the statements of
operations. For all the other periods presented, there have not been any significant embedded
foreign currency derivatives due to fewer committed sales contracts and the short duration to
settlement of such contracts.
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SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 
 12.
    
    ACCRUED WARRANTY COSTSThe Groups warranty activity is summarized below:
 December 31,2005
    
    2006
    
    2006(RMB000)
    

(RMB000)
    

(US$000)Beginning balance
    
    
    
    
    
    
    1,520
    
    
    
    195Warranty provision
    
    
    1,600
    
    
    
    6,030
    
    
    
    772Warranty claims paid
    
    
    (80
    )
    
    
    
    
    
    
    Ending balance
    
    
    1,520
    
    
    
    7,550
    
    
    
    967
 13.
    
    CUSTOMER DEPOSITSCustomer deposits represent cash payments received from customers in advance of the delivery
of PV modules. These deposits are recognized as revenue when the conditions for revenue
recognition have been met. The customer deposits are non-refundable unless the Group fails to
fulfill the terms of the sales contract.14.
    
    SERIES A REDEEMABLE CONVERTIBLE PREFERENCE SHARESDuring 2006, the Company and a group of third party investors (the Investors) entered into a
purchase agreement (Preference Shares Purchase Agreement) whereby the Company issued in
aggregate 79,644,754 voting Series A Redeemable Convertible Preference Shares (the Preference
Shares) for gross proceeds of US$53,000,000 (RMB42,814,945).The Preference Shares Purchase Agreement outlined two separate share closings. On June 27,
2006, 67,106,531 Preference Shares were issued to the Investors for US$48 million (price per
share of US$0.71528) (First Closing). This represented 40.074% of the total share capital
(based on the initial conversion of 1:1). A second closing could take place within 3 months of
the First Closing whereby one of the Investors, Good Energies Investment Limited (Good
Energies), would subscribe for an additional 8,037,048 Preference Shares for US$5 million
(Second Closing). However, this Second Closing would only take place if Good Energies
provided certain services to the Company to the sole satisfaction of the Chairman of the
Company or if the service conditions were otherwise waived by the Company. In addition, if
the Second Closing occurs, the other Investors (excluding Good Energies) will receive, for nil
consideration, additional Preference Shares of 4,501,175. The additional Preference Shares
issued to the other Investors, in essence, resulted in an adjustment to their conversion price
per share. The Companys ability to waive the service conditions and trigger the Second
Closing has been accounted for as a purchase put option (Put Option) issued on June 27,
2006. The Company exercised the Put Option and the Second Closing occurred on August 2, 2006.
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SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 
 14.
    
    SERIES A REDEEMABLE CONVERTIBLE PREFERENCE SHARES (Contd)The Company determined the fair value of the Put Option, Preference Shares and ordinary shares
based on a valuation performed by an independent appraiser, Censere Holdings Limited. On June
27, 2006, the fair value of the Put Option was determined to be approximately US$83,500
(US$0.0104 per share) (RMB667,960) and was recorded in equity with an offsetting increase to
the amount recorded for the Preference Shares sold as Traunche Two.On August 2, 2006, when the Company exercised the Put Option which resulted in the issuance of
8,037,048 Preference Shares to Good Energies in return for cash consideration of US$5 million
(US$0.6221 or RMB4.9953 per share), the fair value of the Preference Shares was determined to
be US$0.81 (RMB6.504) per share. The difference between the fair value of the Preference
Shares and the cash consideration paid amounted to RMB12,087,720 and has been recorded as a
charge to general and administrative expenses.Upon the listing of the Companys shares on Nasdaq on December 20, 2006 (the IPO), all of
the issued and outstanding Preferred Shares had been converted into ordinary shares.For the year ended December 31, 2006, accrued cumulative dividends amounted to RMB7,226,000
(US$925,923) or RMB0.09 (US$0.01) per Preference Share.15.
    
    STATUTORY RESERVESIn accordance with the Regulations on Enterprises with Foreign Investment of China, a foreign
invested enterprise established in the PRC is required to provide certain statutory reserves,
namely (i) general reserve fund, (ii) enterprise expansion fund and (iii) staff welfare and
bonus fund, which are appropriated from net profit as reported in the enterprises PRC
statutory accounts. A wholly-owned foreign invested enterprise is required to allocate at
least 10% of its annual after-tax profit to the general reserve until such reserve has reached
50% of its respective registered capital based on the enterprises PRC statutory accounts. A
non wholly-own foreign invested enterprise is permitted to provide the above allocation of
annual after-tax profit at the discretion of its board of directors. Appropriations to the
enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board
of directors for all foreign invested enterprises. The aforementioned reserves can only be
used for specific purposes and are not distributable as cash dividends.
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SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 15.
    
    STATUTORY RESERVES (Contd)Linyang Solarfun became a wholly-owned foreign invested enterprise in May 2006 and therefore
is subject to the above mandated restrictions on distributable profits. Prior to May 2006,
although Linyang Solarfun was a Sino-foreign joint venture enterprise, it was required to
allocate at least 10% of its after tax profit to general reserve fund in accordance with the
joint venture agreements entered into among the then shareholders of Linyang Solarfun and the
appropriations to the enterprise expansion fund and staff welfare and bonus fund were at the
discretion of the board of directors. For the year ended December 31, 2006, RMB13,779,000
(US$1,765,610) (2005: RMB1,496,000) and RMB749,000 (US$95,975) (2005: Nil) have been
appropriated to reserve fund and enterprise expansion fund while no appropriation has been
made to the staff welfare and bonus fund.The boards of directors of Shanghai Linyang and Sichuan Leshan Linyang (both being
Sino-foregin joint venture enterprise) have resolved that no appropriation to be made to the
statutory reserves for the year ended December 31, 2006.16.
    
    STOCK COMPENSATION EXPENSEOn July 12, 2005, Linyang Solarfun issued a rights offering to all of its then existing
shareholders at a subscription price of approximately US$36,260 per 1% of equity interest
(equivalent to 501,750 ordinary shares of the Company after the restructuring as described in
Note 1) for total proceeds of US$3,626,000. Shareholders who were entitled to 20% of the
rights offering (equivalent to 10,035,000 ordinary shares) did not purchase the shares being
offered (the Unsubscribed Shares). The Unsubscribed Shares were offered to and purchased by
Lianyang Electronics Co., Ltd. which is controlled by the Chairman and director of the Group,
who was also the Groups ultimate controlling shareholder at that time, at the subscription
price of US$0.07 (RMB0.584) per share. The fair value of the ordinary shares, at the time of
the offering, was determined to be RMB0.634 per share based on an independent valuation by
Censere Holdings Limited. The intrinsic value of the Unsubscribed Shares has been recorded as
compensation expense and presented as part of general and administrative expenses in 2005.
Accordingly, RMB501,000 was recorded as compensation expense with a corresponding credit to
additional paid-in capital in the year ended December 31, 2005.On April 8, 2006, three of the then owners of Linyang Solarfun sold their 5% equity interests
(which approximates 5,017,500 ordinary shares of the Company) to Linyang Electronics Co.,
Ltd., for US$72,533 per 1% equity interest. The fair value of the equity interests
transferred was determined to be RMB2,648,681 (US$339,396) per 1% equity interest based on an
independent valuation by Censere Holdings Limited. The intrinsic value of the transfer has
been recorded as compensation expense and presented as part of general and administrative
expenses in the year ended December 31, 2006. Accordingly, RMB10,337,000 (US$1,324,650) was
recorded as compensation expense with a corresponding credit to additional paid-in capital in
the year ended December 31, 2006.
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SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 16.
    
    STOCK COMPENSATION EXPENSE (Contd)On August 2, 2006, when the Company exercised the Put Option which resulted in the issuance of
8,037,048 Preference Shares to Good Energies in return for cash consideration of US$5 million
(US$0.6221 or RMB4.9953 per share), the fair value of the Preference Shares was determined to
be US$0.81 (RMB6.604) pre share. The difference between the fair value of the Preference
Shares and the cash consideration paid amounted to RMB12,087,720 (US$1,548,894) and has been
recorded as a charge to general and administrative expenses in the year ended December 31,
2006.17.
    
    SHARE OPTION PLANIn November 2006, the Company adopted a stock option scheme (the Option Plan) which allows
the Company to offer a variety of incentive awards to employees, directors and consultants of
the Company. As of November 30, 2006, options to purchase not
more than 10,799,685 ordinary
 shares are authorized under the Option Plan. Under the terms of the Option Plan, options are
generally granted at exercise price of US$1.80 per share. All options
granted would expire
on November 30, 2016 and generally vest over 3-5 years. As of December 31,
2006, options to purchase 8,012,998 ordinary shares were granted and outstanding. Included in
these options are 540,000 options that can be early exercised, at the discretion of the
holders, into unvested 540,000 ordinary shares. If the holders services to the Company are
terminated prior to the vesting of the unvested ordinary shares, the Company can repurchase
them for the same price paid by the holders.The fair value of the share option at grant date was determined to be RMB113,868,398 (US$14,590,843)
and such amount shall be recognized as compensation expenses using the
straight line method with graded vesting based on service condition. Accordingly, RMB2,882,200 (US$369,187)
was recorded as compensation expenses with a corresponding credit to additional
paid-in capital in the year ended December 31, 2006. No option was exercised during the year
ended December 31, 2006.A summary of option activity under the share option
plansThe following table summarized the Companys share option activity under all the option plans (in
US$, except shares):
  WeightedWeighted
    
    
    averageaverage
    
    
    remaining
    
    
    AggregateNumber of
    
    
    exercise
    
    
    contractual life
    
    
    intrinsicoptions
    
    
    price
    
    
    (Years)
    
    
    valueOutstanding, January 1, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    8,012,998
    
    
    
    1.80
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited/Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding, December 31, 2006
    
    
    8,012,998
    
    
    
    1.80
    
    
    
    9.92
    
    
    
    4,310,993Vested and expected vest at
December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 The aggregate intrinsic value in the table above represents the total intrinsic value (the
aggregate difference between the Companys closing stock price of US$2.338 per ordinary share as of
December 31, 2006 and the exercise price for in-the-money options) that would have been received by
the option holders if all in-the-money options had been exercised on
December 31, 2006.As of December 31, 2006, there was RMB110,987,272 (US$14,221,662) of unrecognized share-base
compensation cost related to share options. That deferred cost is expected to be recognized over a
weighted-average vesting period of 4.34 years. To the extent the actual forfeiture rate is
different from original estimate; actual share-base compensation related to these awards may be
different from the expectation.The Company calculated the estimated fair value of share options on the date of grant using the
Black-Scholes pricing model with the following assumptions for the year ended December 31, 2006:
 2006Risk-free interest rate
    
    4.4%Expected life (years)
    
    5.24 - 6.25 yearsExpected dividend yield
    
    Volatility
    
    73%Fair value of options at grant date per share
    
    From US$1.76 to US$1.85
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 17.
    
    SHARE OPTION PLAN (Contd)Total compensation cost recognized for the year ended December 31, 2006 is as follows:
 2006(RMB000)
    
    
    (US$000)Cost of revenue
    
    
    123
    
    
    
    16Selling expenses
    
    
    19
    
    
    
    2General and administrative expenses
    
    
    2,223
    
    
    
    285Research and development expenses
    
    
    517
    
    
    
    662,882
    
    
    
    369
 18.
    
    GOVERNMENT GRANTDuring the year ended December 31, 2006, the Group received RMB852,000 (US$109,173) in
government subsidies which was approved by the relevant PRC government authorities. These
subsidies were received because the Group qualifies as a high technology enterprise in
Qidong city of Jiangsu province in the PRC and it met certain criteria such as increase in the
amount of capital investment and net assets, increase in number of employees and increase in
sales and tax payments. The government subsidies are not subject to adjustment and do not have
any restrictions as to the use of funds. Accordingly, the full amount of the subsidies has
been recorded as other income.
 19.
    
    INCOME TAXESThe Company is a tax exempt company incorporated in the Cayman Islands and conducts
substantially all of its business through its subsidiaries located in the PRC.The Companys subsidiaries registered in the PRC are subject to PRC enterprise income tax
(EIT) on the taxable income as reported in their PRC statutory accounts adjusted in
accordance with relevant PRC income tax laws.Linyang Solarfun, the Companys major operating subsidiary, was established as a domestic
company in the PRC and was subject to EIT at a rate of 33% (30% state income tax and a 3%
local income tax). In March 2005, Linyang Solarfun was converted to a Sino-foreign joint
venture entity. In accordance with the relevant tax laws in the PRC, upon becoming a
Sino-foreign joint venture entity, Linyang Solarfuns tax position is governed by the Income
Tax Law of the PRC concerning Foreign Investment and Foreign Enterprises (the Income Tax
Law) and according to which Linyang Solarfun is entitled to a tax concession period (Tax
Holiday) whereby it is exempt from EIT for its first two profit making years (after deducting
losses incurred in previous years) and is entitled to a 50% tax reduction for the succeeding
three years. No EIT provision has been made as Linyang Solarfun did not generate assessable
profits for the period prior to it becoming a Sino-foreign joint venture entity from August
27, 2004 (date of establishment) to December 31, 2004. Under the terms of the Tax Holiday,
Linyang Solarfun is exempt from EIT for its taxable profit in 2005 and 2006. Additionally,
since Linyang Solarfun is a Sino-foreign joint venture entity located in coastal open economic
zones in Qidong City, Jiangsu Province, it is entitled to a preferential tax rate of 27% for
its EIT upon expiry of the Tax Holiday.Shanghai Linyang was established as a domestic company in the PRC and was subject to EIT at a
rate of 33% (30% state income tax and a 3% local income tax).Leshan Jiayang was established as a domestic company in the PRC and was subject to EIT at a
rate of 33% (30% state income tax and a 3% local income tax). However, as it qualifies as
encouraged business located in Western China, it is entitled to a preferential EIT rate of
15%.
 F-30




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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 19.
    
    INCOME TAXES (Contd)The Group had minimal operations in jurisdictions other than the PRC. (Loss) income before
income taxes consists of:
 For the periodfrom August27, 2004 (dateof inception) toDecember 31,
    
    For the year ended December 312004
    
    2005
    
    2006
    
    2006(RMB000)
    
    (RMB000)
    
    (RMB000)
    
    (US$000)Cayman Islands
    
    
    
    
    
    
    
    
    
    
    (28,234
    )
    
    
    (3,619
    )The PRC
    
    
    (607
    )
    
    
    14,314
    
    
    
    131,324
    
    
    
    16,829(607
    )
    
    
    14,314
    
    
    
    103,090
    
    
    
    13,210
  For the periodfrom August27, 2004 (dateof inception) toDecember 31,2004
    
    For the year ended December 312005
    
    2005
    
    2006
    
    2006(RMB000)
    
    (RMB000)
    
    (RMB000)
    
    (US$000)Current
    
    
    
    
    
    
    
    
    
    
    171
    
    
    
    22Deferred
    
    
    
    
    
    
    96
    
    
    
    2,961
    
    
    
    379
    
    
    
    96
    
    
    
    3,132
    
    
    
    401
  For the periodfrom August27, 2004 (dateof inception) toDecember 31,
    
    For the year ended December 312004
    
    2005
    
    2006
    
    2006(RMB000)
    
    (RMB000)
    
    (RMB000)
    
    (US$000)Income tax computed at
the statutory tax rate
at 33%
    
    
    200
    
    
    
    (4,723
    )
    
    
    (34,020
    )
    
    
    (4,359
    )Non-deductible expenses
    
    
    
    
    
    
    (884
    )
    
    
    (4,337
    )
    
    
    (556
    )Tax holidays
    
    
    
    
    
    
    5,407
    
    
    
    48,444
    
    
    
    6,208Tax rate differences
    
    
    
    
    
    
    
    
    
    
    (10,049
    )
    
    
    (1,288
    )Deferred tax benefit
    
    
    
    
    
    
    96
    
    
    
    3,304
    
    
    
    423Changes in the
valuation allowance
    
    
    (200
    )
    
    
    200
    
    
    
    (210
    )
    
    
    (27
    )
    
    
    
    96
    
    
    
    3,132
    
    
    
    401
 F-31




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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 19.
    
    INCOME TAXES (Contd)The benefit of the tax holiday per basic and diluted earnings per share is as follows:
 For the periodfrom August27, 2004 (dateof inception)to December 31,
    
    For the year ended December 31,2004
    
    2005
    
    2006
    
    2006(RMB000)
    
    (RMB000)
    
    (RMB000)
    
    (US$000)Basic
    
    
    
    
    
    
    0.10
    
    
    
    0.47
    
    
    
    0.06Diluted
    
    
    
    
    
    
    0.08
    
    
    
    0.34
    
    
    
    0.04
 Deferred tax assets reflect the tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. The components of deferred tax assets are as follows:
 For the periodfrom August27, 2004 (dateof inception)to December 31,
    
    
    For the year ended December 31,2004
    
    
    2005
    
    
    2006
    
    
    2006(RMB000)
    
    
    (RMB000)
    
    
    (RMB000)
    
    
    (US$000)Deferred tax assets:Current:- Accumulated losses
    
    
    200
    
    
    
    
    
    
    
    210
    
    
    
    27- Warranty provision
    
    
    
    
    
    
    96
    
    
    
    820
    
    
    
    105- Depreciation of
fixed assets
    
    
    
    
    
    
    
    
    
    
    258
    
    
    
    33- Stock compensation
expenses
    
    
    
    
    
    
    
    
    
    
    693
    
    
    
    89- Social welfare provision
    
    
    
    
    
    
    
    
    
    
    367
    
    
    
    47- Allowance for doubtful
accounts
    
    
    
    
    
    
    
    
    
    
    1,262
    
    
    
    162200
    
    
    
    96
    
    
    
    3,610
    
    
    
    463- Valuation allowance
    
    
    (200
    )
    
    
    
    
    
    
    (210
    )
    
    
    (27
    )Net current deferred tax assets
    
    
    
    
    
    
    96
    
    
    
    3,400
    
    
    
    436
 As of December 31, 2004, the Group has net operating loss carryforward of approximately
RMB607,000, for tax purposes. As of December 31, 2004, the Group recorded a valuation
allowance to reduce its deferred tax assets to RMB Nil, because management believed the amount
did not meet the more likely than not criteria. During 2005, the Group fully
utilized the net operating loss carry forwards and began the first year of the Tax Holiday.
During 2005, the Group adjusted its deferred tax assets and valuation allowances based on the
preferential tax rates applied during the Tax Holiday, to reflect the net amount management
believed was more likely than not to be realizable.
 F-32




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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 
 19.
    
    INCOME TAXES (Contd)As of December 31, 2006, the Group has a net operating loss carryforward of approximately
RMB637,000 (US$81,624) for tax purposes, attributed to the operations of Shanghai Linyang
which was newly established in March 2006. The net operating loss carryforward will expire 5
years after Shanghai Linyangs first profitable year. As of December 31, 2006, the Group
recorded a valuation allowance to reduce its deferred tax assets to the net amount management
believe was more likely than not to be realized. Reversal of the valuation allowance in a
subsequent year will reduce income tax expense.20.
    
    RELATED PARTY TRANSACTIONS
 Name of related party
    
    Relationship with the GroupLinyang Electronics Co., Ltd. (Linyang Electronics)
    
    Controlling owner is also a significantshareholder of the CompanyHuaerli (Nantong) Electronics Co., Ltd. (Huaerli Nantong)
    
    Controlling owner is also a significantshareholder of the CompanyQidong Huahong Electronics Co., Ltd. (Qidong Huahong)
    
    Controlling owner is also a significantshareholder of the CompanyLinyang Agricultural Development
(Nantong) Co., Ltd. (Linyang
    
    Controlling owner is also a significantAgricultural)
    
    shareholder of the CompanyShanghai Linyang Electronics
Technology Co., Ltd. (Linyang
    
    Controlling owner is also a significantTechnology)
    
    shareholder of the CompanyNantong Linyang Ecological
Cultural Co., Ltd. (Linyang
    
    Controlling owner is also a significantEcological)
    
    shareholder of the CompanyCitigroup Venture Capital
International Growth Partnership
L.P. (Citi Growth)
    
    Shareholder of the CompanyCitigroup Venture Capital
International Co. Investment L.P.
(Citi Investment)
    
    Shareholder of the CompanyGood Energies Investments Limited
(Good Energies)
    
    Shareholder of the CompanyHony Capital II L.P.
    
    Shareholder of the Company
 F-33




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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 20.
    
    RELATED PARTY TRANSACTIONS (Contd)The Group had the following related party transactions and balances during the periods
presented:
 Linyang
    
    Huaerli
    
    Qidong
    
    Linyang
    
    Linyang
    
    LinyangElectronics
    
    Nantong
    
    Huahong
    
    Agricultural
    
    Ecological
    
    Technology(RMB000)
    
    (RMB000)
    
    (RMB000)
    
    (RMB000)
    
    (RMB000)
    
    (RMB000)(Amount due from (due to) related parties)Balances at August 27, 2004
(date of inception)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Advance for purchase of raw
materials
    
    
    
    
    
    
    8,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Advance to a related party
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating expenses paid on
behalf of the Group
    
    
    
    
    
    
    
    
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    Balances at December 31, 2004
    
    
    10,000
    
    
    
    8,000
    
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    Purchase of raw materials
    
    
    (81
    )
    
    
    (14,813
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Payment for purchase of raw
materials
    
    
    3
    
    
    
    14,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repayment of advance
    
    
    (10,000
    )
    
    
    (8,000
    )Advances from related parties
    
    
    (77,600
    )
    
    
    (27,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repayment of advance
    
    
    21,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating expenses paid on
behalf of the Group
    
    
    (68
    )
    
    
    
    
    
    
    (52
    )
    
    
    
    
    
    
    
    
    
    
    Repayment of operating
expenses paid on behalf of
the Group
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of raw materials
    
    
    
    
    
    
    (1,051
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Payment for purchase of raw
materials
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Advances from a related party
    
    
    (41,800
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repayment of advances
    
    
    68,121
    
    
    
    27,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating expenses paid on
behalf of the Group
    
    
    (619
    )
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    Repayment of operating
expenses paid on behalf of
the Group
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2005
    
    
    (30,911
    )
    
    
    (1,664
    )
    
    
    (83
    )
    
    
    
    
    
    
    
    
    
    
    Purchase of raw materials
    
    
    (2,631
    )
    
    
    (23,762
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Payment for purchase of raw
materials
    
    
    1,012
    
    
    
    25,426
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Advances from a related party
    
    
    (105,900
    )
    
    
    
    
    
    
    
    
    
    
    (9,000
    )
    
    
    
    
    
    
    Repayment of advances
    
    
    136,121
    
    
    
    
    
    
    
    
    
    
    
    9,000
    
    
    
    
    
    
    
    Operating expenses paid on
behalf of the Group
    
    
    (489
    )
    
    
    (7,633
    )
    
    
    
    
    
    
    
    
    
    
    (102
    )
    
    
    Repayment of operating
expenses paid on behalf of
the Group
    
    
    208
    
    
    
    7,633
    
    
    
    83
    
    
    
    
    
    
    
    102
    
    
    
    Purchase of land use right
    
    
    
    
    
    
    
    
    
    
    (26,460
    )
    
    
    
    
    
    
    
    
    
    
    Payment for the purchase of
land use right
    
    
    
    
    
    
    
    
    
    
    4,564
    
    
    
    
    
    
    
    
    
    
    
    Sales to a related party
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153Balance at December 31, 2006
    
    
    (2,590
    )
    
    
    
    
    
    
    (21,896
    )
    
    
    
    
    
    
    
    
    
    
    153Balance at
December 31, 2006 (in US $'000)
    
    
    (332
    )
    
    
    
    
    
    
    (2,806
    )
    
    
    
    
    
    
    
    
    
    
    20
 F-34




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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 20.
    
    RELATED PARTY TRANSACTIONS (Contd)During the year ended December 31, 2005, Qidong Huahong granted the use of a parcel of its
land to the Group for RMB nil considerations. Rental charge of RMB70,000, based on the fair
value of the rental cost incurred by Qidong Huahong has been recorded as an expense by the
Group with a corresponding credit to additional paid-in capital.For the year ended December 31, 2005, notes payable of
RMB10,000,000 were secured by the pledge
of bank deposit amounting to RMB10,000,000 from Huaerli Nantong.For the year ended December 31, 2006, short-term bank borrowings of RMB59,900,000
(US$7,675,453) were jointly guaranteed by Linyang Electronics and Huaerli Nantong. Short term
bank borrowings of RMB240,000,000 (US$30,753,066) and long-term bank borrowing of
RMB31,000,000 (US$3,972,271) were guaranteed by Linyang Electronics. Short-term bank
borrowings of RMB60,000,000 (US$7,688,266) were jointly guaranteed by Linyang Electronics and
Qidong Huahong Electronics. Short-term bank borrowings of
RMB20,000,000 (US$2,562,755) were jointly guaranteed by Linyang
Electronics, a significant shareholder and chairman of the Company
and his spouse.In relation to the issuance of the Preference Shares, the Company obtained a purchase put
option from Good Energies. The put option was exercised by the Company on August 2, 2006 (see
Note 14).The weighted average balances due from (due to) related parties are analyzed as follows:
 Linyang
    
    Huaerli
    
    Qidong
    
    LinyangElectronics
    
    Nantong
    
    Huahong
    
    Technology(RMB000)
    
    (RMB000)
    
    (RMB000)
    
    (RMB000)For the period from
August 27, 2004
(date of inception)
to December 31,
2004
    
    
    5,000
    
    
    
    4,000
    
    
    
    (12
    )
    
    
    For the year ended
December 31, 2005
    
    
    (21,950
    )
    
    
    (6,385
    )
    
    
    (60
    )
    
    
    For the year ended
December 31, 2006
    
    
    (2,590
    )
    
    
    
    
    
    
    (21,896
    )
    
    
    153For the year
ended December 31, 2006 (in US$000)
    
    
    (332
    )
    
    
    
    
    
    
    (2,806
    )
    
    
    20
 As at December 31, 2006, amount due from shareholders represented reimbursement receivable from
Citi Growth and Citi Investment amounted to RMB549,000 (US$70,348) and RMB29,000 (US$3,716),
respectively.As at December 31, 2006, due to shareholders represented
RMB7,128,000 (US$913,366) dividends
payable to preference shareholders (see Note 14) and RMB444,000 (US$56,893) management
consulting fee payable to Hony Capital.All balances with related parties at December 31, 2005 and 2006 were unsecured, non-interest
bearing and without fixed repayment term.
 F-35




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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 21.
    
    EMPLOYEE DEFINED CONTRIBUTION PLANFull time employees of the Groups subsidiaries in the PRC participate in a government
mandated defined contribution plan pursuant to which certain pension benefits, medical care,
unemployment insurance, employee housing fund and other welfare benefits are provided to
employees. Chinese labor regulations require that the PRC subsidiaries of the Group make
contributions to the government for these benefits based on 41% of the employees salaries.
The Groups PRC subsidiaries have no legal obligation for the benefits beyond the
contributions made. The total amounts for such employee benefits, which were expensed as
incurred, were RMB8,000 for the period from August 27, 2004 (date of inception) to December
31, 2004; RMB927,000 for the year ended December 31, 2005; and RMB3,155,000 (US$404,275) for
the year ended December 31, 2006.22.
    
    COMMITMENTS AND CONTINGENCIESOutstanding capital contributionOn October 20, 2006, Shanghai Linyang and a third party company established Shanghai Yangneng,
a joint venture company (see Note 8). Shanghai Linyang has committed
to contribute RMB900,000 (US$115,324) as capital contribution. As of December 31, 2006, the outstanding capital
contribution amounted to RMB600,000 (US$76,883). The capital
contribution commitment is expected to be settled in the next twelve
months.Operating lease commitmentsThe Group has entered into leasing arrangements relating to office premises that are
classified as operating leases. Future minimum lease payments for non-cancelable operating
leases as at December 31, 2006 are as follows:
 December 31,2005
    
    
    2006
    
    
    2006(RMB000)
    
    
    (RMB000)
    
    
    (US$000)Within 1 year
    
    
    58
    
    
    
    1,326
    
    
    
    170Within 1-2 years
    
    
    
    
    
    
    924
    
    
    
    118Within 2-3 years
    
    
    
    
    
    
    228
    
    
    
    29Over 3 years
    
    
    
    
    
    
    304
    
    
    
    39Total
    
    
    58
    
    
    
    2,782
    
    
    
    356
 The terms of the leases do not contain rent escalation or contingent rents.Acquisition of machineryAs of December 31, 2005 and 2006, the Group had commitments of RMB11,000,000 and
RMB119,874,000 (US$15,360,387), respectively, related to acquisition of machinery. The
commitment for acquisition of machinery is expected to be settled within the next twelve
months.
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 22.
    
    COMMITMENTS AND CONTINGENCIES (Contd)Purchase of raw materialsThe commitments related to the purchase of raw materials are listed as below:
 December 31,2005
    
    2006
    
    2006(RMB000)
    
    (RMB000)
    
    (US$000)Within 1 year
    
    
    75,329
    
    
    
    819,564
    
    
    
    105,017
 In addition to the above, in October and November, 2006, the Group entered into raw materials purchase contracts
for silicon wafers with E-Mei Semiconductors Material Factory (E-Mei), a third party
supplier. According to these contracts, the Group has committed to pay purchase advances
totaling RMB220,000,000 (US$28,190,310) to E-Mei in return for a five-year exclusive
procurement right to silicon wafers produced by E-Meis new production facilities, which is
currently under construction. The procurement right entitles the Group to purchase the abovementioned silicon wafers at 8% below
the market price at the time of purchase. The Group will have a first right of refusal to purchase
silicon wafers at market price after the five-year period.The RMB220,000,000 (US$27,834,008) committed purchase advances will be paid to E-Mei according to
progress of construction of the new production facilities based on the construction progress status
report provided by E-Mei. As of December 31, 2006, all the RMB220,000,000 (US$27,834,008)
committed purchase advances remained unpaid. Future amount payable from future purchases from
E-mei will offset against the purchase advances. However, for each purchase, the Group can only
offset 30% of the purchase amount against the purchase advances. After the Group has fully
utilized the advances, the discount on purchase will be adjusted downwards to 3% to 5% of the
market price at the time of purchase.In addition, according to the contracts, a bonus of up to RMB3,600,000 (US$455,466) will be paid to
E-Mei should E-Mei be able to complete the construction of its new production facilities and start
supplying a certain quantity of the silicon wafers to the Group within 18 to 20 months from the
date of the contact.Guarantees and indemnificationIn June 2006, the Company entered into a shareholders agreement in connection with the
issuance of the Series A Redeemable Convertible Preference Shares and according to which the
Company has agreed to indemnify each of its shareholders and their affiliates and each
director and officer of the Company (collectively, the Indemnified Persons) against any
losses that any Indemnified Persons may at any time become subject to or liable for in
connection with their status as a shareholder, director or officer of the Company or any of
their service to or on behalf of the Company to the maximum extent permitted under applicable
law.In accordance with FIN45 Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, guarantor must recognize a liability
for the fair value of the obligations it assumes under certain guarantees. The Company has
determined the fair value of the indemnification to be insignificant. Accordingly, the
Company has not recorded any liabilities for these agreements as of December 31, 2006.ContingenciesAs of December 31, 2006, the Group was contingently liable to the relevant local PRC
government authorities with respect to accumulated under-payment of social insurance and
employee welfare benefits which were estimated to be RMB3,654,471 and recognized as a
liability by the Group. The Group is in the process of settling with the relevant local PRC
government authorities in relation to the outstanding payments. The Group might be subject to
fines or penalty for the underpayment in the past as of December 31, 2006. However, no
accrual has been made as of December 31, 2006 as the amount cannot be reasonably estimated.
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 23.
    
    SEGMENT REPORTINGThe Group operates in a single business segment, which is the development, manufacturing, and
sale of PV products. The following table summarizes the Groups net revenues by geographic
region based on the location of the customers:
 For the year ended December 31,2004
    
    2005
    
    2006
    
    2006(RMB000)
    
    (RMB000)
    
    (RMB000)
    
    (US$000)Germany
    
    
    
    
    
    
    126,555
    
    
    
    197,728
    
    
    
    25,336Italy
    
    
    
    
    
    
    5,946
    
    
    
    204,715
    
    
    
    26,232Spain
    
    
    
    
    
    
    
    
    
    
    179,139
    
    
    
    22,954The PRC
    
    
    
    
    
    
    33,667
    
    
    
    36,219
    
    
    
    4,642Others
    
    
    
    
    
    
    10
    
    
    
    13,106
    
    
    
    1,679Total net revenue
    
    
    
    
    
    
    166,178
    
    
    
    630,907
    
    
    
    80,843
 All the identifiable assets of the Group are located in the PRC.24.
    
    MAJOR CUSTOMERSDetails of the customers accounting for 10% or more of total net revenue in any of the periods
presented are as follows:
 For the year ended December 31,2004
    
    2005
    
    2006
    
    2006(RMB000)
    
    (RMB000)
    
    (RMB000)
    
    (US$000)S.E. Project S.R.L.
    
    
    
    
    
    
    
    
    
    
    203,133
    
    
    
    26,029Social Capital S.L.
    
    
    
    
    
    
    
    
    
    
    175,939
    
    
    
    22,544Solar Projekt
Energysystem GmbH
    
    
    
    
    
    
    13,140
    
    
    
    70,409
    
    
    
    9,022Suntaics
    
    
    
    
    
    
    84,438
    
    
    
    54,856
    
    
    
    7,029
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 25.
    
    INCOME PER SHAREBasic and diluted net income per share for each period presented are calculated as follows:
 For the periodfrom August27, 2004 (dateof inception) toDecember 31,
    
    
    For the year ended December 31,2004
    
    
    2005
    
    
    2006
    
    
    2006(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (US$)(Amounts in thousands except for number of shares and per share data)Numerator:Net (loss) income
    
    
    (607
    )
    
    
    14,410
    
    
    
    105,921
    
    
    
    13,572Dividends allocated to
preference shareholders
    
    
    
    
    
    
    
    
    
    
    (7,226
    )
    
    
    (926
    )Income attributable to
ordinary shareholders
    
    
    (607
    )
    
    
    14,410
    
    
    
    98,695
    
    
    
    12,646Denominator:Number of shares
outstanding, opening
    
    
    50,175,000
    
    
    
    50,175,000
    
    
    
    100,350,000
    
    
    
    100,350,000Retroactive adjustment for
bonus element in rights
offering  July 12, 2005
    
    
    1,819,399
    
    
    
    1,819,399
    
    
    
    
    
    
    
    Weighted average number of
shares issued (48,355,601
shares)
    
    
    
    
    
    
    2,517,141
    
    
    
    
    
    
    
    New ordinary shares issued
from IPO (60,000,000
shares issued on December
20, 2006)
    
    
    
    
    
    
    
    
    
    
    1,972,603
    
    
    
    1,972,603Conversion of Convertible
Preference Share
(79,644,754 shares
converted on December 26,
2006)
    
    
    
    
    
    
    
    
    
    
    1,309,229
    
    
    
    1,309,229Weighted average number of
shares outstanding  basic
    
    
    51,994,399
    
    
    
    54,511,540
    
    
    
    103,631,832
    
    
    
    103,631,832Weighted average number of
partially paid share
subscriptions (50,175,000
shares)
    
    
    
    
    
    
    11,854,929
    
    
    
    
    
    
    
    Effect of Preference Shares
    
    
    
    
    
    
    
    
    
    
    38,476,628
    
    
    
    38,476,628Effect of stock options
(8,012,998 options issued
on November 30, 2006)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average number of
shares outstanding 
diluted
    
    
    51,994,399
    
    
    
    66,366,469
    
    
    
    142,108,460
    
    
    
    142,108,460Basic net (loss) income per
share
    
    RMB(0.01
    )
    

    RMB0.26
    

    
    RMB0.95
    

    
    US$
    0.12Diluted net (loss) income
per share
    
    RMB(0.01
    )

    
    RMB0.22
    

    
    RMB0.74
    

    
    US$
    0.09
 As of December 31, 2006, the potential dilutive ordinary
shares in relation to stock options were anti-diluted.
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 26.
    
    INCOME PER SHARE (CONTD)On July 12, 2005, Linyang Solarfun issued a rights offering to its then existing ordinary
shareholders. Since the subscription price was less than the fair value of the shares, as
determined based on an independent appraisal performed by Censere Holdings Limited, the rights
offering is deemed to contain a bonus element similar to a stock dividend and is accounted for
as such. Accordingly, the basic and diluted earnings per share are adjusted retroactively for
the bonus element of the right offering for all periods presented. In addition, ordinary shares which were not fully paid for until December 12, 2005 were included in the computation
of diluted income per share using the treasury stock method.27.
    
    SUBSEQUENT EVENTSSubsequent to December 31, 2006, the following events occurred:
 (i)
    
    On March 16, 2007, the PRC government promulgated Law of the Peoples Republic of
China on Enterprise Income Tax (New Tax Law), which will be effective from January 1,
2008. Under the new tax law, FIEs and domestic companies are subject to a uniform tax
rate of 25%. The Companys PRC subsidiaries will then measure and pay enterprise income
tax pursuant to the New Tax Law. In addition, according to the New Tax Law, FIEs
currently enjoying preferential treatment in the form of enterprise income tax reduction
or exemption may continue to enjoy such treatment until the end of the preferential
treatment period.(ii)
    
    On March 19, 2007, May 10, 2007 and June 28,
2007, 150,000, 660,000 and 100,000 options,
respectively, were authorized to be granted to certain employees. The options have an
exercise price of US$2.44, US$2.87 and US$2.11 per share,
respectively, and have vesting terms of five years.(iii)
    
    In April 2007, the Group established Nantong Linyang New Energy Construction and
Technology R&D Centre Co., Ltd. (Linyang R&D). The registered capital of the Linyang
R&D is RMB5 million of which all had been contributed by the Group on April 4, 2007. The
principal activity of Linyang R&D is to develop PV products. As of the date of this
report, Linyang R&D has not yet commenced its operation.(iv)
    
    In May 2007, the Group incorporated Solarfun Power Hong Kong Limited (Solarfun
HK), a company incorporated in Hong Kong. As of the date of this report, Solarfun HK
has not yet commenced its operation.(v)
    
    Subsequent to December 31, 2006, the Group entered into
various one-year to two-year fixed quantity agreements with certain
domestic suppliers to procure silicon wafers or ingots, with a
planned total purchase amount of RMB531,000,000 (US$68,041,158).
Certain of the contract prices are subject to renegotiation on a
quarterly basis.
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 28.
    
    ADDITIONAL FINANCIAL INFORMATION OF THE COMPANYUnder PRC laws and regulations, the Companys PRC subsidiary, Linyang Solarfun, is restricted
in its ability to transfer certain of its net assets to the Company in the form of dividend
payments, loans, or advances. The amounts restricted include paid up capital and statutory
reserve, as determined pursuant to PRC generally accepted accounting principles, totaling
RMB2,110,962,000 (US$270,493,971) as of December 31, 2006.Statements of operations
 For the periodfrom August 27,2004 (date ofinception) toDecember 31,
    
    For the year ended December 31,2004
    
    2005
    
    2006
    
    2006(RMB000)
    
    (RMB000)
    
    (RMB000)
    
    (US$000)Net revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cost of revenue
    
    
    
    
    
    
    
    
    
    
    (123
    )
    
    
    (16
    )Gross profit
    
    
    
    
    
    
    
    
    
    
    (123
    )
    
    
    (16
    )Operating expenses (Notes 16 and 15)
    
    
    
    
    
    
    
    
    
    
    (27,514
    )
    
    
    (3,525
    )Operating loss
    
    
    
    
    
    
    
    
    
    
    (27,637
    )
    
    
    (3,541
    )Equity in profit of subsidiary
companies, net (Note a)
    
    
    (607
    )
    
    
    14,410
    
    
    
    137,046
    
    
    
    17,560Interest income
    
    
    
    
    
    
    
    
    
    
    107
    
    
    
    14Exchange loss
    
    
    
    
    
    
    
    
    
    
    (3,595
    )
    
    
    (461
    )Income before tax
    
    
    (607
    )
    
    
    14,410
    
    
    
    105,921
    
    
    
    13,572Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    
    (607
    )
    
    
    14,410
    
    
    
    105,921
    
    
    
    13,572Net (loss) income attributable to
ordinary shareholders
    
    
    (607
    )
    
    
    14,410
    
    
    
    98,695
    
    
    
    13,572
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 28.
    
    ADDITIONAL FINANCIAL INFORMATION OF THE COMPANY (Contd)Balance sheets
 For the year ended December 31,2005
    
    2006
    
    2006(RMB'000)
    
    (RMB'000)
    
    (US$'000)ASSETSCurrent assets:Cash and bank
    
    
    
    
    
    
    1,080,706
    
    
    
    138,479Other receivables
    
    
    
    
    
    
    9,644
    
    
    
    1,236Deferred expense
    
    
    
    
    
    
    4,216
    
    
    
    540Amount due from subsidiaries (Note b)
    
    
    
    
    
    
    18,741
    
    
    
    2,401Amount due from shareholders (Note b)
    
    
    
    
    
    
    579
    
    
    
    74Total current assets
    
    
    
    
    
    
    1,113,886
    
    
    
    142,730Non-current assets:Investment in subsidiaries (Note a)
    
    
    73,670
    
    
    
    608,914
    
    
    
    78,026Total non-current assets
    
    
    73,670
    
    
    
    608,914
    
    
    
    78,026Total assets
    
    
    73,670
    
    
    
    1,722,800
    
    
    
    220,756LIABILITIES, PREFERENCE SARES AND
SHAREHOLDERS EQUITY:Current liabilities:Other payables
    
    
    
    
    
    
    16,311
    
    
    
    2,090Amount due to shareholders
    
    
    
    
    
    
    7,572
    
    
    
    970Amount due to subsidiaries (Note b)
    
    
    
    
    
    
    20,702
    
    
    
    2,653Total current liabilities
    
    
    
    
    
    
    44,585
    
    
    
    5,713Shareholders EquityOrdinary shares
(par value US$0.0001 per share;
400,000,000 shares authorized, 50,175,000
shares, 100,350,000 shares, 100,350,000
shares and 239,9994,754 shares issued and
outstanding at December 31, 2004, 2005
and 2006, respectively)
    
    
    84
    
    
    
    193
    
    
    
    25Additional paid-in capital
    
    
    59,783
    
    
    
    1,565,524
    
    
    
    200,604Reserve fund
    
    
    1,496
    
    
    
    16,024
    
    
    
    2,053Retained earnings
    
    
    12,307
    
    
    
    96,474
    
    
    
    12,361Total shareholders equity
    
    
    73,670
    
    
    
    1,678,215
    
    
    
    215,043Total liabilities and shareholders equity
    
    
    73,670
    
    
    
    1,722,800
    
    
    
    220,756
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 28.
    
    ADDITIONAL FINANCIAL INFORMATION OF THE COMPANY (Contd)Statements of cash flows
 For the periodfrom August 27,2004 (date of'inception) toDecember 31,
    
    For the year ended December 31,2004
    
    2005
    
    2006
    
    2006(RMB000)
    
    (RMB000)
    
    (RMB000)
    
    (US$000)Cash flows from operating
activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash used in investing
activities
    
    
    (30,000
    )
    
    
    (29,296
    )
    
    
    (593,980
    )
    
    
    (76,111
    )Net cash provided by financing
activities
    
    
    30,000
    
    
    
    29,296
    
    
    
    1,674,579
    
    
    
    214,577Net increase (decrease) in cash
    
    
    
    
    
    
    
    
    
    
    1,080,599
    
    
    
    138,466Cash at the beginning of
period/ year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash at the end of period/ year
    
    
    
    
    
    
    
    
    
    
    1,080,599
    
    
    
    138,466
 (a)
    
    Basis of presentationIn the Company-only financial statements, the Companys investment in subsidiaries is
stated at cost plus equity in undistributed earnings of subsidiaries since inception.
The Company-only financial statements should be read in conjunction with the Companys
consolidated financial statements.The Company records its investment in its subsidiaries under the equity method of
accounting as prescribed in APB Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock. Such investment is presented on the balance sheet as
Investment in subsidiaries and share of the subsidiaries profit or loss as Equity
in profit (loss) of subsidiary company on the statements of operations.The subsidiaries did not pay any dividend to the Company for the periods presented.Certain information and footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles have been
condensed or omitted.
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##### Table of Contents



SOLARFUN POWER HOLDINGS CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 28.
    
    ADDITIONAL FINANCIAL INFORMATION OF THE COMPANY (Contd)
 (b)
    
    Related party balancesFor the year ended December 31, 2006, the Company made advances to its subsidiaries
amounting to RMB18,741,000 (US$2,401,430). During the same period, a subsidiary of
the Company paid operating expenses amounting to RMB20,702,000 (US$2,652,708) on
behalf of the Company. The Company did not have any related party transaction for any
of the other periods presented.During the year ended December 31, 2006, amount due from shareholders represented
reimbursement for preferred share issuance cost receivable from Citi Growth and Citi
Investment amounted to RMB549,000 (US$70,348) and RMB29,000 (US$3,716), respectively.In the year ended December 31, 2006, the Company accrued cumulative dividends of
RMB7,226,000 (US$925,923) to its Preference Shareholders. Unpaid dividends as of
December 31, 2006 amounted to RMB7,128,000 (US$913,366).(c)
    
    CommitmentsThe Company does not have any significant commitments or long-term obligations as of
any of the periods presented.(d)
    
    Foreign currenciesThe United States Dollar (US$) amounts disclosed in the financial statement are
presented solely for the convenience of the readers. Translation of amounts from RMB
into US$ for the convenience of the readers were calculated at the noon buying rate of
US$1.00 = RMB7.8041 on December 29, 2006 in the City of New York for cable transfers
of RMB certified for customs purposes by the Federal Reserve Bank of New York. No
representation is made that the RMB amounts could have been, or could be, converted
into US$ at such rate.
 F-44