UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549





FORM
20-F








(Mark
One)


o
            Registration statement pursuant
      to Section 12(b) or 12(g) of the Securities Exchange Act of
      1934


or


x
            Annual report pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of
      1934


For
the fiscal year ended December 31, 2009.


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


Date
of event requiring this shell company report





Commission
file number: 001-33433





CHINA
SUNERGY CO., LTD.





(Exact
name of Registrant as specified in its charter)





N/A





(Translation
of Registrant’s name into English)





Cayman
Islands





(Jurisdiction
of incorporation or organization)





No. 123
Focheng West Road


Jiangning
Economic & Technical Development Zone


Nanjing,
Jiangsu 211100, People’s Republic of China


(Address
of principal executive offices)





Stephen
Zhifang Cai, (86 25) 5276 6887,


stephen.cai@chinasunergy.com,





No. 123
Focheng West Road


Jiangning
Economic & Technical Development Zone


Nanjing,
Jiangsu 211100, People’s Republic of China





(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contact
Person)


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







Title of each class
                
                Name of each exchange on which registeredAmerican
      Depositary Shares, each representing six ordinary shares, par
      value
                  $0.0001
      per share
                
                Nasdaq
      Global Market








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


None


(Title
of Class)





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


None


(Title
of Class)





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





267,287,253
ordinary shares, par value $0.0001 per share, as of December 31,
2009.





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


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


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


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


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


Large
accelerated filer o     Accelerated
filer x     Non-accelerated
filer o


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


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


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


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


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


Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.    Yes  o    No  o










TABLE OF CONTENTS





INTRODUCTION
                  
                  3I.           
      PART I
                  
                  5ITEM
      1.
                  IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
                  
                  5ITEM
      2.
                  OFFER
      STATISTICS AND EXPECTED TIMETABLE
                  
                  5ITEM
      3.
                  KEY
      INFORMATION
                  
                  5ITEM
      4.
                  INFORMATION
      ON THE COMPANY
                  
                  31ITEM
      4A.
                  UNRESOLVED
      STAFF COMMENTS
                  
                  43ITEM
      5.
                  OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
                  
                  43ITEM
      6.
                  DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
                  
                  64ITEM
      7.
                  MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
                  
                  72ITEM
      8.
                  FINANCIAL
      INFORMATION
                  
                  74ITEM
      9.
                  THE
      OFFER AND LISTING
                  
                  76ITEM
      10.
                  ADDITIONAL
      INFORMATION
                  
                  77ITEM
      11.
                  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                  
                  86ITEM
      12.
                  DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
                  
                  87II.           PART
      II
                  
                  89ITEM
      13.
                  DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES
                  
                  89ITEM
      14.
                  MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
                  
                  89ITEM
      15.
                  CONTROLS
      AND PROCEDURES
                  
                  90ITEM
      16A.
                  AUDIT
      COMMITTEE FINANCIAL EXPERT
                  
                  92ITEM
      16B.
                  CODE
      OF ETHICS
                  
                  92ITEM
      16C.
                  PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                  
                  92ITEM
      16D.
                  EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
                  
                  92ITEM
      16E.
                  PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS.
                  
                  93ITEM
      16F.
                  CHANGE
      IN REGISTRANT’S CERTIFYING ACCOUNTANT
                  
                  93ITEM
      16G.
                  CORPORATE
      GOVERNANCE.
                  
                  93III.         PART
      III
                  
                  93ITEM
      17.
                  FINANCIAL
      STATEMENTS
                  
                  93ITEM
      18.
                  FINANCIAL
      STATEMENTS
                  
                  93ITEM
      19.
                  EXHIBITS
                  
                  93


2


INTRODUCTION




In this
annual report, except where the context otherwise requires:




·
            “we,”
      “us,” “our company,” “our,” “Sunergy” and “China Sunergy” refer to China
      Sunergy Co., Ltd., its predecessor entities and its
      subsidiaries;




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




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




·
            “RMB”
      or “Renminbi” refers to the legal currency of China; “$” or “U.S. dollars”
      refers to the legal currency of the United States; and “Euro” or “€”
      refers to the legal currency of the European
  Union;




·
            “original
      equipment manufacturing” or “OEM” refers to arrangements under which we
      process silicon wafers provided by our customers into solar cells and
      charge processing fees from these
customers;




·
            “Matrix
      cell” previously named as passivated emitter and rear cell, refers to a
      solar cell that uses oxide on its front and rear surfaces, and that makes
      contact with metal at the rear surface only at certain
      regions;




·
            “selective
      emitter cell” refers to a solar cell in which the regions under its front
      metal contact and the rest of the front surface areas are separately
      diffused and optimized;




·
            “HP
      solar cell” refers to a more efficient version of our standard P-type
      cell, the conversion efficiency rate of which may generally be higher than
      that of standard P-type solar cell as a result of an enhanced production
      process used;




·
            when
      calculating our manufacturing or production capacity of solar cells, we
      have assumed that all products will be made using 156-millimeter
      monocrystalline silicon wafers, even though we currently use and expect to
      continue to use a mixture of monocrystalline and multicrystalline silicon
      wafers, each in sizes of 125-millimeter and 156-millimeter; to the extent
      we use smaller wafers or multicrystalline wafers, our actual production
      will be less than our capacity;
and


3


Our
financial statements are expressed in the U.S. dollar, which is the reporting
and functional currency of China Sunergy Co., Ltd. However, a major portion of
the revenues and expenses of our consolidated operating subsidiary is
denominated in Renminbi. With respect to amounts not recorded in our
consolidated financial statements included elsewhere in this report, all
translations from Renminbi to U.S. dollars were made at the noon buying rate in
the City of New York for cable transfers in Renminbi per U.S. dollar as
certified for customs purposes by the Federal Reserve Bank of New York. Unless
otherwise noted, all translations from Renminbi to U.S. dollars have been made
at a rate of RMB6.8259 to $1.00, the noon buying rate in effect as of December
31, 2009. We make no representation that any Renminbi or U.S. dollar amounts
could have been, or could be, converted to U.S. dollars or Renminbi, at any
particular rate, or at all. On May 21, 2010 the noon buying rate was RMB6.8262
to $1.00.




We
completed our initial public offering of 9,775,000 ADSs on May 22, 2007. On May
17, 2007, we listed our ADSs on the Nasdaq Global Market under the symbol
“CSUN.” On July 1, 2008, we completed an offering of $54.5 million principal
amount of 4.75% convertible senior notes due June 2013 to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933.
Concurrently with the note offering, we also registered the offering of
4,431,000 ADSs, which we loaned to an affiliate of the initial purchaser of the
notes, who in turn sold the borrowed ADSs in the offering. We did not receive
any proceeds from the offering of the borrowed ADSs, but have received a nominal
lending fee from the ADS borrower.


4




FORWARD-LOOKING
INFORMATION




This
annual report on Form 20-F contains statements of a forward-looking nature.
These statements relate to events involving known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from those expressed or implied by
the forward-looking statements. These statements are made under the “safe
harbor” provisions of Section 27A of the Securities Exchange Act of 1934, or
Exchange Act. Whenever you read a statement that is not simply a statement of
historical fact (such as when we describe what we “believe,” “expect” or
“anticipate” will occur, and other similar statements), you must remember that
our expectations may not materialize, even though we believe that they are
reasonable.




Whether
actual results will conform with our expectations and predictions is subject to
a number of risks and uncertainties, many of which are beyond our control, and
reflect future business decisions that are subject to change. Some of the
assumptions, future results and levels of performance expressed or implied in
the forward-looking statements we make inevitably will not materialize, and
unanticipated events affecting our results may occur.




We
caution you not to place undue reliance on forward-looking statements. You
should read these statements in conjunction with the risk factors disclosed in
Item 3 of this annual report, “Key Information—Risk Factors.” We do not
undertake any obligation to update or revise the forward-looking statements
except as required under applicable law.





I.
            PART
      I




ITEM
      1.
            IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS




Not Applicable.




ITEM
      2.
            OFFER
      STATISTICS AND EXPECTED TIMETABLE




Not Applicable.




ITEM
      3.
            KEY
      INFORMATION




A.
            Selected Financial
      Data




The
following table presents our selected consolidated financial information. You
should read the following information in conjunction with Item 5, “Operating and
Financial Review and Prospects.” The selected consolidated statement of
operations data for the three years ended December 31, 2007, 2008 and 2009 and
the selected consolidated balance sheet data as of December 31, 2008 and 2009
have been derived from our audited consolidated financial statements included in
this annual report and should be read in conjunction with those statements. Our
selected consolidated statement of operations data for the years ended December
31, 2005 and 2006, and the selected consolidated balance sheet data as of
December 31, 2005, 2006 and 2007, have been derived from our audited
consolidated financial statements not included in this annual
report.  Our audited consolidated financial statements are prepared
and presented in accordance with United States generally accepted accounting
principles, or U.S. GAAP.


5




For
      the Years Ended December 31,2005
              
              
              2006
              
              
              2007
              
              
              2008
              
              
              2009(in thousands, except share, per share,
                operating data and percentages)Consolidated
      Statement of Operations DataNet
      revenues
              
              $
              13,750
              
              
              $
              149,521
              
              
              $
              234,908
              
              
              $
              350,920
              
              
              $
              284,865Cost
      of revenues
              
              
              (11,796
              )
              
              
              (122,889
              )
              
              
              (216,881
              )
              
              
              (335,454
              )
              
              
              (268,252
              )Gross
      profit
              
              
              1,954
              
              
              
              26,632
              
              
              
              18,027
              
              
              
              15,466
              
              
              
              16,613Operating
      expenses:Selling
      expenses
              
              
              (38
              )
              
              
              (1,014
              )
              
              
              (1,644
              )
              
              
              (3,866
              )
              
              
              (2,920
              )General
      and administrative expenses
              
              
              (1,584
              )
              
              
              (9,901
              )(1)
              
              
              (13,664
              )
              
              
              (16,779
              )
              
              
              (24,517
              )Research
      and development expenses
              
              
              (49
              )
              
              
              (546
              )
              
              
              (2,555
              )
              
              
              (1,871
              )
              
              
              (4,382
              )Total
      operating expenses
              
              
              (1,671
              )
              
              
              (11,461
              )(1)
              
              
              (17,863
              )
              
              
              (22,516
              )
              
              
              (31,819
              )Income
      (loss) from operations
              
              
              283
              
              
              
              15,171
              
              
              
              164
              
              
              
              (7,050
              )
              
              
              (15,206
              )Net
      income (loss)
              
              $
              (307
              )
              
              $
              11,814
              
              
              $
              (4,855
              )
              
              $
              (22,938
              )
              
              $
              (9,846
              )Net
      loss attributable to China Sunergy Co., Ltd.
              
              
              (307
              )
              
              
              (11,814
              )
              
              
              (4,855
              )
              
              
              (22,938
              )
              
              
              (9,846
              )Dividend
      on Series A redeemable convertible preferred shares
              
              
              —
              
              
              
              (13,377
              )(2)
              
              
              (155
              )
              
              
              —
              
              
              
              —Dividend
      on Series B redeemable convertible preferred shares
              
              
              —
              
              
              
              (28,552
              )(3)
              
              
              (330
              )
              
              
              —
              
              
              
              —Dividend
      on Series C redeemable convertible preferred shares
              
              
              —
              
              
              
              (7,097
              )(4)
              
              
              (233
              )
              
              
              —
              
              
              
              —Net
      loss attributable to China Sunergy Co., Ltd. ordinary
      shareholders
              
              $
              (307
              )
              
              $
              (37,212
              )
              
              $
              (5,573
              )
              
              $
              (22,938
              )
              
              $
              (9,846
              )Net
      loss per share-Basic
              
              $
              (0.00
              )
              
              $
              (0.36
              )
              
              $
              (0.04
              )
              
              $
              (0.10
              )
              
              $
              (0.04
              )-Diluted
              
              $
              (0.00
              )
              
              $
              (0.36
              )
              
              $
              (0.04
              )
              
              $
              (0.10
              )
              
              $
              (0.04
              )Shares
      used in computation-Basic
              
              
              108,000,000
              
              
              
              103,583,178
              
              
              
              185,165,757
              
              
              
              238,079,890
              
              
              
              239,366,840-Diluted
              
              
              108,000,000
              
              
              
              103,583,178
              
              
              
              185,165,757
              
              
              
              238,079,890
              
              
              
              239,366,840Other
      Consolidated Financial DataGross
      margin
              
              
              14.2
              %
              
              
              17.8
              %
              
              
              7.7
              %
              
              
              4.4
              %
              
              
              5.8
              %Consolidated
      Operating DataSolar
      cells sold (inmegawatts, or
      MW)
              
              
              4.4
              
              
              
              46.4
              
              
              
              70.0
              
              
              
              100.4
              
              
              
              181.5Average
      selling price (in $ per watt)
              
              $
              3.10
              
              
              $
              3.22
              
              
              $
              2.92
              
              
              $
              3.32
              
              
              $
              1.36




(1)
              Includes
      a non-cash charge of $3.7 million relating to the excess distribution to
      our president and a non-cash charge of $0.5 million relating to
      forgiveness of shareholder receivables from certain of our directors and
      executive officers.
  (2)
              Includes
      a one-time beneficial conversion feature of $13.1
  million.
  (3)
              Includes
      a one-time beneficial conversion feature of $28.0
  million.
  (4)
              Includes
      a one-time beneficial conversion feature of $6.9
  million.


6




As
      of December 31,2005
                
                
                2006
                
                
                2007
                
                
                2008
                
                
                2009(in thousands, except share
      and per share data)Consolidated
      Balance Sheet DataCash
      and cash equivalents
                
                $
                2,765
                
                
                $
                14,750
                
                
                $
                60,458
                
                
                $
                94,800
                
                
                $
                123,855Restricted
      cash
                
                
                21,959
                
                
                
                4,952
                
                
                
                23,473
                
                
                
                62,400
                
                
                
                55,678Accounts
      receivable, net
                
                
                1,705
                
                
                
                43,048
                
                
                
                26,817
                
                
                
                8,906
                
                
                
                15,292Advances
      to suppliers, net
                
                
                17,408
                
                
                
                26,281
                
                
                
                79,912
                
                
                
                7,320
                
                
                
                184Amounts
      due from related parties
                
                
                14,104
                
                
                
                1,977
                
                
                
                2,112
                
                
                
                18,583
                
                
                
                22,103Inventories
                
                
                6,647
                
                
                
                44,331
                
                
                
                56,092
                
                
                
                59,125
                
                
                
                22,645Property,
      plant and equipment, net
                
                
                13,414
                
                
                
                38,730
                
                
                
                52,929
                
                
                
                102,609
                
                
                
                93,790Total
      assets
                
                
                79,307
                
                
                
                176,327
                
                
                
                321,144
                
                
                
                397,725
                
                
                
                372,659Short-term
      bank borrowings
                
                $
                21,685
                
                
                $
                69,263
                
                
                $
                121,841
                
                
                $
                97,299
                
                
                $
                102,516Accounts
      payable
                
                
                3,216
                
                
                
                11,845
                
                
                
                7,157
                
                
                
                29,099
                
                
                
                27,411Amounts
      due to related parties
                
                
                28,437
                
                
                
                4
                
                
                
                8
                
                
                
                246
                
                
                
                2,369Total
      current liabilities
                
                
                65,393
                
                
                
                92,104
                
                
                
                136,243
                
                
                
                146,622
                
                
                
                139,063Long-term
      bank borrowings
                
                
                8,674
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Convertible
      senior notes
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                48,098
                
                
                
                44,000Series
      A redeemable convertible preferred shares
                
                
                —
                
                
                
                13,228
                
                
                
                —
                
                
                
                —
                
                
                
                —Series
      B redeemable convertible preferred shares
                
                
                —
                
                
                
                28,502
                
                
                
                —
                
                
                
                —
                
                
                
                —Series
      C redeemable convertible preferred shares
                
                
                —
                
                
                
                20,056
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
      equity
                
                
                5,240
                
                
                
                22,280
                
                
                
                183,848
                
                
                
                174,957
                
                
                
                166,588Total
      liabilities and equity
                
                
                79,307
                
                
                
                176,327
                
                
                
                321,144
                
                
                
                397,725
                
                
                
                372,659


7


Exchange
Rate Information




This
annual report contains translations of certain Renminbi amounts into U.S.
dollars at the rate of RMB6.8259 to $1.00, the noon buying rate in effect on
December 31, 2009 in New York City for cable transfers of Renminbi as certified
for customs purposes by the Federal Reserve Bank of New York. We make no
representation that the Renminbi or U.S. dollar amounts referred to in this
annual report could have been or could be converted into U.S. dollars or
Renminbi, as the case may be, at any particular rate or at all. See Item 3, “Key
Information—Risk Factors—Risks Related to Our Company and Our
Industry—Fluctuations in exchange rates could adversely affect our business” for
discussions of the effects of fluctuating exchange rates. On May 21, 2010, the
noon buying rate was RMB6.8262 to $1.00.




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




Noon
      Buying RatePeriod
              
              Period
      End
              
              
              Average(1)
              
              
              Low
              
              
              High(RMB
      per $1.00)2005
              
              
              8.0702
              
              
              
              8.1826
              
              
              
              8.2765
              
              
              
              8.07022006
              
              
              7.8041
              
              
              
              7.9579
              
              
              
              8.0702
              
              
              
              7.80412007
              
              
              7.2946
              
              
              
              7.5806
              
              
              
              7.8127
              
              
              
              7.29462008
              
              
              6.8225
              
              
              
              6.9193
              
              
              
              7.2946
              
              
              
              6.78002009
              
              
              6.8259
              
              
              
              6.8295
              
              
              
              6.8470
              
              
              
              6.8176October
      2009
              
              
              6.8264
              
              
              
              6.8267
              
              
              
              6.8292
              
              
              
              6.8248November
      2009
              
              
              6.8265
              
              
              
              6.8271
              
              
              
              6.8300
              
              
              
              6.8255December
      2009
              
              
              6.8259
              
              
              
              6.8275
              
              
              
              6.8299
              
              
              
              6.82442010January
      2010
              
              
              6.8268
              
              
              
              6.8269
              
              
              
              6.8295
              
              
              
              6.8258February
      2010
              
              
              6.8258
              
              
              
              6.8285
              
              
              
              6.8330
              
              
              
              6.8258March
      2010
              
              
              6.8258
              
              
              
              6.8262
              
              
              
              6.8270
              
              
              
              6.8254April
      2010
              
              
              6.8247
              
              
              
              6.8256
              
              
              
              6.8275
              
              
              
              6.8229May
      2010 (through May 21, 2010)
              
              6.8262
              
              
              6.8267
              
              
              6.8285
              
              
              6.8245








(1)
            Annual
      averages are calculated from month-end rates. Monthly averages are
      calculated using the average of the daily rates during the relevant
      period.




B.
            Capitalization and
      Indebtedness




Not Applicable.




C.
            Reasons for the Offer
      and Use of Proceeds




Not Applicable.




D.
            Risk
      Factors




Risks
Related to Our Company and Our Industry




Difficult
global economic conditions and credit environment may adversely affect the
demand for our products.




The
demand for solar power products is influenced by macroeconomic factors, such as
the supply and price of other energy products, as well as government regulations
and policies concerning the electric utility industry. The global financial
markets have experienced a downturn since 2008, and most of the world’s major
economies have experienced a period of slow economic growth. The global economic
downturn has resulted in weakened market demand for products that require
significant initial capital expenditures, including solar power products. For
example, the global economic downturn in several key solar power markets has
resulted in slower investments in new installation projects that make use of
solar power products. Existing projects may also be delayed as a result of the
credit and other disruptions. The unfavorable credit environment, which affects
the ability of sponsors to obtain financing for their projects, has also
contributed to the slowdown of the large solar project market segments.
Furthermore, a decrease in the price of other energy products, such as oil, coal
and natural gas, may reduce the urgency of the market to invest in alternative
energy. These macroeconomic factors have resulted in reduced demand for our
solar power products, and have adversely affected our operating results. In 2008
and 2009, partly due to the impact of global financial market disruption and
economic slowdown, some of our customers cancelled or delayed orders for our
products.


8


The
overall global economic conditions and credit environment have improved
significantly over the second half of 2009. However, at the time of this annual
report, European Union and International Monetary Fund are preparing effective
bail-out plans to resolve the economic crisis in Greece, which has the potential
to spread to other parts of Europe. If such negative economic and market
downturn happens, our business and results of operations may be materially and
adversely affected.




Volatile
market and industry trends, in particular, the decline in demand for solar
products may cause the average selling price of our products to decline, and
reduce our revenues and profitability.




We are
affected by solar power market and industry trends. From the fourth quarter of
2008 to the first quarter of 2009, the global solar power industry experienced a
precipitous decline in demand. During the same period, the global supply of
solar products exceeded the global demand due to the excess production capacity
as a result of the global economic downturn. Such oversupply of solar products
contributed to the decline in the average selling price of solar cells. The
average selling prices of our solar cells decreased from $3.32 per watt in 2008
to $1.36 per watt in 2009.As
the effect of the global economic crisis subsided through 2009, the combination
of increased availability of financing for downstream buyers and decreased
average selling prices of solar power products contributed to an overall
increase in demand during the second half of 2009 for solar power products
compared to the first quarter of 2009. However, if demand for solar power
products declines again and the supply of solar power products continues to
grow, the average selling price of our products will be materially and adversely
affected, which may reduce our revenues and profitability.




The
availability and price of silicon raw materials may affect our gross margins and
profitability.




Polysilicon
is an essential raw material in our production of solar power products. The
procurement costs of silicon wafers and other silicon-based raw materials have
accounted for a substantial majority of our cost of revenues since we began our
commercial production of solar cells in August 2005. The global supply of
polysilicon is controlled by a limited number of producers and in the past
several years there was an industry-wide shortage of polysilicon due to the
growing demand for solar power products and the continuing expansion of the
semiconductor industry. According to Solarbuzz LLC, or Solarbuzz, an independent
solar energy research and consulting firm, the average long-term supply contract
price of polysilicon increased from approximately $60-$65 per kilogram in 2007
to $60-$75 per kilogram in 2008. In addition, according to Solarbuzz, spot
prices for solar grade polysilicon were in the range of $230-$375 per kilogram
for most of the first half of 2008 and rose to a peak of $450-$475 per kilogram
by mid-2008. Increases in the price of polysilicon have in the past resulted in
increases in the price of wafers, and these increases in the price of silicon
raw materials have in the past increased our production costs and thus affected
our profitability. However, in late 2008 and 2009, newly available polysilicon
capacity has resulted in an increased supply of polysilicon, which created a
downward pressure on the price of polysilicon.  According to
Solarbuzz, the average initial price range of long-term polysilicon supply
contracts decreased to $50-$60 in the fourth quarter of 2009, and the spot price
for solar grade polysilicon decreased rapidly to $150-$200 per kilogram by the
beginning of 2009, and further declined to $55-$60 per kilogram by the end of
2009. However, we cannot assure you that the price of polysilicon will continue
to decline or remain at its current levels, especially if the global solar power
market regains its growth momentum. Moreover, if the industry-wide shortage of
polysilicon happens again, we may face a shortage of silicon raw materials and
experience late or non-delivery from suppliers and purchase silicon raw
materials of lower grade quality that may result in lower conversion efficiency
and reduced average selling price and revenues.




Our
strategy of expanding into downstream solar power business may not be as
successful as we envisioned.




In March 2010, we entered into two
share transfer agreements with China Electric Equipment Group Co., Ltd., or
CEEG, an entity controlled by Mr. Tingxiu Lu, our chairman, and Sundex Holdings
Limited, a company not affiliated with us, pursuant to which we will acquire
from CEEG and Sundex Holdings Limited the 100% equity interests in CEEG
(Shanghai) Solar Science & Technology Co., Ltd. and the 100% equity
interests in CEEG (Nanjing) New Energy Co., Ltd., both of which are our
affiliates and are controlled by Mr. Tingxiu Lu, at a total consideration of
approximately RMB320.0 million ($46.9 million). The two transactions are
expected to close before June 30, 2010, subject to customary closing conditions
including obtaining necessary government approvals. CEEG (Shanghai) Solar
Science & Technology and CEEG (Nanjing) New Energy integrate the research
and development, production, sales and servicing of solar modules, with total
annual production capacities of 150 MW and 70 MW, respectively, as of March
2010. These acquisitions will facilitate the implementation of our strategy to
expand into downstream solar power business, including solar module and
solutions businesses.


9


These proposed acquisitions and our
implementation of the strategy of expanding into downstream solar power business
will result in substantial changes to our business, including, among others, the
change of our customer base, from primarily module manufacturers and system
integrators purchasing solar cells to primarily system integrators and solar
power project developers. We have limited experience engaging in solar module
and solutions businesses and may not be successful in establishing a strong
reputation in the market. Moreover, this sector of the solar power industry is
rapidly evolving and is becoming increasingly competitive. We cannot predict
whether, or how quickly, this market will grow.




Our successful expansion into solar
module and solutions businesses depends on a number of factors, including: level
of demand for solar modules and solutions services; our ability to provide solar
modules and solutions services with quality satisfactory to our customers; our
ability to hire and retain enough staff with relevant experience in this
business; our ability to compete effectively with other companies engaging in
similar businesses; our ability to maintain and develop relationships with solar
module and solutions services customers, including existing customers of these
companies to be acquired; our ability to offer module products and solutions
services in the countries presenting culture, language, regulatory or other
barriers; our ability to adapt and develop our products and services according
to market conditions and needs; and our ability to integrate the companies to be
acquired. If we fail to successfully expand such business, our growth strategy
will be impaired.  We may fail to recoup our investment, and our
business, competitiveness and results of operations could be materially and
adversely affected.




We
have a limited operating history and we have incurred losses in certain prior
periods and may incur losses in the future.




We
incurred net losses of $4.9 million, $22.9 million and $9.8 million in 2007,
2008 and 2009, respectively. We cannot assure you that we will not incur net
losses in the future or that there will not be any earnings or revenue declines
in any future periods. Our ability to achieve and maintain profitability depends
on, among others, the growth rate of the solar power market, the continued
global market acceptance of solar power products in general and our existing and
future products in particular, our ability to secure quality raw materials,
primarily silicon wafers, the pricing trend of solar power products, the
competitiveness of our products as well as our ability to provide new products
to meet the demands of our customers, our ability to achieve our manufacturing
expansion plans and our ability to control our costs and expenses. We may not be
able to achieve or sustain profitability on a quarterly or annual basis.
Furthermore, our limited operating history may not provide a meaningful basis
for evaluating our business, financial performance and prospects. Accordingly,
even though we achieved growth or profitability during certain prior periods,
you should not rely on our results of operations for any prior periods as an
indication of our future performance. You should consider our business and
prospects in light of the risks, expenses and challenges that we have as a
company which has a limited operating history and is seeking to develop and
manufacture new products in a rapidly evolving market.





Our
dependence on a limited number of third-party suppliers for key raw materials
and customized manufacturing equipment could prevent us from timely delivering
our products to our customers in the required quantities, which could result in
order cancellations and decreased revenue.




We
purchase silicon raw materials, primarily silicon wafers, from a limited number
of third-party suppliers. Our top ten suppliers supplied approximately 57.4% of
the silicon raw material supplies we procured in 2009, mostly under contracts
with a term of less than one year. If we fail to develop or maintain our
relationships with our major suppliers, we may be unable to manufacture our
products or our products may only be available at a higher cost or after a long
delay, and we could be prevented from delivering our products to our customers
in the required quantities and at prices that are profitable. Problems of this
kind could cause order cancellations and loss of market share. Historically, we
encountered problems with respect to the quality of silicon raw material
supplied by some of our suppliers, which resulted in lower conversion
efficiencies of our solar cells. Some of our suppliers have failed to perform
their delivery obligations in the past. In addition, historically, many of our
contracts did not provide for a remedy for non-delivery beyond a refund of any
advance payment that we may have made, and our legal recourse in cases of
non-delivery may be limited.


10


The
failure of any major supplier to supply raw materials that meet our quality,
quantity and cost requirements in a timely manner could impair our ability to
manufacture our products and could increase our costs, particularly if we are
unable to obtain these materials and components from alternative sources on a
timely basis or on commercially reasonable terms. The pricing terms under our
raw material supply framework agreements generally are to be determined based on
future negotiations. If we cannot reach agreement on pricing terms with those
suppliers in the future, those agreements will not be enforceable and we would
then need to seek alternative supplies. In such an event, we may not be able to
secure sufficient alternative supplies.




In
addition, certain of our manufacturing equipment has been designed and made
specifically for us. As a result, such equipment is not readily available from
multiple vendors and would be difficult to repair or replace. Any significant
damage to, or breakdown of, our customized manufacturing equipment could cause
material interruptions to our operations and consequentially could have a
material adverse effect on our business and results of operations.




Our
costs and expenses may increase as a result of entering into fixed price, firm
purchase commitment arrangements with our suppliers.




In
response to the industry-wide shortage of silicon raw materials experienced
prior to the third quarter of 2008, we purchased silicon raw materials using
short-term and long-term contracts from a limited number of international and
domestic suppliers. Currently we use primarily short-term contracts to secure
our silicon raw materials supply. Some agreements provide for firm purchase
commitments and fixed pricing or pricing adjustable within a relatively small
range. From the fourth quarter of 2008 to mid-2009, the price of silicon raw
materials decreased precipitously because of the excess supply of silicon raw
materials resulting from slower global solar power market growth. In light of
such excess supply, we have sought to re-negotiate with our long-term supply
partner in regard to certain long-term supply contracts signed in 2008. If we
fail to re-negotiate or terminate these contracts, we may be subject to
contractual damages. See “—We have been a party in several legal proceedings,
which, if determined adversely, could negatively affect our business and results
of operations.” If the prices under our amended supply contracts continue to be
higher than the market prices, we may be placed at a competitive disadvantage
versus our competitors, and our profitability could decline. In addition, if
demand for our solar power products decreases and such agreements require us to
purchase more silicon raw materials than are required to meet our demand, we may
incur costs associated with carrying excess inventory, which may have a material
adverse effect on our cash flows. To the extent we are not able to pass these
increased costs and expenses on to our customers, our business, financial
condition and results of operations may be materially and adversely
affected.




We
have significant outstanding bank borrowings, and we may not be able to arrange
adequate financing when they mature or may encounter other difficulties in
maintaining liquidity.




As of
December 31, 2009, we had $123.9 million in cash and cash equivalents, and we
had $102.5 million in outstanding borrowings, all of which would become due
within one year. In the first quarter of 2010, we borrowed additional loans and
repaid some of our loans, and all of our current loans will become due within
one year of the date of this report. Recent turmoil in the credit markets and
the potential impact on the liquidity of financial institutions may adversely
affect our ability to fund our business through borrowings, under either
existing or newly created instruments in the public or private markets on terms
that we believe to be reasonable, if at all. We cannot assure you that we will
be able to obtain extensions of these facilities as they mature. If we are
unable to obtain extensions of these facilities, or if we are unable to obtain
sufficient alternative funding on reasonable terms to make repayments, we will
have to repay these borrowings with cash generated by our operating activities.
We cannot assure you that our business will generate sufficient cash flows from
operations to repay these borrowings. In addition, repaying these borrowings
with cash generated by our operating activities will divert our financial
resources from the requirements of our ongoing operations and future
growth.




Historically,
given the state of the industry, we generally needed to make prepayments at a
certain percentage of the order value to our suppliers of silicon raw materials
in advance of shipment. Due to the relative oversupply of polysilicon,
prepayment as a percentage of the entire contract has been reducing. In 2009,
most of our suppliers granted us credit terms under their contracts with us.
However, our purchases of silicon raw materials may continue to require us to
make certain working capital commitments. We may also need additional capital
for the expansion and modification of our manufacturing lines in the future. As
a result of these requirements, we may require additional debt or equity
financing. Furthermore, we have granted credit terms for our sales to some of
our large customers. Some of our customers may fail to meet their payment
obligations, which would materially and adversely affect our financial position,
liquidity and results of operations.


11


In
addition, we may also need a significant amount of cash to meet future capital
requirements in connection with our overall expansion plan, including the
expansion of our solar power product manufacturing facilities, as well as
research and development activities in order to remain competitive. Future
acquisitions, expansions, market changes or other developments may also cause us
to obtain additional funds. If we fail to effectively manage our cash flows from
operations, borrowings and equity contributions to support our cash flow
requirements, we may encounter difficulty in liquidity, which would have a
material adverse effect on our business, financial condition and future
prospects.




Our
advance payments to most of our silicon raw material suppliers expose us to the
credit risk of these suppliers, and if these suppliers default in delivery or
refunding the payment, our financial condition, results of operations and
liquidity may be adversely affected.




Under the
supply contracts with most of our silicon raw material suppliers entered into
during an industry-wide shortage of silicon raw materials in the past few years,
we made prepayments to our suppliers prior to the scheduled delivery dates for
silicon raw materials. The prepayment as a percentage of the entire contract has
been reducing due to the dramatic change of the availability of polysilicon
since the fourth quarter of 2008, and our advances to suppliers decreased
significantly to $7.3 million and further decreased to $0.2 million as of
December 31, 2008 and 2009, respectively. However, we still depend on a limited
number of suppliers and we may continue to be required to make such advance
payments without receiving collateral in the future. As a result, our claims for
such advance payments would rank only as unsecured claims, exposing us to the
credit risks of the suppliers in the event of their insolvency or bankruptcy. We
may not be able to recover such advance payments and would suffer losses should
the suppliers fail to fulfill their delivery obligations under the
contracts.




Our
dependence on a limited number of customers may cause significant fluctuations
or declines in our revenues.




We
currently sell a substantial portion of our solar cells to a limited number of
customers. Our top five customers contributed over 56.4% of our net revenues in
2009, including CEEG (Shanghai) Solar Science and Technology Co., Ltd. and CEEG
(Nanjing) New Energy Co., Ltd., both of which are our affiliates and are
controlled by Mr. Tingxiu Lu, our chairman, which contributed approximately
19.3% and 9.3%, respectively, of our net revenues in 2009. Sales to our
customers are typically made through non-exclusive arrangements.After
the completion of our proposed acquisitions as described above, our customer
base may change from primarily module manufacturers and system integrators to
primarily system integrators and solar power project developers.




We
anticipate that our dependence on a limited number of customers will continue in
the foreseeable future. Consequently, any one of the following events may cause
material fluctuations or declines in our revenues:




•
            reduction,
      delay or cancellation of orders from one or more of our significant
      customers;




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




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




The
practice of requiring customers to make advance payments when they place orders
with us has declined, and we have experienced and will continue to experience
increased needs to finance our working capital requirements and are exposed to
increased credit risk of our customers.




We
historically required our customers to make an advance payment of a certain
percentage of their orders, a business practice that helped us to manage our
accounts receivable, prepay our suppliers and reduce the amount of funds that we
needed to finance our working capital requirements. In line with market trend,
this practice of requiring our customers to make advance payments is on the
decline, and has resulted in our increased need to obtain additional short-term
borrowings to fund our current cash requirements. Furthermore, a larger portion
of our revenues have been and may continue to be, derived from credits sales to
our customers. Receivables from our top three customers represented
approximately 43.6% of our total accounts receivable as of December 31, 2009.
CEEG (Shanghai) Solar Science and Technology Co., Ltd. and CEEG (Nanjing) New
Energy Co., Ltd., both of which are our affiliates and are controlled by Mr.
Tingxiu Lu, our chairman, accounted for 18.8% and 12.3% of our total accounts
receivable, respectively, as of December 31, 2009. Failure to timely collect our
receivables may adversely affect our cash flows. In 2009, we recorded $7.3
million allowance for doubtful accounts, primarily attributable to the doubtful
accounts in connection with our sales to a major client of us in 2008. In 2010,
we believe a majority of our revenues are expected to be derived from credit
sales, generally with payment schedules according to negotiated contracts. As a
result of the disruptions in the financial markets and other macro-economic
challenges which had affected the world economy, our customers may experience
cash flow concerns. As a result, they may delay their payment to us. Any
inability of current or potential customer to pay us may adversely affect our
earnings and cash flow.




12


If
we are unable to maintain a high utilization rate of our manufacturing capacity,
our operating margins may decline substantially.





Our
ability to achieve profitability depends in part on our ability to maintain a
high utilization rate of our manufacturing capacity. With the slowed growth of
the solar power market, it is more difficult for us to obtain enough orders for
the solar power products that we are capable of producing. If we are unable to
obtain sufficient orders for our products, procure sufficient raw materials, or
if we experience any material equipment failure, then we will not be able to
maintain a high utilization rate of our manufacturing capacity. As we incur
fixed costs associated with our facilities and equipment whether they are being
utilized, operating at less than full utilization results in expenses without
corresponding revenue, which may reduce our operating margins.




The
reduction or elimination of government subsidies and economic incentives for
on-grid solar energy applications could cause demand for our products and our
revenues to decline.




Almost
all of our solar power products sold are eventually used in the on-grid market,
where the solar power systems are connected to the utility grid and generate
electricity to feed into the grid. We believe that the near-term growth of the
market for on-grid applications depends in large part on the availability and
size of government subsidies and economic incentives. The reduction or
elimination of subsidies and economic incentives may adversely affect the growth
of this market or result in increased price competition, either of which could
cause our revenues to decline.




Today, when upfront system costs are
factored into cost per kilowatt, the cost of solar power substantially exceeds
the cost of power furnished by the electric utility grid in almost all
locations. As a result, national and local governmental bodies in many
countries, most notably in China, Germany, Italy, Japan, Spain, South Korea and
the United States, have provided subsidies and economic incentives in the form
of feed-in tariffs, rebates, tax credits and other incentives to distributors,
system integrators and manufacturers of solar power products in order to promote
the use of solar energy in on-grid applications and to reduce dependence on
other forms of energy. Policy shifts could reduce or eliminate these government
economic incentives altogether. For example,the rapid rise of German and
Spanish markets were largely due to the enactment of relevant government
policies setting feed-in tariff rates at attractive  levels. In September 2008, the Spanish
government reduced its national feed-in tariff and set a 500 MW installation cap
for 2009, which had a significant negative effect on the Spanish solar power
market and partly contributed to decreases in global selling prices of solar
power products in later 2008 and early 2009. At the beginning of 2009, the
German government reduced solar feed-in tariffs by between 9% and 11%. In May
2010, German Parliament Lower House (Bundestag) approved a proposal of a further
mid-year reduction in solar feed-in tariffs of 16% for rooftop systems and 15%
for most open-field installations. If this proposal is later approved by German
Parliament Upper House (Bundesrat) and becomes law, a significant decrease in
the demand for solar power products in Germany will likely follow. In addition, we exported a large amount
of our products to Europe, especially to Germany, and we expect to sell more
products to the European market after our expansion into downstream solar power
business. There have been market rumors that the European Union may seek to
initiate anti-dumping investigations regarding imports of solar power products
from China. If an anti-dumping investigation is initiated against Chinese
exporters or if the European Union imposes anti-dumping measures, including
tariffs on solar power product imports from China, such action could materially
and adversely affect our business and results of operations. Reductions in, or
eliminations of, subsidies and economic incentives for on-grid solar energy
applications could result in decreased demand for our products and cause our
revenues to decline.


13




Because
the markets in which we compete are highly competitive and many of our
competitors have greater resources than we do, we may not be able to compete
successfully and we may lose or be unable to gain market share.




The
market for solar power products is highly competitive and continually evolving.
We expect to face increased competition, which may result in price reductions,
reduced margins or loss of market share. Our competitors include solar power
divisions of large conglomerates such as Kyocera, Sanyo and Sharp Corporation,
as well as specialized power product manufacturers such as Canadian Solar Inc.,
JA Solar Holdings Co., Ltd., Motech Industries Inc., Q-Cells AG, Sunpower Corp.,
Suntech Power Holdings Co., Ltd., Solarfun Power Holdings Co., Ltd. and Trina
Solar Ltd. Some of our competitors, for example Yingli Green Energy Holding Co.,
Ltd., have also become vertically integrated, from wafer and module
manufacturing to solar system integration. During periods of raw material supply
shortage, their internally produced raw materials may enable them to realize a
higher margin in comparison with other solar power product
manufacturers.




We may
also face new competition from semiconductor manufacturers, several of which
have already announced their intention to start production of solar power
products. Decrease in polysilicon price and increase in solar power product
manufacturing could result in substantial downward pressure on the price of
solar power products and intensify the competition in 2010. In addition, the
entire solar power industry faces competition from conventional and non-solar
renewable energy technologies. Due to the relatively high manufacturing costs
compared to most other energy sources, solar energy is generally not competitive
without government subsidies and economic incentives.




Many of
our existing and potential competitors have substantially greater financial,
technical, manufacturing and other resources than we do. Our competitors’
greater size in some cases provides them with a competitive advantage with
respect to manufacturing costs due to their economies of scale and their ability
to purchase raw materials at lower prices. For example, those of our competitors
that also manufacture semiconductors may source both semiconductor grade silicon
wafers and solar grade silicon wafers from the same supplier. As a result, such
competitors may have stronger bargaining power with the supplier and have an
advantage over us in pricing as well as obtaining silicon wafer supplies at
times of shortage. Many of our competitors also have more established
distribution networks and larger customer bases. In addition, many of our
competitors have well-established relationships with our customers and have
extensive knowledge of our target markets. As a result, they may be able to
devote greater resources to the research, development, promotion and sale of
their products or respond more quickly to evolving industry standards and
changes in market conditions than we can. It is possible that new competitors or
alliances among existing competitors could emerge and rapidly acquire
significant market share, which would harm our business. If we fail to compete
successfully, our business would suffer and we may lose or be unable to gain
market share.




Prices
for our silicon raw materials and products, and therefore our results of
operations, may vary according to seasonal demand, unpredictable events such as
adverse weather conditions and natural disasters, and other
factors.




The price
of polysilicon, an essential raw material for our production of solar power
products, is volatile. Historically our margins and results of operations have
been materially and adversely affected by the availability and price of
polysilicon and other silicon raw materials. The market prices for our products
are also subject to fluctuation due to a number of other factors and could
decline unexpectedly. For example, the price for solar power products in
Germany, which is used throughout our industry as a pricing benchmark, could be
adversely affected by changes in the subsidies available for solar power, and
price declines in Germany or in any other major market for solar power products
could adversely affect our average selling prices. Purchases of solar power
products also tend to decrease during the winter months because of adverse
weather conditions in certain regions, which complicate the installation of
solar power systems. Historically, our results of operations have been affected
by such seasonality of industry-wide demand for solar power products. Our
quarterly operating results also may fluctuate from period to period due to
other factors, including adverse weather conditions and natural disasters. For
example, unusually heavy snowstorms in central China in the first quarter of
2008 disrupted our power supply and the transportation of our raw materials and
finished products, forcing us to suspend our operations for three weeks. Any of
these various factors could negatively affect our production, margins and
results of operations and, as a result of these factors, you may not be able to
rely on period to period comparisons of our operating results as an indication
of our future performance.




If
solar power technology is not suitable for widespread adoption, or if sufficient
demand for solar power products does not develop or takes longer to develop than
we anticipate, our revenues may not continue to increase or may even decline,
and we may be unable to achieve or sustain our profitability.




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


14


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




•
            success
      of other alternative energy generation technologies, such as wind power,
      hydroelectric power and biomass;




•
            fluctuations
      in economic and market conditions that affect the viability of
      conventional and other renewable energy sources, such as increases or
      decreases in the prices of oil and other fossil fuels or decreases in
      capital expenditures by end users of solar power
  products;




•
            availability
      of government subsidies and incentives to support the development of the
      solar power industry;




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




•
            deregulation
      of the electric power industry and the broader energy
      industry.




If solar
power technology is not viable for widespread adoption or sufficient demand for
solar power products does not develop or develops to a lesser extent than we
anticipate, our revenues may suffer and we may be unable to sustain our
profitability.




Advances
in solar power technology could render our products uncompetitive or obsolete,
which could reduce our market share and cause our sales and profit to
decline.




The solar
power market is characterized by evolving technology standards that require
improved features, such as higher conversion efficiencies and higher power
output. This requires us to develop new solar power products and enhancements
for existing solar power products to keep pace with evolving industry standards
and changing customer requirements. For example, currently we are focused on
crystalline silicon technology and the expansion of production capacity based on
crystalline silicon, which today is the primary technology used by most solar
cell and module manufacturers. Some overseas producers have focused on
developing alternative forms of solar power technologies, such as thin-film
technologies. Failure to further refine our technology and to develop and
introduce new solar power products could cause our products to become
uncompetitive or obsolete, which could reduce our market share and cause our
revenues to decline. We will need to invest significant financial resources in
research and development to maintain our market position, keep pace with
technological advances in the solar power industry and effectively compete in
the future.




If our
future innovations fail to enable us to maintain or improve our competitive
position, we may lose market share. If we are unable to successfully design,
develop and bring to market competitive new solar power products or enhance our
existing solar power products, we may not be able to compete successfully.
Competing solar power technologies may result in lower manufacturing costs or
higher product performance than those expected from our solar power products. In
addition, if we, or our customers, are unable to manage product transitions, our
business and results of operations would be negatively affected.




We
may not be successful in the commercial production of N-type solar cells or
other new products, which could limit our growth prospects.




We are
currently developing process technology for manufacturing N-type solar cells.
The conversion efficiency rate of N-type solar cells may generally be higher
than that of mainstream P-type solar cells. However, we cannot assure you that
we will be able to commercially manufacture N-type solar cells on a large scale
in a cost effective way.




We may
face significant challenges in manufacturing N-type solar cells. Minor
deviations in the manufacturing process can cause decreases in yield and cell
conversion efficiencies. We may face difficulty in securing wafer supply for the
manufacture of N-type solar cells. If we are unable to commence manufacturing
our N-type solar cells on a timely basis, or if we face technological
difficulties in cost-efficiently producing our N-type solar cells with the
expected performance on a stable level, or if we are unable to secure sufficient
raw material supplies or generate sufficient customer demand for our N-type
solar cells, our business and prospects may be adversely
impacted.


15


In
addition, as of the date of this prospectus, we have five selective emitter cell
manufacturing lines.  During the second half of 2009, we made a concerted
effort to improve the performance of our standard HP solar cells.




Our
future success substantially depends on our ability to increase both our
manufacturing capacity and total output, which exposes us to a number of risks
and uncertainties.




We
currently have ten solar cell manufacturing lines, with an aggregate annual
production capacity of 320 MW, assuming the use of 156-millimeter
monocrystalline silicon wafers. Our future success depends on our ability to
increase both our manufacturing capacity and total output. If we are unable to
do so, we may be unable to expand our business, decrease our costs per watt,
maintain our competitive position and improve our profitability. Our ability to
establish additional manufacturing capacity and increase output is subject to
significant risks and uncertainties, including:




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




•
            delays
      and cost overruns as a result of a number of factors, many of which are
      beyond our control, such as increases in the price of silicon raw
      materials and problems with equipment
vendors;




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




•
            diversion
      of significant management
attention;




•
            the
      ability to secure sufficient silicon raw materials, primarily silicon
      wafers, to support our expanded manufacturing capacity;
  and




•
            the
      recovery of global economy and demand for solar products in overseas
      markets as influenced by the global economic downturn and its
      effects.




If we are
unable to establish or successfully operate additional manufacturing capacity,
or if we encounter any of the risks described above, we may be unable to expand
our business as planned. Moreover, we cannot assure you that if we do expand our
manufacturing capacity as planned, we will be able to generate sufficient
customer demand for our solar power products to support our increased production
levels.




We
may experience difficulty in achieving acceptable yields and product performance
as a result of manufacturing problems, which could negatively impact our future
revenue.




The
technology for the manufacture of solar power products is highly complex and is
continually being modified in an effort to improve yields and product
performance. The quality of the raw materials used, microscopic impurities such
as dust and other contaminants, difficulties in the manufacturing process, or
malfunctions of the equipment or facilities used can lower yields, cause quality
control problems, interrupt production or result in losses of products in
process.




Because
our existing manufacturing capabilities are, and our future manufacturing
capabilities will likely remain, concentrated in our manufacturing facilities in
Nanjing, China, any problem in our facilities may limit our ability to
manufacture products. We may encounter problems in our manufacturing facilities
as a result of, among other things, production failures, construction delays,
human errors, equipment malfunction or process contamination, which could
seriously harm our operations. We may also experience floods, droughts, power
losses and similar events beyond our control that would affect our facilities.
For example, the unusually heavy snowstorms in the first quarter of 2008
disrupted our power supply and forced us to suspend our manufacturing operations
for three weeks. Any disruption in our manufacturing process that forces us to
shut down and restart our production causes a drop-off in production quality
during the first two or three weeks after we resume production, which in turn
reduces our yield as more of our output falls below our quality control
standards during that period.


16


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




Our
future success depends substantially on the continued services of Mr. Tingxiu
Lu, our chairman, our executive officers and key employees, especially Dr.
Jianhua Zhao, our vice chairman and chief technology officer, Mr. Stephen
Zhifang Cai, our director and chief executive officer, Mr. Siegfried Yi Chou
Hsu, our chief financial officer, and Dr. Aihua Wang, our vice president. In the
past, certain of our executive officers and key employees resigned from their
positions. For example, Mr. Kenneth Luk resigned from the position as our chief
financial officer in March 2009. Dr. Fengming Zhang resigned from the positions
as our director and vice president in charge of manufacturing technology in
April 2009. Mr. Ruennsheng Allen Wang resigned from the position as our director
and chief executive officer in March 2010. We subsequently appointed Mr.
Shiliang Guo as our director in May 2009, Mr. Siegfried Yi Chou Hsu as our chief
financial officer in October 2009, and Mr. Stephen Zhifang Cai as our chief
executive officer and director in March and April 2010, respectively. Although
we have successfully found replacements for these vacated positions in the past,
we cannot assure you that we will continue to be able to find eligible
candidates in the future if one or more of our executive officers or key
employees are unable or unwilling to continue in their present
positions.




Although
we believe that these changes of our management team did not materially affect
our business operations in the past, if we lose the services of our executive
officers or key employees due to their resignation, non-compliance with
applicable law or any other reason in the future, especially if we cannot timely
find replacements, our business may be severely disrupted, our financial
conditions and results of operations may be materially and adversely affected
and we may incur additional expenses to recruit, train and retain personnel. If
any of our executive officers or key employees joins a competitor or forms a
competing company, we may lose customers, suppliers, know-how and key
professionals and staff members. Each of our executive officers and key
employees has entered into an employment agreement with us which contains
non-competition provisions. However, if any dispute arises between our executive
officers or our key employees and us, these agreements may not be enforceable in
China, where these executive officers or our key employees reside, in light of
the uncertainties with China’s legal system. See “—Risks Related to Doing
Business in China—Uncertainties with respect to the Chinese legal system could
have a material adverse effect on us.”




If
we fail to manage our growth and expansion effectively, our business may be
adversely affected.




We have
experienced a period of rapid growth and expansion that has placed, and
continues to place, significant strain on our management personnel, systems and
resources. To accommodate our growth, we anticipate that we will need to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including improvements to our accounting and other
internal management systems, all of which require substantial management
efforts. We also will need to continue to expand, train, manage and motivate our
workforce, manage our customer relationships and manage our relationships with
raw material suppliers. All of these endeavors will require substantial
management effort and skill and the incurrence of additional expenditures. If we
fail to manage our growth effectively, that failure may have a material adverse
effect on our business.




Future
acquisitions may have an adverse effect on our ability to manage our
business.




If we are
presented with appropriate opportunities, we may acquire technologies,
businesses or assets that are complementary to our business. For example, in
March 2010, we entered into two share transfer agreements to acquire the 100%
equity interests in CEEG (Shanghai) Solar Science & Technology Co., Ltd. and
the 100% equity interests in CEEG (Nanjing) New Energy Co., Ltd., both of which
are our affiliates and are controlled by Mr. Tingxiu Lu, our chairman. These and
any future acquisitions may expose us to potential risks, including risks
associated with the assimilation of new personnel, unforeseen or hidden
liabilities, the diversion of management attention and resources from our
existing business and the inability to generate sufficient revenues to offset
the costs and expenses of acquisitions. Any difficulties encountered in the
acquisition and integration process may have an adverse effect on our ability to
manage our business.


17


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




In 2009,
we derived 35.0% of our net revenues from sales of our products to customers
outside of China. We intend to continue to expand our sales in Europe as well as
in other overseas markets such as the United States, Australia and other Asian
countries and regions. The marketing, distribution and sale of our solar power
products in the international markets expose us to a number of risks,
including:




•
            fluctuations
      in currency exchange rates;




•
            increased
      costs associated with maintaining marketing efforts in various
      countries;




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




•
            difficulty
      in engaging and retaining sales personnel who are knowledgeable about, and
      can function effectively in, overseas
markets;




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




•
            demand
      for solar products in overseas markets as influenced by world wide credit
      crisis and its effects.




If
we are unable to attract, train and retain qualified personnel, our business may
be materially and adversely affected.




Our
future success depends, to a significant extent, on our ability to attract,
train and retain qualified personnel, particularly technical personnel with
expertise in the solar power industry. Since our industry is characterized by
high demand and intense competition for talent, there can be no assurance that
we will be able to attract or retain the qualified technical staff or other
highly- skilled employees that we will need to achieve our strategic objectives.
As we are still a relatively young company and our business has grown rapidly,
our ability to train and integrate new employees into our operations may not
meet the growing demands of our business. If we are unable to attract and retain
qualified personnel, our business may be materially and adversely
affected.




We
may be exposed to infringement or misappropriation claims by third parties,
which, if determined adversely to us, could cause us to pay significant damage
awards.




Our
success depends largely on our ability to use and develop our technology and
know-how without infringing the intellectual property rights of third parties.
The validity and scope of claims relating to solar power technology patents
involve complex scientific, legal and factual questions and analysis and,
therefore, may be highly uncertain. We may be subject to litigation involving
claims of patent infringement or violation of other intellectual property rights
of third parties. The defense and prosecution of intellectual property suits,
patent opposition proceedings and related legal and administrative proceedings
can be both costly and time-consuming and may significantly divert the efforts
and resources of our technical and management personnel. An adverse
determination in any such litigation or proceedings to which we may become a
party could subject us to significant liability to third parties, require us to
seek licenses from third parties, to pay ongoing royalties, or to redesign our
products, or subject us to injunctions prohibiting the manufacture and sale of
our products or the use of our technologies. Protracted litigation could also
result in our customers or potential customers deferring or limiting their
purchase or use of our products until resolution of such
litigation.




Failure
to protect our intellectual property rights may undermine our competitive
position, and litigation to protect our intellectual property rights may be
costly.




We rely
primarily on trade secrets, patent laws and other contractual restrictions to
protect our intellectual property. Nevertheless, these afford only limited
protection, and the actions we take to protect our intellectual property rights
may not be adequate to provide us with meaningful protection or commercial
advantage. For example, as of March 31, 2010, we have seven patents and 11
pending patent applications in China. We cannot assure you that in a legal
proceeding the claims of our patents would be found valid or that the claims
would be interpreted as having sufficient scope to protect the technology we
consider important to our business, nor can we assure you that our patent
applications will eventually issue with claims of sufficient scope to protect
additional technology significant to our business. As a result, we may be unable
to exclude third parties from using the technologies that we have developed and
compete with us, which could have a material adverse effect on our business,
financial condition or operating results.


18


Furthermore,
we have granted NewSouth Innovations Pty Limited, a non-exclusive, royalty-free
license to use the technology for manufacturing N-type solar cells covered in
one of our patents in China for internal research purposes, and a right to
commercially utilize or sublicense such technology after March 1, 2009, provided
that they may not sublicense such technology to certain of our Chinese
competitors until after March 1, 2010. As a result, we may not be able to block
our competitors from using the technology covered by this patent after March 1,
2010, which could have a material adverse effect on our business, financial
condition or operating results.




In
addition, litigation may be necessary to enforce our intellectual property
rights. We cannot assure you that the outcome of such potential litigation will
be in our favor. Such litigation may be costly and may divert management
attention as well as divert other resources away from our business. In addition,
we have no insurance coverage against litigation costs and would have to bear
all costs arising from such litigation to the extent we are unable to recover
them from other parties. The occurrence of any of the foregoing could have a
material adverse effect on our business, results of operations and financial
condition.




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




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




We
anticipate that our products and their installation will be subject to oversight
and regulation in accordance with national and local regulations relating to
building codes, safety, environmental protection, utility interconnection and
metering and related matters. It is difficult to track the requirements of
individual jurisdictions and to design products that comply with the varying
standards. Any new government regulations or utility policies pertaining to our
solar power products may result in significant additional expenses to us or
cause a significant reduction in demand for our solar power
products.




Heightened
environmental concerns and increased awareness of climate change risks
associated with fossil fuel-based power generation have generated political
momentum in many governments, which subsequently implemented strategies aimed at
the reduction of emissions of carbon dioxide and certain other gases commonly
referred to as “greenhouse gases.” Renewable energy sources such as solar power
help address these environmental concerns, and governments around the world have
implemented a variety of policy initiatives to accelerate the development and
adoption of solar power. While passage of climate change legislation or other
regulatory initiatives that regulate or restrict emissions of greenhouse gases
may encourage use of solar power and accordingly increase demand for our
products and services, this could cause us to incur additional direct costs in
complying with any new environmental regulations during our manufacturing and
research and development processes, as well as increased indirect costs
resulting from our customers, suppliers or both incurring additional compliance
costs which are subsequently passed on to us.




Fluctuations
in exchange rates could adversely affect our business.




The value
of the Renminbi against the U.S. dollar, Euro and other currencies is affected
by, among other things, changes in China’s political and economic conditions and
China’s foreign exchange policies. On July 21, 2005, the PRC government changed
its decade-old policy of pegging the value of the Renminbi to the U.S. dollar.
Under the new policy, the Renminbi was permitted to fluctuate within a narrow
and managed band against a basket of certain foreign currencies. This change in
policy caused the Renminbi to appreciate approximately 21.5% against the U.S.
dollar over the following three years. Since reaching a high against the U.S.
dollar in July 2008, however, the Renminbi has traded within a narrow band
against the U.S. dollar, remaining within approximately 1% of its August 2008
high. As a consequence, the Renminbi has fluctuated sharply since July 2008
against other freely traded currencies, in tandem with the U.S.
dollar.  For example, the Renminbi appreciated approximately 27%
against the Euro between July 2008 and November 2008.  It is difficult
to predict how long the current situation may last and when and how it may
change again.


19




A major
portion of our sales are denominated in Renminbi and Euros, with the remainder
in U.S. dollars, while a substantial portion of our costs and expenses is
denominated in Renminbi and U.S. dollars, with the remainder in Euros.
Fluctuations in exchange rates, particularly among the U.S. dollars, Renminbi
and Euros, may affect our net profit margins and could result in fluctuations in
foreign currency exchange and operating gains and losses. We incurred a net
foreign exchange loss of approximately $0.5 million in 2009. We cannot predict
the impact of future exchange rate fluctuations on our results of operations and
may incur net foreign currency losses in the future. In addition, as we rely
entirely on dividends paid to us by our operating subsidiaries in China, any
significant revaluation of the Renminbi may have a material adverse effect on
our revenues and financial condition, and the value of, and any dividends
payable on, our ordinary shares and ADSs. For example, to the extent that we
need to convert U.S. dollars into Renminbi for our operations, appreciation of
the Renminbi against the U.S. dollar would have an adverse effect on the
Renminbi amount we receive from the conversion. Conversely, if we decide to
convert our Renminbi into U.S. dollars for the purpose of making payments for
dividends on our common shares or for other business purposes, appreciation of
the U.S. dollar against the Renminbi would have a negative effect on the U.S.
dollar amount available to us. Furthermore, due to the fact that we are paid in
Euros for a proportion of our sales, fluctuations in the exchange rate between
the Euro and the RMB may also have a material effect on our results of
operations.




Noncompliance
with present or future construction and environmental regulations may result in
potentially significant monetary damages and fines.




In the
past, we had begun operating facilities without having obtained all the
necessary approvals on the completion acceptance of our certain facilities from
relevant PRC construction and environmental protection authorities. As of the
date of this annual report, we have not received any administrative penalties in
respect of such non-compliance.  As of the date of this annual report,
we have obtained all the approvals from the relevant PRC environmental
protection authorities and construction authorities with respect to the
completion acceptance for these facilities.




As our
manufacturing processes generate noise, waste water, gases and other industrial
wastes, we are required to comply with all national and local regulations
regarding protection of the environment. In addition, the National People’s
Congress of China and the Chinese government have promulgated certain
resolutions and regulations regarding climate change, which generally require
enterprises to take actions to effectively manage the impact of climate change,
develop renewable energy solutions and control emissions. We believe we are in
material compliance with present environmental protection requirements and
regulations, and have all necessary environmental permits to conduct our
business, except as disclosed herein. However, if more stringent regulations are
adopted in the future, the costs of compliance with such new regulations could
be substantial. We believe that we have all of the permits necessary to conduct
our business as it is presently conducted. If we fail to comply with present or
future environmental regulations, however, we may be required to pay substantial
fines, suspend production or cease operations. We use, generate and discharge
toxic, volatile and otherwise hazardous chemicals and wastes in our research and
development and manufacturing activities. Any failure by us to control the use
of, or to restrict adequately the discharge of, hazardous substances could
subject us to potentially significant monetary damages and fines or suspensions
in our business operations.




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




As the
insurance industry in China is still in an early stage of development, product
liability insurance available in China offer limited coverage compared to that
offered in many other countries. We do not have any product liability insurance.
As with other solar power product manufacturers, we are exposed to risks
associated with product liability claims if the use of our solar power products
results in injury. Since our products generate electricity, it is possible that
users could be injured or killed by our products as a result of product
malfunctions, defects, improper installation or other causes. We only began
commercial shipment of our solar power products in August 2005, and, because of
our limited operating history, we cannot predict whether product liability
claims will be brought against us in the future or the effect of any resulting
negative publicity on our business. The successful assertion of product
liability claims against us could result in potentially significant monetary
damages and require us to make significant payments. In addition, we have
purchased business interruption insurance in 2009, but we can not assure you
that it is adequate.


20


Problems
with product quality or product performance may result in a decrease in
customers and revenues, incur unexpected expenses or cause us to incur warranty
expenses, and may damage our market reputation and prevent us from achieving
increased sales and market share.




Our
products may contain defects that are not detected until after they are sold or
are installed because we cannot test for all possible scenarios. We have
received in the past, and may receive from time to time in the future,
complaints from certain customers that portions of our solar power products have
quality deficiencies. If we deliver solar power products that do not satisfy our
customers’ or end users’ quality requirements, or if there is a perception that
our products are of poor quality, our credibility and the market acceptance and
sales of our solar power products could be harmed. We may also incur substantial
expenses to compensate the customers. Historically, some of our sales contracts
with overseas customers provided for a 10-year warranty for the performance of
our solar cells, and in some cases, our solar cells were sold with up to a
20-year warranty. In 2009, we sold 8.3 MW of solar modules, in most cases with a
five-year warranty for defects in material and workmanship and a minimum power
output warranty of up to 25 years following the date of purchase. We expect to
sell more solar modules with similar warranty terms after our expansion into
downstream solar power business. As a result, we bear the risk of extensive
warranty claims long after we have sold our products and recognized revenues. We
have sold solar cells only since August 2005. Due to the short usage history of
our products, we cannot assure you that our assumptions regarding the durability
and reliability of our products are reasonable. Our warranty provisions may be
inadequate, and we may have to incur substantial expense to repair or replace
defective products in the future. Any increase in the defect rate of our
products would cause us to increase the amount of our warranty reserves and have
a correspondingly negative impact on our operating results. Furthermore,
widespread product failures may damage our market reputation, reduce our market
share and cause our sales to decline.




If we fail to maintain an effective
system of internal controls, we may be unable to accurately report our financial
results or prevent fraud, and investor confidence and the market price of our
common shares may, therefore, be adversely impacted.




We are
subject to reporting obligations under the U.S. securities laws. Beginning with
our annual report on Form 20-F for the fiscal year ending December 31, 2008, we
are required to prepare a management report on our internal controls over
financial reporting containing our management’s assessment of the effectiveness
of our internal controls over financial reporting. In addition, our independent
registered public accounting firm must attest to and report on the effectiveness
of our internal controls over financial reporting.




There
have been historical deficiencies with our internal controls. For example, in
connection with the audit of our financial statements as of and for the year
ended December 31, 2007, we and our independent registered public accounting
firm identified several significant deficiencies in connection with access
control on important transactions in our enterprise resource planning, or ERP,
system, our management of inventory and fixed assets, bad debt provision and ERP
software application development. In connection with the audit of our financial
statements as of and for the year ended December 31, 2009, we and our
independent registered public accounting firm identified a significant
deficiency in our internal financial reporting procedure relating to the
internal communications between our legal and finance department. We have
undertaken remedial steps to improve our internal control over financial
reporting and our disclosure controls.




In
connection with the preparation of this annual report on Form 20-F, we carried
out an evaluation of the effectiveness of our internal control over financial
reporting. Based on this evaluation, our management concluded that our internal
control over financial reporting was effective as of December 31, 2009. See
“Item 15. Controls and Procedures.” If we fail to maintain an effective
system of internal control over financial reporting and an effective system of
disclosure controls in the future, we may be unable to accurately report our
financial results or prevent fraud, and as a result, investor confidence and the
market price of our ADSs may be adversely impacted. Furthermore, we have
incurred and anticipate that we will continue to incur considerable costs,
management time and other resources in an effort to comply with Section 404
and other requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley
Act.




Our
chairman has substantial influence over our company, and his interests may not
be aligned with the interests of our other shareholders.




Mr.
Tingxiu Lu, our chairman, currently beneficially owns 14.7% of our outstanding
share capital as of March 31, 2010. Part of the shares he beneficially owns
became the subject of a dispute, which is further described in Item 6E. Further,
most of our bank borrowings are guaranteed by CEEG, an entity controlled by Mr.
Lu. CEEG guaranteed the bank borrowings of Sunergy Nanjing for up to RMB1
billion until May 2011, subject to adjustment in the event of a material change
in CEEG’s credit or operational status. Mr. Lu has substantial influence over
our business, including decisions regarding mergers, consolidations and the sale
of all or substantially all of our assets, election of directors and other
significant corporate actions. This concentration of ownership may discourage,
delay or prevent a change in control of our company, which could deprive our
shareholders of an opportunity to receive a premium for their shares as part of
a sale of our company and might reduce the price of our ADSs. These actions may
be taken even if they are opposed by our other shareholders and holders of our
ADSs, including those who purchased our ADSs in our initial public
offering.


21




We
have been a party in several legal proceedings, which, if determined adversely,
could negatively affect our business and results of operations.




We and
several of our directors and officers were named defendants in three purported
class actions currently pending in the United States District Court for the
Southern District of New York—Brown v. China Sunergy Co., Ltd. et al., Case No.
07-CV-07895 (DAB), Sheshtawy v. China Sunergy Co., Ltd. et al., Case No.
07-CV-08656 (DAB), and Giombetti v. China Sunergy Co., Ltd. et al., Case No.
07-CV-09689 (DAB). On September 29, 2008, the District Court appointed a lead
plaintiff and consolidated the three cases. The lead plaintiff alleges that we
made false and misleading statements in our registration statement and
prospectus in connection with our initial public offering in May 2007 regarding,
among other things, the procurement of polysilicon, and seek unspecified
damages. In July 2009, the defendants agreed to settle the class action. The
proposed settlement agreement, filed with the court on October 16, 2009, is
still pending and must be approved by the court before becoming final. We have
recorded an estimated amount of $1.1 million for the final settlement in our
consolidated financial statements as of and during the year ended December 31,
2009.




We have
filed a petition in a Norwegian district court seeking injunction with regard to
the withdrawal of a $50 million bank guarantee, which is a security for our
payment obligation under a long term supply contract entered into between REC
SiTech AS, a Norwegian wafer supplier, and us in June 2008. Without obtaining
our written consent as the contract requires, REC SiTech AS merged into REC
Wafer Norway AS upon its dissolution on January 1, 2009. Subsequently, the bank
guarantee was not renewed. REC Wafer Norway AS claimed that the non-renewal of
the bank guarantee was a breach of contract which according to the supply
contract is the basis for the drawdown of the bank guarantee, and it sought to
draw on the bank guarantee.





The
Salten District Court initially granted us the injunction prohibiting REC Wafer
Norway AS from drawing on the bank guarantee but later rejected our request for
an extension of the injunction upon a hearing held in January 2010. We
subsequently appealed to the Court of Appeal in Norway, which denied our
injunction request on April 16, 2010, and we have now a further appeal to the
supreme court of Norway. The Court of Appeal further ordered on April 23, 2010
to the effect that its ruling on April 16, 2010 is to be suspended until the
appeal is determined by the Supreme Court, which may not provide its ruling
before mid-June 2010.





Unfavorable
resolutions of these legal proceedings or any future legal proceedings could
materially and adversely affect our results of operations and financial
condition. See Item 8, “Financial Information—Legal Proceedings.”




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.




All of
our business operations are conducted in China and a majority of our sales are
made in China. Accordingly, our business, financial condition, results of
operations and prospects are affected significantly by economic, political and
legal developments in China. The Chinese economy differs from the economies of
most developed countries in many respects, including:




•
            the
      amount of government involvement;




•
            the
      level of development;




•
            the
      growth rate;




•
            the
      control of foreign exchange; and




•
            the
      allocation of resources.




22


While the
Chinese economy has grown significantly in the past 20 years, the growth has
been uneven, both geographically and among various sectors of the economy. The
PRC government has implemented various measures to encourage or control economic
growth and guide the allocation of resources. Some of these measures benefit the
overall Chinese economy, but may also have a negative effect on us. For example,
our financial condition and results of operations may be adversely affected by
government control over capital investments or changes in tax regulations that
are applicable to us. As the PRC economy is increasingly linked to the global
economy, it is affected in various respects by downturns and recessions of major
economies around the world, such as the recent financial services and economic
crises of these economies. The various economic and policy measures enacted by
the PRC government to forestall economic downturns or shore up the PRC economy
could materially affect our clients’ businesses and our business.




The
Chinese economy has been transitioning from a planned economy to a more
market-oriented economy. Although in recent years the PRC government has
implemented measures emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of the productive assets in China is still owned by the PRC
government. The continued control of these assets and other aspects of the
national economy by the PRC government could materially and adversely affect our
business. The PRC government also exercises significant control over Chinese
economic growth through the allocation of resources, controlling payment of
foreign currency- denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Efforts by the PRC
government to slow the pace of growth of the Chinese economy could result in
decreased capital expenditures by solar energy users, which in turn could reduce
demand for our products.




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




We
conduct substantially all of our manufacturing operations through our wholly
owned subsidiary, China Sunergy (Nanjing) Co., Ltd., or Sunergy Nanjing,
previously named CEEG (Nanjing) PV-Tech Co., Ltd., a limited liability company
established in China. Sunergy Nanjing is generally subject to laws and
regulations applicable to foreign investment in China and, in particular, laws
applicable to wholly foreign-owned enterprises. The PRC legal system is based on
written statutes. Prior court decisions may be cited for reference but have
limited precedential value. Since 1979, PRC legislation and regulations have
significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since these laws and regulations have not been
fully developed and the PRC legal system continues to rapidly evolve, the
interpretations of many laws, regulations and rules are not always uniform and
enforcement of these laws, regulations and rules involves uncertainties. We
cannot predict the effect of future developments in the PRC legal system,
including the promulgation of new laws, changes to existing laws or the
interpretation or enforcement thereof, the preemption of local regulations by
national laws, or the overturn of local government’s decisions by the superior
government. These uncertainties may limit legal protections available to us. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention.




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




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




Furthermore,
the dividends we receive from our PRC subsidiary may also be adversely affected
by the Law of the People’s Republic of China on Enterprise Income Tax, or the
New EIT Law, and its implementation rules, or the New EIT Law Implementation
Rules, which became effective on January 1, 2008. See “—Our global income and
the dividends we receive from our PRC subsidiary may be subject to PRC tax under
the New EIT Law, which would have a material adverse effect on our results of
operations.”




23


Our
global income and the dividends we receive from our PRC subsidiary may be
subject to PRC tax under the New EIT Law, which would have a material adverse
effect on our results of operations.




Under the
New EIT Law and the New EIT Law Implementation Rules, which became effective on
January 1, 2008, an enterprise established outside of the PRC with “de facto
management bodies” within the PRC is considered a PRC resident enterprise and
will be subject to a 25% PRC enterprise income tax on its global income. The New
EIT Law Implementation Rules define the term “de facto management bodies” as
“establishments that carry out substantial and overall management and control
over the manufacturing and business operations, personnel, accounting,
properties, etc. of an enterprise.” On April 22, 2009, the State Administration
of Taxation released a circular, or the Resident Enterprise Circular, which sets
out the standards and procedures for recognizing the location of the “de facto
management bodies” of an enterprise registered outside of the PRC and funded by
Chinese enterprises as controlling investors, or the Chinese Funded Enterprise.
Under the Resident Enterprise Circular, if (i) a Chinese Funded Enterprise’s
major management department and personnel who are responsible for carrying out
daily operations are primarily located in the PRC; (ii) the department or the
personnel who have the right to decide or approve the Chinese Funded
Enterprise’s financial and human resource matters are located in the PRC; (iii)
the major assets, accounting books and records, company seals, board and
shareholder meeting resolutions of the Chinese Funded Enterprise are located or
maintained in the PRC; and (iv) 50% or more of voting board members or senior
executives habitually reside in China, such Chinese Funded Enterprise shall be
considered as a PRC resident enterprise. The Resident Enterprise Circular
explicitly provides that the above standards shall apply to the enterprises
which are registered outside the PRC and funded by Chinese enterprises as
controlling investors, therefore such standards may be cited for reference only
and may not be directly adopted when considering whether our Company’s “de facto
management body” is in the PRC or not.  Moreover, the assessment of
“resident enterprise” shall be determined by the PRC tax authorities based on
the facts and circumstances of each individual case. Accordingly, it is still
unclear whether we will be considered as a PRC resident enterprise under the New
EIT Law as of the date of this annual report. If we are considered a PRC
resident enterprise, we will be subject to a 25% PRC income tax on our global
income and such 25% PRC income tax on our global income could significantly
increase our tax burden and materially and adversely affect our cash flow and
profitability.




Under the
applicable PRC tax laws in effect before January 1, 2008, dividend payments to
foreign investors made by foreign- invested enterprises such as our PRC
subsidiary, Sunergy Nanjing, were exempt from PRC withholding tax. Pursuant to
the New EIT Law and the New EIT Law Implementation Rules, however, dividends
generated after January 1, 2008 and payable by a foreign-invested enterprise to
its foreign investors will be subject to a 10% withholding tax if the foreign
investors are considered as non-PRC resident enterprises without any
establishment or place of business within China or if the dividends payable have
no connection with the establishment or place of business of the foreign
investors within China, unless any such foreign investor’s jurisdiction of
incorporation has a tax treaty with China that provides for a reduced
withholding arrangement. The Cayman Islands, where we are incorporated, does not
have such a tax treaty with China. China Sunergy (Hong Kong) Co., Ltd., or
Sunergy Hong Kong, the direct holder of the 100% equity interest in Sunergy
Nanjing, is incorporated in Hong Kong. According to the Mainland and Hong Kong
Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion
of Taxation on Income agreed between China and Hong Kong in August 2006,
dividends paid by a foreign-invested enterprise in China to its direct holding
company in Hong Kong will be subject to withholding tax at a rate of no more
than 5% (if the foreign investor owns directly at least 25% of the shares of the
foreign-invested enterprise).  Under the New EIT Law Implementation
Rules, if we and Sunergy Hong Kong were regarded as PRC resident enterprises,
the dividends payable to us from Sunergy Nanjing would be exempt from the PRC
income tax. If we were regarded as a non-PRC resident enterprise and Sunergy
Hong Kong were regarded as a PRC resident enterprise, then Sunergy Hong Kong
would be required to withhold a 10% withholding tax on any dividends payable to
us, while if Sunergy Hong Kong is regarded as a non-PRC resident enterprise,
then Sunergy Nanjing would be required to withhold a 5% withholding tax on any
dividends payable to Sunergy Hong Kong. In either case, the amount of funds
available to us to meet our cash requirements, including the payment of
dividends to our shareholders and debt service on any debt we incur, could be
materially reduced.




In
addition, if we are regarded as a PRC resident enterprise, under the New EIT
Law, any dividends to be distributed by us to our non-PRC shareholders or
holders of ADSs will be subject to a withholding tax. We also cannot assure you
that any gain realized by non-PRC shareholders or holders of our ADSs from the
transfer of our shares or ADSs will not be subject to a withholding tax. Unless
there are further rules announced by the Chinese tax authorities, we may be
required under the New EIT Law to withhold PRC income tax on our dividends
payable to our non-PRC shareholders or holders of ADSs, or any gain realized by
our non-PRC shareholders or holders of ADSs from transfer of the shares or ADSs,
and your investment in our ADSs may be materially and adversely
affected.




24


According to a circular released by the
State Administration of Taxation regarding the understanding and recognition of
the identification of “beneficial owner” under tax treaties on October 27, 2009,
or the Beneficial Owner Recognition Circular, a corporate resident of a
contracting state will not be entitled to the lower withholding tax rate under a
tax treaty if it is considered a "conduit company" which is set up merely for
the purpose of avoiding or reducing tax or transferring or accumulating profits,
as opposed to a beneficial owner who owns and controls an item of income, or the
right or property from which that item of income is derived, and is normally
engaged in substantive business activities such as manufacturing, sales and
management. Therefore, if Sunergy Hong Kong were not considered to be the
beneficial owner of Sunergy Nanjing as the case may be, under the terms of the
Beneficial Owner Recognition Circular, we may not be able to enjoy the
applicable tax treaty benefits between the PRC and Hong Kong, and any dividends
paid by Sunergy Nanjing to Sunergy Hong Kong may incur a higher withholding tax
rate of 10%. No similar tax treaty exists between the PRC and the Cayman
Islands.




Restrictions
on currency exchange may limit our ability to receive and use our revenues or
financing effectively.




Certain
portions of our revenues and expenses are denominated in Renminbi. If our
revenues denominated in Renminbi increase or expenses denominated in Renminbi
decrease in the future, we may need to convert a portion of our revenues into
other currencies to meet our foreign currency obligations, including, among
others, payment of dividends declared, if any, in respect of our ordinary shares
or ADSs. Under China’s existing foreign exchange regulations, Sunergy Nanjing is
able to pay dividends in foreign currencies, without prior approval from the
State Administration of Foreign Exchange, or SAFE, by complying with certain
procedural requirements. However, we cannot assure you that the PRC government
will not take further measures in the future to restrict access to foreign
currencies for current account transactions.




Most
foreign exchange transactions by Sunergy Nanjing under capital accounts continue
to be subject to significant foreign exchange controls and require the approval
of, or registration with, PRC governmental authorities. In particular, if
Sunergy Nanjing borrows foreign currency loans from us or other foreign lenders,
these loans cannot exceed statutory limits and must be registered with the SAFE,
and if we finance Sunergy Nanjing by means of additional capital contributions,
these capital contributions must be approved or registered by certain government
authorities including the SAFE, the Ministry of Commerce or their local
counterparts. These limitations could affect the ability of Sunergy Nanjing to
obtain foreign exchange through debt or equity financing, and could affect our
business and financial condition.




Our
business benefits from certain PRC preferential tax treatments. Expiration of,
or changes to, these incentives could have a material adverse effect on our
operating results.




The PRC
government has provided various incentives to foreign-invested enterprises.
Because Sunergy Nanjing is a foreign-invested enterprise engaged in
manufacturing businesses and located in Nanjing, which is within a coastal
economic zone, it was entitled to a preferential enterprise income tax rate of
24% prior to January 1, 2008. As a foreign-invested enterprise engaged in
manufacturing businesses, Sunergy Nanjing is also entitled to a two-year income
tax exemption and 50% reduction for the succeeding three years from the first
profitable year. On March 16, 2007, the National People’s Congress of China, or
the Congress, enacted the New EIT Law, under which foreign invested enterprises
and domestically-owned enterprises would be subject to enterprise income tax at
a uniform rate of 25%. On December 6, 2007, the State Council promulgated the
New EIT Law Implementation Rules. Both the New EIT Law and its Implementation
Rules became effective on January 1, 2008.  The New EIT Law also
provides transitional measures for enterprises established prior to the
promulgation of the New EIT Law and eligible for lower tax rate or preferential
treatment in accordance with the then-prevailing tax laws and administrative
regulations.  On December 26, 2007, State Council of China promulgated
the Circular on Carrying Out the Transitional Preferential Policies concerning
Enterprise Income Tax, or the Circular. Under the New EIT Law, the
Implementation Rules and the Circular, enterprises which were established and
already enjoyed preferential enterprise income tax treatments before March 16,
2007 will continue to enjoy them (i) in the case of preferential tax rates, for
a period of five years from January 1, 2008, and the enterprises which
previously enjoyed the tax rate of 24% shall be subject to the tax rate of 25%
in 2008, or (ii) in the case of preferential tax exemption or reduction for a
specified term, until the expiration of such term or 2012, whichever is earlier.
However, the Circular also prescribes that if the above transitional relief of
enterprise income tax overlaps with the preferential treatments provided by the
New EIT Law, an enterprise may choose the more favorable treatment, and shall
not enjoy both.  The treatment cannot be changed once it is chosen. In
addition, on April 14, 2008, the Ministry of Finance, the Ministry of Science
and Technology and the State Administration of Taxation jointly promulgated the
Administration Measures for Recognition of High and New Technology Enterprises,
or the Recognition Measures. Pursuant to the New EIT Law, the New EIT Law
Implementation Rules and the Recognition Measures, the qualifying High and New
Technology Enterprise, or HNTE, is eligible for a preferential tax rate of
15%.  In October 2008, Sunergy Nanjing obtained the HNTE certificate
with a three-year validity term from 2008 to 2010. Therefore, Sunergy Nanjing is
entitled to a preferential income tax rate of 15% as long as it maintains its
HNTE qualification under the New EIT Law and the Recognition
Measures.  Based on the Circular, the management chooses to enjoy the
transitional relief, i.e. 12.5% from 2008 to 2010.  The management
believes it is more-likely-than-not to renew its HNTE status in 2011 and will be
eligible for the 15% preferential rate for the following three years from 2011
to 2013.  If Sunergy Nanjing fails to maintain the HNTE qualification,
its applicable enterprise income tax rate will increase to up to 25%, which
could have a material adverse effect on our results of operations. We cannot
assure you that we will be able to maintain our current effective tax rate in
the future. Any discontinuation of preferential tax treatment or any increase of
the enterprise income tax rate applicable to Sunergy Nanjing could have a
material adverse effect on our financial condition and results of
operations.




25




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.




On August
8, 2006, six PRC regulatory agencies, including CSRC, promulgated the Regulation
on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which
became effective on September 8, 2006.




This
regulation, among other things, has certain provisions that purport to require
offshore special purpose vehicles, or SPVs, formed for the purpose of acquiring
PRC domestic companies and controlled by PRC individuals, to obtain the approval
of the CSRC prior to listing their securities on an overseas stock exchange. The
application of this PRC regulation remains unclear with no consensus currently
existing among the leading PRC law firms regarding the scope and applicability
of the CSRC approval requirement. On September 21, 2006, the CSRC published on
its official website a notice specifying the documents and materials that are
required to be submitted for obtaining CSRC approval. We believe, based on the
advice of our PRC counsel, Jun He Law Offices, that although the CSRC generally
has jurisdiction over overseas listing of SPVs like us, it was not necessary for
us to obtain CSRC approval for our initial public offering given the fact that
we had legally completed the acquisition of all the equity interest in Sunergy
Nanjing before the new regulation became effective. Uncertainty as to how this
regulation will be interpreted or implemented still remains. If the CSRC or
another PRC regulatory agency subsequently determines that the CSRC’s approval
was required for our initial public offering, we may face sanctions by the CSRC
or another PRC regulatory agency. If this happens, these regulatory agencies may
impose fines and penalties on our operations in the PRC, limit our operating
privileges in the PRC, delay or restrict the repatriation of the proceeds from
our initial public offering into the PRC, restrict or prohibit payment or
remittance of dividends by Sunergy Nanjing, or take other actions that could
have a material adverse effect on our business, financial condition, results of
operations, reputation and prospects, as well as the trading price of our ADSs.
Also, if later the CSRC requires that we obtain its approval, we may be unable
to obtain a waiver of the CSRC approval requirements, if and when procedures are
established to obtain such a waiver. Any uncertainties and/or negative publicity
regarding this CSRC approval requirement could have a material adverse effect on
the trading price of our ADSs.




Regulations
relating to offshore investment activities by PRC residents may limit our
ability to inject capital into our PRC subsidiary, limit our subsidiary’s
ability to distribute profits to us, or otherwise adversely affect
us.




In
October 2005, SAFE issued a regulation entitled “Circular on several issues
concerning foreign exchange regulation of corporate finance and roundtrip
investments by PRC residents through special purpose companies incorporated
overseas,” or Circular No. 75. Circular No. 75 states that if PRC residents use
assets or equity interests in their PRC entities as capital contributions to
establish offshore companies or inject assets or equity interests of their PRC
entities into offshore companies to raise capital overseas, they must register
with local SAFE branches with respect to their overseas investments in offshore
companies and must also file amendments to their registrations if their offshore
companies experience material events involving capital variation, such as
changes in share capital, share transfers, mergers and acquisitions, spin-off
transactions, long-term equity or debt investments or uses of assets in China to
guarantee offshore obligations. Under Circular No. 75, failure to comply with
the registration procedures set forth in such regulation may result in
restrictions being imposed on the foreign exchange activities of the relevant
PRC entity, including the payment of dividends and other distributions to its
offshore parent, as well as restrictions on the capital inflow from the offshore
entity to the PRC entity. While we believe our shareholders have complied with
existing SAFE registration procedures, any future failure by any of our
shareholders who is a PRC resident or controlled by a PRC resident to comply
with relevant requirements under Circular No. 75 could subject our company to
fines or sanctions imposed by the PRC government, including restrictions on
Sunergy Nanjing’s ability to pay dividends or make distributions to us and our
ability to increase our investment in or provide loans to Sunergy
Nanjing.


26




A failure to comply with PRC
regulations regarding the registration of shares and share options held by our
employees who are PRC citizens may subject such employees or us to fines and
legal or administrative sanctions.




Pursuant
to the Implementation Rules of the Administrative Measures on Individual Foreign
Exchange, or the Individual Foreign Exchange Rules, promulgated on January 5,
2007 by SAFE and the Operating Procedures on Administration of Foreign Exchange
for PRC Individuals’ Participation in Employee Share Ownership Plans and
Employee Share Option Plans of Overseas Listed Companies, or the Share Option
Rules, issued by SAFE in March 2007, PRC citizens who are granted shares or
share options by an overseas-listed company according to its employee share
option or share incentive plan are required, through the PRC subsidiary of such
overseas-listed company or other qualified PRC agents, to register with SAFE and
complete certain other procedures related to the share option or other share
incentive plan. In addition, the overseas listed company or its PRC subsidiary
or other qualified PRC agent is required to appoint an asset manager or
administrator and a custodian bank, and open special foreign currency accounts
to handle transactions relating to the share option or other share incentive
plan.




In
addition, the General Administration of Taxation has issued certain circulars
concerning employee share options. Pursuant to these circulars, our employees
working in China who exercise their share options will be subject to PRC
individual income tax. Our PRC subsidiaries have obligations to file documents
related to such employee share options with relevant tax authorities and
withhold individual income taxes of those employees who exercise their share
options.




We and
the participants of our share incentive plans who are PRC citizens are subject
to these rules, and we will attempt to comply with the relevant requirements
under such rules. Failure to comply with such rules may subject us and the
participants of our share incentive plans who are PRC citizens to fines and
legal sanctions and prevent us from further granting options and restricted
share under our share incentive plans, which could adversely affect our business
operations.




Increase
in labor costs and the new Labor Contract Law and other labor-related
regulations in the PRC may adversely affect our business and our
profitability.




On June
29, 2007, the National People’s Congress of China enacted a new Labor Contract
Law, which became effective on January 1, 2008. Compared to the PRC Labor Law
effective as of January 1, 1995, the new Labor Contract Law imposes more
restrictions and increases costs for the employers to terminate employment,
including specific provisions related to fixed term employment contracts,
temporary employment, probation, consultation with the labor union and employee
assembly, employment without a contract, dismissal of employees, compensation
upon termination and overtime work, and collective bargaining. According to the
new Labor Contract Law, the employer is obliged to sign an unlimited term labor
contract with an employee if the employer continues to hire the employee after
two consecutive fixed term labor contracts or after the employee spends 10
consecutive years working for the employer. The employer also has to pay a
compensation fee to the employee if the employer terminates an unlimited term
labor contract. Unless an employee refuses to extend an expired labor contract,
such compensation is also required when the labor contract expires. Further,
under the Regulations on Paid Annual Leave for Employees, which became effective
on January 1, 2008, employees who have served more than one year for an employer
are entitled to a paid vacation ranging from 5 to 15 days, depending on their
length of service. Employees who waive such vacation time at the request of
employers shall be compensated for three times their normal salaries for each
waived vacation day. As a result of these new protective labor measures, our
labor costs are expected to increase, which may adversely affect our business
and our results of operations.




We
face risks related to health epidemics and other outbreaks.




Our
business could be adversely affected by the effects of avian flu, SARS or
another epidemic or outbreak. China reported a number of cases of SARS in April
2004. Since 2005, there have been reports of occurrences of avian flu in various
parts of China, including a few confirmed human cases and deaths. In April 2009,
an outbreak of a new strain of influenza identified as the Influenza A (H1N1)
virus occurred in Mexico resulting in a number of deaths. As the virus continued
to spread worldwide including China, the World Health Organization on June 11,
2009 declared the H1N1 virus outbreak a global pandemic. The spread of H1N1 or
any prolonged recurrence of avian influenza, SARS or other adverse public health
developments in China could have a material adverse effect on our business
operations. These could include restrictions on our ability to travel or ship
our products outside of China as well as temporary closure of our manufacturing
facilities. Such closures or travel or shipment restrictions would severely
disrupt our business operations and adversely affect our results of operations.
We have not adopted any written preventive measures or contingency plans to
combat any future outbreak of avian flu, SARS or any other
epidemic.


27





Risks
Related to Our Shares and ADSs




The
market price for our ADSs has been volatile since our ADSs began trading on
NASDAQ, and may be subject to fluctuations in the future, which could result in
substantial losses to investors.




The
closing price of our ADSs has ranged from a high of $17.88 to a low of $1.38
since our ADSs began trading on NASDAQ on May 17, 2007. We cannot assure you
that the market price of ADSs will not significantly fluctuate from its current
level. The market price of our ADSs may be subject to wide fluctuations in
response to factors including the following:




•
            announcements
      of technological or competitive
developments;




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




•
            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 solar power
      technology companies;




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




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




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




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




•
            sales
      or perceived sales of additional
ADSs.




In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also have a material
adverse effect on the market price of our ADSs. In particular, the performance
and fluctuation of market prices of other companies with business operations
located mainly in China that have listed their securities in the United States
may affect the volatility in the price of and trading volumes for our ADSs. The
trading performances of these China-based companies’ securities at the time of
or after their offerings may affect the overall sentiment toward China-based
companies’ securities listed in the United States and consequently may impact
the trading performance of our ADSs. Volatility in global capital markets could
also have an effect on the market price of our ADSs. For example, financial
markets have experienced extreme disruption in the past years, including, among
other things, extreme volatility in security prices. In the event of a
continuing market downturn, the market price of our ADSs may further
decline.




Substantial
future sales of our ADSs or ordinary shares in the public market, or the
perception that these sales could occur, could cause the price of our ADSs to
decline.




Additional
sales of our ADSs or ordinary shares in the public market, or the perception
that these sales could occur, could cause the market price of our ADSs to
decline. If our shareholders sell substantial amounts of our ADSs, including
those issued upon the exercise of outstanding options, in the public market, the
market price of our ADSs could fall. Such sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate. If any existing shareholder or
shareholders sell a substantial amount of ordinary shares, the prevailing market
price for our ADSs could be adversely affected.


28




In
addition, we may issue additional ordinary shares or ADSs for future
acquisitions. If we pay for our future acquisitions in whole or in part with
additionally issued ordinary shares or ADSs, your ownership interests in our
company would be diluted and this, in turn, could have a material adverse effect
on the price of our ADSs.




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




Based on
the market price of our ADSs, the value of our assets, and the composition of
our income and assets, although we do not believe that we were a “passive
foreign investment company,” or PFIC, for U.S. federal income tax purposes for
our taxable year ended December 31, 2009, we cannot assure you that we were not
a PFIC for such year. A non-U.S. corporation will be a PFIC for any taxable year
if either (1) at least 75% of its gross income for such year is passive income
or (2) at least 50% of the value of its assets (based on an average of the
quarterly values of the assets) during such year is attributable to assets that
produce passive income or are held for the production of passive income. We must
make a separate determination after the close of each taxable year as to whether
we were a PFIC for that year. Because the value of our assets for purposes of
the PFIC test will generally be determined by reference to the market price of
our ADSs or ordinary shares, fluctuations in the market price of the ADSs or
ordinary shares may cause us to become a PFIC. Although we do not believe that
we were a PFIC for our taxable year ended December 31, 2009, because of the
depressed market price of the ADSs and our retention of a significant amount of
cash during such year, there is a significant risk that we could be treated as a
PFIC for such year. Accordingly, we cannot assure you that we were not a PFIC
for such year. If we are a PFIC for any taxable year during which a U.S. Holder
(as defined in Item 10, “Additional Information—Taxation—United States Federal
Income Taxation”) holds an ADS or an ordinary share, certain adverse U.S.
federal income tax consequences could apply to such U.S. Holder. See Item 10,
“Additional Information—Taxation—United States Federal Income Taxation—Passive
Foreign Investment Company.”




Your
right to participate in any future rights offerings may be limited, which may
cause dilution to your holdings and you may not receive cash dividends if it is
impractical to make them available to you.




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




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




Anti-takeover
provisions in our charter documents may discourage a third party from acquiring
us, which could limit our shareholders’ opportunities to sell their shares at a
premium.




Our
amended and restated memorandum and articles of association include provisions
that could limit the ability of others to acquire control of us, modify our
structure or cause us to engage in change-of-control transactions. These
provisions could have the effect of depriving our shareholders of an opportunity
to sell their shares at a premium over prevailing market prices by discouraging
third parties from seeking to obtain control of us in a tender offer or similar
transaction.




For
example, our board of directors will have the authority, without further action
by our shareholders, to issue preferred shares in one or more series and to fix
the powers and rights of these shares, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights associated with our ordinary shares.
Preferred shares could thus be issued quickly with terms calculated to delay or
prevent a change in control or make removal of management more difficult. In
addition, if our board of directors issues preferred shares, the market price of
our ordinary shares may fall and the voting and other rights of the holders of
our ordinary shares may be adversely affected.


29




Our
amended and restated articles of association provide for a staggered board,
which means that our directors are divided into three classes, with around one-
third of our board standing for election every year. This means that, with our
staggered board, at least two annual shareholders’ meetings, instead of one, are
generally required in order to effect a change in a majority of our directors.
Our staggered board can discourage proxy contests for the election of our
directors and purchases of substantial blocks of our shares by making it more
difficult for a potential acquirer to take control of our board in a relatively
short period of time.




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




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




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




You
will have limited ability to bring an action against us or against our directors
and officers, or to enforce a judgment against us or them, because we are
incorporated in the Cayman Islands, because we conduct a majority of our
operations in China and because the majority of our directors and officers
reside outside the U.S.




We are
incorporated in the Cayman Islands, and conduct substantially all of our
operations in China through Sunergy Nanjing, our wholly owned subsidiary
established in China. Most of our directors and officers reside outside the
United States and substantially all of the assets of those persons are located
outside the United States. As a result, it may be difficult or impossible for
you to bring an action against us or against these individuals in the Cayman
Islands or in China in the event that you believe that your rights have been
infringed under the applicable securities laws or otherwise. Even if you are
successful in bringing an action of this kind, the laws of the Cayman Islands
and of China may render you unable to enforce a judgment against our assets or
the assets of our directors and officers.




The
voting rights of holders of our ADSs are limited in several significant ways by
the terms of the deposit agreement.




Holders
of our ADSs may only exercise their voting rights with respect to the underlying
ordinary shares in accordance with the provisions of the deposit agreement. Upon
receipt of voting instructions from a holder of ADSs in the manner set forth in
the deposit agreement, the depositary will endeavor to vote the underlying
ordinary shares in accordance with these instructions. Under our amended and
restated memorandum and articles of association and Cayman Islands law, the
minimum notice period required for convening a general meeting is ten clear
days. When a general meeting is convened, you may not receive sufficient notice
of a shareholders’ meeting to permit you to withdraw your ordinary shares to
allow you to cast your vote with respect to any specific matter at the meeting.
In addition, the depositary and its agents may not be able to send voting
instructions to you or carry out your voting instructions in a timely manner. We
will make all reasonable efforts to cause the depositary to extend voting rights
to you in a timely manner, but we cannot assure you that you will receive the
voting materials in time to ensure that you can instruct the depositary to vote
your shares. Furthermore, the depositary and its agents will not be responsible
for any failure to carry out any instructions to vote, for the manner in which
any vote is cast or for the effect of any such vote. As a result, you may not be
able to exercise your right to vote and you may lack recourse if your ordinary
shares are not voted as you requested.


30




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




Your
ADSs, represented by American depositary receipts, are transferable on the books
of the depositary. However, the depositary may close its books at any time or
from time to time when it deems expedient in connection with the performance of
its duties. The depositary may close its books from time to time for a number of
reasons, including in connection with corporate events such as a rights
offering, during which time the depositary needs to maintain an exact number of
ADS holders on its books for a specified period. The depositary may also close
its books in emergencies, and on weekends and public holidays. The depositary
may refuse to deliver, transfer or register transfers of our ADSs generally when
our books or the books of the depositary are closed, or at any time if we or the
depositary thinks it is necessary or advisable to do so in connection with the
performance of its duty under the deposit agreement, including due to any
requirement of law or any government or governmental body, or under any
provision of the deposit agreement.




ITEM
      4.
            INFORMATION
      ON THE COMPANY




A.
            History and
      Development of the Company




Our
operating subsidiary, Sunergy Nanjing, was incorporated in August 2004 in
Nanjing, China. China Sunergy Co., Ltd., or Sunergy BVI, our holding company
incorporated in the British Virgin Islands, acquired all of the equity interests
in Sunergy Nanjing in April 2006 through a series of transactions that we have
accounted for as a legal reorganization. As part of a restructuring in
anticipation of our initial public offering, we incorporated China Sunergy Co.,
Ltd., or Sunergy, in the Cayman Islands on August 4, 2006. Sunergy became our
ultimate holding company upon its issuance of shares to the existing
shareholders of Sunergy BVI on August 30, 2006 in exchange for all shares of
equivalent classes that these shareholders previously held in Sunergy BVI. In
December 2007, Sunergy BVI incorporated China Sunergy (Hong Kong) Co., Ltd., or
Sunergy Hong Kong, in Hong Kong. During the same month, Sunergy BVI transferred
all of the equity interests in Sunergy Nanjing to Sunergy Hong Kong, which
became the direct holding company of Sunergy Nanjing. We conduct substantially
all of our operations through Sunergy Nanjing.




In May
2007, we completed our initial public offering, in which we issued and sold
9,775,000 ADSs, representing 58,650,000 of our ordinary shares, at a public
offering price of $11.00 per ADS. In July 2008, we completed our offering of
$54.5 million aggregate principal amount of 4.75% convertible senior notes due
June 2013 and public offering of 4,431,000 ADSs, which were loaned to an
affiliate of the initial purchaser of the notes, who in turn sold the borrowed
ADSs in the offering. We did not receive any proceeds from the offering of the
borrowed ADSs, but has received a nominal lending fee from the ADS
borrower.




In March
2010, we entered into two share transfer agreements with CEEG and Sundex
Holdings Limited pursuant to which we will acquire from CEEG and Sundex Holdings
Limited the 100% equity interests in CEEG (Shanghai) Solar Science &
Technology Co., Ltd. and the 100% equity interests in CEEG (Nanjing) New Energy
Co., Ltd., both of which are our affiliates and are controlled by Mr. Tingxiu
Lu, our chairman, at the consideration of RMB200 million (approximately $29.3
million) and RMB120 million (approximately $17.6 million), respectively. The two
transactions are expected to close before June 30, 2010, subject to customary
closing conditions including obtaining necessary government
approvals.




Our
principal executive offices are located at No. 123 Focheng West Road, Jiangning
Economic & Technical Development Zone, Nanjing, Jiangsu 211100, People’s
Republic of China. Our telephone number at this address is (86-25) 5276-6688 and
our fax number is (86-25) 5276-6882.




You
should direct all inquiries to us at the address and telephone number of our
principal executive offices set forth above. Our website is
www.chinasunergy.com. The information contained on our website does not form
part of this report. Our agent for service of process in the United States is CT
Corporation System, located at 111 Eighth Avenue, New York, New York
10011.




B.
            Business
      Overview




We
manufacture our solar cells from silicon wafers utilizing crystalline silicon
solar cell technology to convert sunlight directly into electricity through a
process known as the photovoltaic effect. We sell our solar cell products to
Chinese and overseas module manufacturers and system integrators, who assemble
our solar cells into solar modules and solar power systems for use in various
markets.


31




We
commenced business operations in August 2004. In 2005, we had only one solar
cell manufacturing line. In 2006, we installed five additional solar cell
manufacturing lines and expanded our annual manufacturing capacity by 160 MW,
assuming the use of 156-millimeter monocrystalline silicon wafers. Our fifth
line, which achieved full scale manufacturing capacity in November 2006,
commenced commercial mass production of selective emitter cells using
monocrystalline silicon wafers, an improved version of the P-type solar cells
that we and most other solar cell manufacturers produce, in the fourth quarter
of 2007. In December 2008, we installed four new solar cell lines for the
production of selective emitter cells. These four new lines are producing
selective emitter cells with performance similar to those from the first line
which produces selective emitter solar cells.  Hence, five of our
manufacturing lines are capable of producing high efficiency selective emitter
cells. As of the date of this annual report, our ten solar cell manufacturing
lines have an aggregate annual production capacity of 320 MW, assuming the use
of 156-millimeter monocrystalline silicon wafers.




Our
research and development team is led by two solar power researchers, Dr. Jianhua
Zhao and Dr. Aihua Wang, with 30 and 25 years of experience, respectively, and
established credentials in the solar power industry. Our research and
development efforts focus on continually enhancing our solar cell conversion
efficiencies, which measure the ability of solar power products to convert
sunlight into electricity, and improving our manufacturing
operations.




During
the second half of 2009, our research team has made a concerted effort to
improve the performance of our standard HP solar cells.  In addition,
we continued focusing on the development of advanced process technology for
manufacturing other new products, such as N-type solar cells. Some of our
lab-manufactured N-type solar cells had been measured by Fraunhofer-Institut Für
Solare Energiesysteme ISE, or Fraunhofer ISE,a Germany based institute
for solar energy systems, and recorded a conversion efficiency rate of
19.13%.  The Matrix cells under development also demonstrated
significant improvement during 2009.  Some of our lab-manufactured
Matrix cells recorded a conversion efficiency rate of 19.04%, as measured by
Fraunhofer ISE.




In 2007,
the shipment of our solar power products amounted to 74.0 MW, including 70.0 MW
of solar cells sold, 2.4 MW of solar cells processed under OEM arrangements, and
1.6 MW of modules sold. In 2008, the shipment of our solar power products
amounted to 107.2 MW, including 100.4 MW of solar cells sold, 4.2 MW of solar
cells processed under OEM arrangements and 2.6 MW of modules sold. In 2009, the
shipment of our solar power products amounted to 194.0 MW, including 181.5 MW of
solar cells sold, 4.2 MW of solar cells processed under OEM arrangements and 8.3
MW of modules sold. We had net revenues of $234.9 million, $350.9 million and
$284.9 million in 2007, 2008 and 2009, respectively. We incurred net losses of
$4.9 million, $22.9 million and $9.8 million in 2007, 2008 and 2009,
respectively.




Products




We
currently design, develop, manufacture and sell solar cells. A solar cell is a
device made from a silicon wafer that converts sunlight directly into
electricity by a process known as the photovoltaic effect. Currently, we produce
both monocrystalline and multicrystalline silicon solar cells. In addition to
standard P-type solar cells and HP solar cells, we also produce since the fourth
quarter of 2007 selective emitter cells, an improved version of the P-type solar
cells that we and most other solar cell manufacturers produce.




The
following table sets forth the types of solar cells we offered in 2009 with the
specifications indicated.




Monocrystalline or
      Multicrystalline
                                        Solar
      Cell
                                      
                                      Dimensions
                                        (mm×mm)
                                      
                                      As a Percentage
      of
                                        Total
      Output in 2009
                                        As Measured by MW
      (%)Monocrystalline
      silicon solar cell
                                      
                                      125×125
                                        156×156
                                      
                                      
                                      48.4
                                        27.0Multicrystalline silicon
      solar cell
                                      
                                      156×156
                                      
                                      
                                      24.6




We
produce a test batch of solar cells from each shipment of silicon wafers that we
receive, and return the wafers if the quality is below our standards. However,
normal variation in the quality of silicon wafers in shipments that meet our
standards will still result in the production of a certain proportion of solar
cells that do not meet our customers’ specifications.


32




Manufacturing
Process




The
manufacturing process for our solar cells includes the following main
steps:




•
            Chemical
      treatment of silicon wafers. We first fabricate a textured structure on
      the wafer surface through chemical treatment to reduce the reflection of
      sunlight. The chemical treatment process produces a surface structure,
      which traps sunlight into the
silicon.




•
            Diffusion
      process. Diffusion is a thermal process through which we selectively
      incorporate impurities into the silicon wafer and form an electrical field
      within the surface region of the
wafer.




•
            Back
      junction removal. We achieve electrical isolation between the front and
      back surfaces of the silicon wafer through a process known as backside
      etching technology.




•
            Anti-reflection
      coating and surface passivation. We apply an anti-reflection coating to
      the front surface of the solar cell, which helps to significantly reduce
      the light reflection at the cell surface. Such coating also passivates the
      cell surface to reduce the carrier loss at the surface and hence increases
      the cell current density. Our surface coating technology ensures the
      appropriate thickness and refractive index of the coating to achieve high
      conversion efficiencies.




•
            Screen
      printing and firing. We screen print negative and positive metal contacts,
      or electrodes, on the solar cell. Silicon and metal electrodes are then
      connected through an electrode firing process in a furnace at a high
      temperature.




•
            Testing,
      sorting and packaging.  The cells, once manufactured, are tested
      on the cell tester, and sorted according to their electrical performance
      and according to their visual appearance.  They are then packed
      for shipment.




Manufacturing
Capacity and Manufacturing Facilities




Since our
inception in August 2004, we have significantly expanded our manufacturing
capacity to capture a larger portion of the market opportunity for our solar
cells. In June 2005, we completed construction on a green-field site and started
trial production of our first manufacturing line with a production capacity of
32 MW per year, assuming the use of 156-millimeter monocrystalline silicon
wafers. We sold 4.4 MW of solar cells in 2005.




We
completed our second to sixth solar cell manufacturing lines and started
generating revenues from these lines in 2006.




Our fifth
line, which achieved full scale manufacturing capacity in November 2006,
commenced commercial mass production of selective emitter cells using
monocrystalline silicon wafers in the fourth quarter of 2007. In 2008, we
installed four new solar cell lines for the production of selective emitter
cells. These four new lines are producing selective emitter cells with
performance similar to those from the first line which produces selective
emitter solar cells. In 2008, we also converted four of our standard P-type
solar cell manufacturing lines into HP solar cell manufacturing lines, three of
which are capable of producing HP solar cells using multicrystalline silicon
wafers as raw materials. In August 2009, we converted another standard P-type
solar cell manufacturing line into HP solar cell manufacturing lines. As of the
date of this annual report, we have ten solar cell manufacturing lines. Five of
them are capable of producing HP solar cells and the other five are capable of
producing both selective emitter solar cells and HP solar cells, with an
aggregate annual production capacity of 320 MW, assuming the use of
156-millimeter monocrystalline silicon wafers. Our actual output of solar cells
depends on the size of the silicon wafers that we use; historically we have used
a mix of monocrystalline and multicrystalline silicon wafers, each in sizes of
125 millimeters or 156 millimeters. Our actual output does not match our
production capacity because we cannot obtain sufficient supply of 156-millimeter
wafers, as most of our suppliers and most of the suppliers in China sell the
smaller size. To the extent we use smaller wafers or multicrystalline wafers,
our actual production will be less than our production
capacity.


33




The table
below sets forth a summary of our current manufacturing lines for solar cells as
of the date of this annual report:




Solar Cell
                                    Manufacturing Line
                                  
                                  Time of Achieving Full-scale
                                    Manufacturing Capacity
                                  
                                  Annualized Manufacturing Capacity(1)
                                    (in MW)Line
      1
                                  
                                  August
      2005(3)
                                  
                                  32Line
      2
                                  
                                  May
      2006(3)
                                  
                                  32Line
      3
                                  
                                  June
      2006(3)
                                  
                                  32Line
      4
                                  
                                  November 2006(3)
                                  
                                  32Line
      5
                                  
                                  November
      2006(2)
      (3)
                                  
                                  32Line
      6
                                  
                                  December 2006
      (3)
                                  
                                  32Line
      7
                                  
                                  December 2008(2)
      (3)
                                  
                                  32Line
      8
                                  
                                  December 2008(2)
      (3)
                                  
                                  32Line
      9
                                  
                                  December 2008(2)
      (3)
                                  
                                  32Line
      10
                                  
                                  December 2008(2)
      (3)
                                  
                                  32Total
                                  
                                  
                                  
                                  320





(1)
            Calculated
      by assuming the use of 156-millimeter monocrystalline silicon wafers, with
      assumptions regarding the number of cells per month and the conversion
      rates of those cells.




(2)
            Capable
      of producing selective emitter solar
cells.




(3)
            Capable
      of producing HP solar cells.




Raw
Materials




Silicon
wafers are the most important raw materials for producing solar cells, with
monocrystalline and multicrystalline silicon wafers as the most commonly used
materials. We can produce solar cells with either of these types of silicon
wafers, and this dual capability provides us with flexibility in raw material
procurement.




We seek
to procure silicon wafers from various suppliers, most of which are
manufacturers located in China. In addition, we also procure polysilicon from
various suppliers, and outsource the production of silicon wafers from these
polysilicon raw materials under toll manufacturing arrangements with third
parties. Sometimes, we sell polysilicon raw materials to wafer manufacturers and
purchase silicon wafers from them under buy-and-sell arrangements. In order to
meet a portion of our raw material requirements, we also enter into buy-and-sell
arrangements with some of our customers, under which we secure silicon wafers
from some of our customers, and sell solar cells to them in return.




In 2009,
our principal suppliers of silicon wafers and other silicon-based raw materials
included Jiangxi LDK Solar Hi-Tech Co. Ltd., Jinzhou Yangguang Energy Co., Ltd.,
Luoyang Zhonggui High-tech Co., Ltd., Sunshine Silicon Valley Electrical Science
& Technology Co., Ltd, and Tianwei New Energy (Chengdu) Silicon Wafer Co.,
Ltd. Our top five suppliers supplied approximately 39.6% of silicon wafers and
other silicon raw material supplies that we procured in 2009. Due to the
industry-wide shortage of silicon raw materials experienced during the past few
years, we purchased silicon raw materials using short-term and long-term
contracts from a limited number of international and domestic suppliers. Some
agreements provide for firm purchase commitments and fixed pricing or pricing
adjustable within a relatively small range. From the fourth quarter of 2008 to
mid-2009, the price of silicon raw materials decreased rapidly due to the excess
supply of silicon raw materials resulting from a slowed global solar power
market growth. In light of such excess supply, we have sought to re-negotiate
with our long-term supply partner in regard to certain long term supply
contracts signed in 2008. In 2009, almost all of our purchases of silicon raw
materials were made under short-term contracts. Given the current wafer price
environment, we also seek to exert greater control over incoming wafer quality
while establishing stable and long-term relationships with high quality
suppliers.


34




Our
manufacturing process also involves metallic paste, chemicals and other
materials. We secure these raw materials from multiple vendors who have
demonstrated good quality control and reliability.




Quality
Assurance and Customer Support and Service




Our
quality control consists of three components: incoming inspection through which
we ensure the quality of the raw materials that we source from third parties,
in-process quality control of our manufacturing processes, and output quality
control of finished products through inspection and testing. We have received
the ISO 9001:2000 certification for our quality assurance programs, which we
believe demonstrates our technological capabilities and instills customer
confidence. We adhere to strict standards when testing the conversion efficiency
of our products to ensure that our products perform to specified
standards.




A team
within our sales group works closely with our quality assurance group to provide
customer support and service. We emphasize gathering customer feedback for our
products and timely addressing customer concerns. Our customer support and
service team also provides our customers with training and consultation with
respect to the application of our products.




Customers
and Markets




We sell
our solar cells primarily to module manufacturers, who assemble our cells into
solar modules and solar power systems for use in various markets, particularly
the European market. We also outsource to third parties the manufacturing of
solar modules from our solar cells or purchase solar modules from third parties
for sale of such solar modules to our customers. In 2009, solar module sales
accounted for 5.4% of our revenues. In 2009, our major customers included asola
Advanced and Automotive Solar Systems GmbH, CEEG (Nanjing) New Energy Co., Ltd.,
an entity controlled by our chairman, Mr. Tingxiu Lu, CEEG (Shanghai) Solar
Science and Technology Co., Ltd., an entity also controlled by Mr. Lu, Solarwatt
AG and Tianwei New Energy (Chengdu) Photovoltaik Module Co., Ltd. In 2009, our
top five customers contributed 56.4% of our net revenues, including CEEG
(Shanghai) Solar Science and Technology Co., Ltd. and CEEG (Nanjing) New Energy
Co., Ltd., which contributed 19.3% and 9.3%, respectively, of our net revenues
in 2009.




We
currently make a majority of our sales to customers located in China. We also
sell our solar power products to customers located in Germany, Italy, Australia
and other countries. The following table sets forth by region our net revenues
derived from sales of our products for the periods indicated:




Year Ended December 31,2007
                      
                      
                      2008
                      
                      
                      2009(in thousands, except percentages)Europe:—
      Germany
                      
                      $
                      62,314
                      
                      
                      
                      26.5
                      %
                      
                      $
                      126,860
                      
                      
                      
                      36.2
                      %
                      
                      $
                      67,120
                      
                      
                      
                      23.5
                      %—
      Italy
                      
                      
                      8,980
                      
                      
                      
                      3.8
                      
                      
                      
                      6,128
                      
                      
                      
                      1.7
                      
                      
                      
                      7,557
                      
                      
                      
                      2.7—
      Spain
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      9,399
                      
                      
                      
                      2.7
                      
                      
                      
                      2,743
                      
                      
                      
                      1.0—
      Others
                      
                      
                      1,803
                      
                      
                      
                      0.8
                      
                      
                      
                      51
                      
                      
                      
                      0
                      
                      
                      
                      1,783
                      
                      
                      
                      0.6Europe
      Total
                      
                      
                      73,097
                      
                      
                      
                      31.1
                      
                      
                      
                      142,437
                      
                      
                      
                      40.6
                      
                      
                      
                      79,203
                      
                      
                      
                      27.8PRC
                      
                      
                      151,058
                      
                      
                      
                      64.3
                      
                      
                      
                      196,628
                      
                      
                      
                      56.0
                      
                      
                      
                      185,177
                      
                      
                      
                      65.0South
      Africa
                      
                      
                      83
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —India
                      
                      
                      2,332
                      
                      
                      
                      1.0
                      
                      
                      
                      1,154
                      
                      
                      
                      0.3
                      
                      
                      
                      1,657
                      
                      
                      
                      0.6South
      Korea
                      
                      
                      6,419
                      
                      
                      
                      2.8
                      
                      
                      
                      10,257
                      
                      
                      
                      2.9
                      
                      
                      
                      409
                      
                      
                      
                      0.1Australia
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      11,947
                      
                      
                      
                      4.2


35





Year Ended December 31,2007
                                    
                                    
                                    2008
                                    
                                    
                                    2009(inthousands,exceptpercentages)America
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    2,568
                                    
                                    
                                    
                                    0.9Others
                                    
                                    
                                    1,919
                                    
                                    
                                    
                                    0.8
                                    
                                    
                                    
                                    444
                                    
                                    
                                    
                                    0.1
                                    
                                    
                                    
                                    3,904
                                    
                                    
                                    
                                    1.4Total
      net revenues
                                    
                                    $
                                    234,908
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    $
                                    350,920
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    $
                                    284,865
                                    
                                    
                                    
                                    100
                                    %




In order
to continue growing our sales and to reduce our reliance on any particular
market segment, we intend to broaden our geographic presence and customer base.
While we expect China to continue to be one of our key markets for the
foreseeable future, we plan to expand into several overseas solar power markets,
including European countries and those countries and regions with growing demand
or market potential for solar power products, such as France, Czech
Republic, United States, Canada, Australia, Japan and other Asian countries
and regions after we expand into downstream solar power business.




We sell
our products primarily under sales contracts, purchase orders and buy-and-sell
arrangements, as follows:




•
            Sales
      contracts and purchase orders. Historically, we entered into sales
      contracts of various terms with our customers and were obligated to
      deliver solar power products according to a pre-agreed price and schedule
      during the term of the contract. Given the volatility in average selling
      prices of silicon raw materials and solar power products in recent
      periods, a substantial portion of our contracts now provide for
      re-negotiation of price terms based on regular pricing reviews every three
      or six months or provide for adjustment of pricing terms when the change
      in exchange rate reaches certain benchmarks. We typically require our
      customers to pay a certain percentage of the purchase price as advance
      payment within a short period after signing the sales contracts. The
      percentage of advance payments varies depending on the credit status of
      our customers, our relationship with the customers, market demand and the
      terms of a particular contract. We may grant our large customers credit
      terms, usually within 30-45 days, according to our current credit policy.
      With respect to the other customers, we typically request full payment
      before or upon shipment. We also sell our solar power products via
      purchase orders placed by our customers. After we expand into downstream
      solar power business, we anticipate that we will continue to use the
      combination of sales contracts and purchase orders to directly sell solar
      modules to end customers.




•
            Buy-and-sell
      arrangements. Historically, we obtained silicon wafer supplies from our
      customers, and were obligated to sell solar cells to them in return under
      buy-and-sell arrangements. The payment we make for the wafers and the
      payment our customers make for the solar cells are either settled
      separately or sometimes offset against each
  other.




We also
process silicon wafers provided by our customers into solar cells under OEM
arrangements, and we charge processing fees from these customers.




From
2008, particularly in the fourth quarter of 2008 and the first quarter of 2009,
partly due to the impact of global financial market disruption and economic
slowdown, some of our customers cancelled or delayed orders for our products.
Purchases of solar power products tend to decrease during the winter months
because of adverse weather conditions in certain regions, which complicate the
installation of solar power systems. Historically, our results of operations
have been affected by such seasonality of industry-wide demand for solar power
products.




Sales
and Marketing




We market
and sell our solar power products worldwide through our direct sales force,
which is based in our facilities in Nanjing, China. Our marketing programs
include industrial conferences, trade fairs, sales training, advertising and
public relation events. Our sales and marketing groups work closely with our
research and development and manufacturing groups to coordinate our product
development activities, product launches and ongoing demand and supply planning.
We plan to establish a global sales network and have expanded our sales network
by establishing two regional offices, one in Shanghai, China and the other in
Munich, Germany. We may establish more regional offices in other European
countries and the United States in the future to further expand our sales
network.


36




Historically,
the identity of our customers has changed substantially from year to year. We
aim to further develop long-term relationships with key customers who are market
leaders or strong niche players in their respective industrial or geographic
segments. We believe that these customers will provide consistent revenue
streams to minimize business volatility, and we target to achieve a substantial
portion of our total net revenues from sales to strategic customers. To further
diversify our customer base, which currently consists primarily of module
manufacturers and system integrators purchasing solar cells, we will seek to
increase our sales to system integrators and solar power project developers in
connection with our expansion into downstream solar power business.




Intellectual
Property




As of the
date of this annual report, we have seven patents in China, one of which relates
to process technology for the manufacture of N-type solar cells, two relate to
process technology for the improvement of cell performance, two relate to
utility models for N-type solar cells and the other two relate to utility model
for improvement on performance of solar cells. In addition, we have 11 patent
applications pending in China, three of which relate to manufacture of solar
cells, four relate to process technology for solar cells, one relates to
improvement on performance of solar cells, two relate to rectification of bowed
solar cells and the last one relates to measurement of solar cells.We intend to continue
to assess appropriate opportunities for patent protection of those aspects of
our technology that we believe provide significant competitive advantage to
us.




We also
rely on a combination of trade secrets and employee contractual protections to
establish and protect our proprietary rights. We believe that many elements of
our solar power products and manufacturing processes involve proprietary
know-how, technology or data that are not covered by patents or patent
applications, including technical processes, equipment designs, algorithms and
procedures. We have taken security measures to protect these elements. All of
our research and development personnel have entered into confidentiality and
proprietary information agreements with us. These agreements address
intellectual property protection issues and require our employees to assign to
us all of their inventions, designs and technologies that they develop primarily
utilizing our resources or when performing their duties during their
employment.




We are
the registered owner of the trademarks “NPV”and “CSUN” and two logos in China.
Further, CEEG and Sunergy Nanjing entered into two trademark license agreements
effective as of February 9, 2006 and June 7, 2006, respectively, pursuant to
which CEEG granted to Sunergy Nanjing the rights to use the trademarks of “CEEG”
and its Chinese characters in Sunergy Nanjing’s ordinary business for ten
years.




Competition




The
market for solar power products is highly competitive and continually evolving.
We expect to face increased competition, which may result in price reductions,
reduced margins or loss of market share. We believe that the key competitive
factors in the market for solar power products include:




•
            manufacturing
      efficiency;




•
            conversion
      efficiency and performance;




•
            price;




•
            strength
      of supplier relationships; and




•
            reputation.




Our
competitors include solar power divisions of large conglomerates such as
Kyocera, Sanyo and Sharp Corporation, as well as specialized solar power
manufacturers such as Canadian Solar Inc., JA Solar Holdings Co., Ltd., Motech
Industries Inc., Q-Cells AG, Sunpower Corp., Suntech Power Holdings Co., Ltd.,
Solarfun Power Holdings Co. Ltd. and Trina Solar Ltd. Some of our competitors
have also become vertically integrated, from wafer and module manufacturing to
solar power system integration, such as Yingli Green Energy Holding Co.,
Ltd.


37


Many of
our competitors are developing or currently producing products based on
alternative solar power technologies, such as thin-film technologies, which may
ultimately have costs similar to, or lower than, our projected costs. We expect
that we will also need to compete with new entrants to the solar power market.
In addition, the entire solar power industry also faces competition from
conventional and non-solar renewable energy technologies.




Many of
our existing and potential competitors have substantially greater financial,
technical, manufacturing and other resources than we do. Our competitors’
greater size in some cases provides them with a competitive advantage with
respect to manufacturing costs due to their economies of scale and their ability
to purchase raw materials at lower prices. Many of our competitors also have
more established distribution networks and larger customer bases. As a result,
they may be able to devote greater resources to the research, development,
promotion and sale of their products or respond more quickly to evolving
industry standards and changes in market conditions than we can.




REGULATION




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




Renewable
Energy Law and Other Government Directives




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




The law
also sets out the national policy to encourage the installation and use of solar
energy water-heating systems, solar energy heating and cooling systems, solar
photovoltaic systems and other solar energy utilization systems. It also
provides the general principles regarding financial incentives for the
development of renewable energy projects. The projects, as listed in the
renewable energy industry development guidance catalogue, may obtain
preferential loans from financial institutions and can enjoy tax preferences.
The State Council is authorized to stipulate the specific tax preferential
treatments. However, so far, no rule has been issued by the State Council
pertaining to this matter. In January 2006, China’s National Development and
Reform Commission promulgated two implementation directives of the Renewable
Energy Law. These directives set out specific measures in setting prices for
electricity generated by solar and other renewal power generation systems and in
sharing additional expenses occurred. The directives further allocate the
administrative and supervisory authorities among different government agencies
at the national and provincial levels and stipulate responsibilities of
electricity grid companies and power generation companies with respect to the
implementation of the Renewable Energy Law. In July 2007, China’s National
Development and Reform Commission further promulgated an implementation
directive of the Renewable Energy Law. The directive stipulates the
responsibility of electricity grid companies to buy all electricity generated by
renewable energy power generation systems.




PRC
Ministry of Construction also issued directives in September 2006 and February
2007, which seek to expand the use of solar energy in residential and commercial
buildings and encourages the increased application of solar energy in different
townships.




In
addition, the State Council promulgated a directive in July 2005 which sets out
specific measures to conserve energy resources.




On March
23, 2009, PRC Ministry of Finance promulgated the Interim Measures for
Administration of Government Subsidy Funds for Application of Solar Photovoltaic
Technology in Building Construction, or the Interim Measures, to support the
demonstration and the promotion of solar photovoltaic application in China.
Local governments are encouraged to issue and implement supporting policies for
the development of solar photovoltaic technology. Under these Interim Measures,
the Ministry of Finance provides subsidies for projects with individual solar
installations that are greater that 50 kilowatt-peak in size and have more than
16% conversion efficiency for monocrystalline solar power products, more than
14% conversion efficiency for multicrystalline solar power products and more
than 6% conversion efficiency for amorphous silicon solar power products, and
gives priority support to solar power technology integrated into building
construction, grid-connected solar power building applications and some public
solar power building applications such as schools, hospitals and offices. For
2009, the standard subsidy is set at RMB20 per watt in principle and the
detailed standard is to be determined by factors including, but not limited to,
the level of integration of buildings with solar power and the technology of
solar power products. The Interim Measures do not apply to projects completed
before March 23, 2009, the promulgation date of the Interim
Measures.


38




On April
16, 2009, the General Offices of the PRC Ministry of Finance and the PRC
Ministry of Housing and Urban-Rural Development jointly issued the Guidelines
for Declaration of Demonstration Project of Solar Photovoltaic Building
Applications. These guidelines set the subsidies given out in 2009 to qualified
solar projects at no more than RMB20 per watt for projects involving the
integration of solar power components into buildings’ structural elements and at
no more than RMB15 per watt for projects involving the installation of solar
power components onto building rooftops and wall surfaces.




On July
16, 2009, PRC Ministry of Finance, Ministry of Science and Technology and
National Energy Administration jointly issued the Notice on Implementation of
Demonstration Project of Golden Sun to support the promotion of photovoltaic
generation in China. Under this notice, the photovoltaic projects which meet
certain requirements will be provided with subsidies.  On November 9,
2009, Ministry of Finance, Ministry of Science and Technology and National
Energy Administration further jointly issued the Notice on Successful
Implementation of Demonstration Project of Golden Sun to emphasize the
requirements for subsidizing the photovoltaic projects.




Environmental
Regulations




We are
subject to a variety of governmental regulations related to environmental
protection. The major environmental regulations applicable to us include the
Environmental Protection Law of the PRC, the Law of PRC on the Prevention and
Control of Water Pollution, Implementation Rules of the Law of PRC on the
Prevention and Control of Water Pollution, the Law of PRC on the Prevention and
Control of Air Pollution, Implementation Rules of the Law of PRC on the
Prevention and Control of Air Pollution, the Law of PRC on the Prevention and
Control of Solid Waste Pollution, and the Law of PRC on the Prevention and
Control of Noise Pollution.




We are in
compliance with present environmental protection requirements in all material
aspects and have all necessary environmental permits to conduct our business,
except as disclosed herein, see “Item 3- Key Information—D. Risk
Factors—Risks
Related to Our Company and Our Industry—Noncompliance
with present or future construction and environmental regulations may result in
potentially significant monetary damages and fines”. Our operations are subject
to regulation and periodic monitoring by local environmental protection
authorities.




Restriction
on Foreign Ownership




The
principal regulation governing foreign ownership of solar power businesses in
the PRC is the Foreign Investment Industrial Guidance Catalogue, effective as of
December 1, 2007, or the Catalogue. The Catalogue classifies the various
industries into four categories: encouraged, permitted, restricted and
prohibited. As confirmed by the government authorities, Sunergy Nanjing, our
operating subsidiary, is engaged in an encouraged industry. Sunergy Nanjing is
permitted under the PRC laws to be wholly owned by a foreign company. Sunergy
Nanjing is, accordingly, also entitled to certain preferential treatments
granted by the PRC government authorities, such as exemption from tariffs on
equipment imported for its own use.




Tax




PRC
enterprise income tax is calculated primarily on the basis of taxable income
determined under PRC enterprise income tax laws and regulations.  In
accordance with the Income Tax Law of China for Enterprises with Foreign
Investment and Foreign Enterprises promulgated as of April 9, 1991 and effective
on July 1, 1991, or the Income Tax Law, and its implementing rules, or the
Income Tax Law Implementation Rules, foreign-invested enterprises incorporated
in the PRC were generally subject to an enterprise income tax rate of 33% (30%
of state income tax plus 3% of local income tax). The Income Tax Law and the
Income Tax Law Implementation Rules provided certain preferential tax treatments
to foreign-invested enterprises established in certain areas in the
PRC.




Sunergy
Nanjing, a foreign-invested enterprise engaged in a manufacturing business and
established in Nanjing, which is within a coastal economic zone, was entitled to
a preferential enterprise income tax rate of 24%. As a wholly foreign owned
enterprise engaged in a manufacturing business, Sunergy Nanjing was also
entitled to a two-year exemption of the enterprise income tax from its first
profitable year, which was 2006, and to a 50% reduction of its applicable income
tax rate for the succeeding three years,. To enjoy the above preferential
treatment, the operation duration of Sunergy Nanjing shall be no less than 10
years.


39




On March
16, 2007, the National People’s Congress of China promulgated the New EIT Law.
On December 6, 2007, the State Council promulgated the New EIT Law
Implementation Rules. Both the New EIT Law and the New EIT Law Implementation
Rules became effective on January 1, 2008. Under the New EIT Law and the New EIT
Law Implementation Rules, domestically-owned enterprises and foreign-invested
enterprises are all subject to a uniform tax rate of 25%.  The New EIT
Law also provides transitional measures for enterprises established prior to the
promulgation of the New EIT Law and eligible for lower tax rate or preferential
treatment in accordance with the then-prevailing tax laws and administrative
regulations.  On December 26, 2007, State Council of China promulgated
the Circular. Under the New EIT Law, the New EIT Law Implementation Rules and
the Circular, enterprises which were established and already enjoyed
preferential enterprise income tax treatments before March 16, 2007 will
continue to enjoy them (i) in the case of preferential tax rates, for a period
of five years from January 1, 2008, and the enterprises which previously enjoyed
the tax rate of 24% shall be subject to the tax rate of 25% in 2008, and (ii) in
the case of preferential tax exemption or reduction for a specified term, until
the expiration of such term or 2012, whichever is earlier. However, The Circular
also prescribes that if the above transitional relief of enterprise income tax
overlaps with the preferential treatments provided by the New EIT Law, an
enterprise may choose the more favorable treatment, but cannot enjoy
both.  The treatment cannot be changed once it is chosen.




On April
14, 2008, the Ministry of Finance, the Ministry of Science and Technology and
the State Administration of Taxation jointly promulgated the Recognition
Measures. Pursuant to the New EIT Law, the New EIT Law Implementation Rules and
the Recognition Measures, HNTE is eligible for a preferential tax rate of 15%.
On October 21, 2008, Sunergy Nanjing obtained a HNTE certificate with a
three-year validity term, from 2008 to 2010. Therefore, Sunergy Nanjing is
eligible for a 15% preferential tax rate during the above period.




Based on
the Circular, the management chooses to enjoy the transitional relief, i.e.
12.5% from 2008 to 2010.  The management believes that
more-likely-than-not Sunergy Nanjing will be able to renew its HNTE status in
2011 and will be eligible for the 15% preferential rate for the following three
years from 2011 to 2013. Therefore, management applied the 15% income tax rate
in deferred tax calculations. If the renewal is not received for 2011 to 2013,
then the net deferred tax asset balance as of December 31, 2009 would change
from the current $4.4 million to $5.5 million. The difference would be an
increase of $1.1 million to current net earnings.




Sunergy
Shanghai was established in November 2007 and its applicable PRC enterprise
income tax rate is 25%.





Pursuant
to the Provisional Regulation of China on Value Added Tax and its provisional
rules, all entities and individuals that are engaged in the sale of goods, the
provision of processing, repairs and replacement services and the importation of
goods into China are generally required to pay value added tax, or VAT, at a
rate of 17.0% of the gross sales proceeds received, less any deductible VAT
already paid or borne by the taxpayer. Further, when exporting goods, the
exporter is entitled to a portion or all of the refund of VAT that it has
already paid or borne. Accordingly, Sunergy Nanjing is subject to the 17.0% VAT
with respect to its sales of solar cells in China, while Sunergy Nanjing’s
export sales of solar cells are exempt from such VAT.




Foreign
Currency Exchange




The
principal regulations governing foreign currency exchange in China are the
Foreign Exchange Administration Regulations (1996), as amended in 1997 and 2008
respectively. Under these regulations, the Renminbi is freely convertible for
current account items, including the distribution of dividends, interest
payments, trade and service-related foreign exchange transactions. However, for
capital account items, such as direct investment, loan, repatriation of
investment and investment in securities outside China, the conversion of foreign
currencies into Renminbi is subject to the prior approval of SAFE, but the
conversion of Renminbi into foreign currencies for the international payment and
remittance under capital accounts is generally exempt from SAFE’s prior approval
unless otherwise required by Chinese laws and regulations.




Pursuant
to the Administration Rules of the Settlement, Sale and Payment of Foreign
Exchange (1996), enterprises may only buy, sell or remit foreign currencies at
banks that are authorized to conduct foreign exchange business after the
enterprise provides valid commercial documents and relevant supporting documents
and, in the case of certain capital account transactions, after obtaining
approval from SAFE or its competent local branches. Capital investments by
enterprises outside of China are also subject to limitations, which include
approvals by the Ministry of Commerce, SAFE and the National Development and
Reform Commission, or their respective competent local
branches.


40




Pursuant
to the Notice of the General Affairs Department of the State Administration of
Foreign Exchange on the Relevant Operating Issues concerning the Improvement of
the Administration of Payment and Settlement of Foreign Currency Capital of
Foreign-funded Enterprises (2008), the foreign currency capital of foreign
invested enterprises, after being converted to Renminbi, can only be used for
doing business within the business scope approved by relevant governmental
authorities, and shall not be used for domestic equity investment unless
otherwise provided for.




The
business operations of Sunergy Nanjing, which are subject to the foreign
currency exchange regulations, have all been in compliance with these
regulations in all material aspects.




Dividend
Distribution




The
principal regulations governing distribution of dividends of wholly
foreign-owned enterprises include the Wholly Foreign- owned Enterprise Law
(1986), as amended by the Decision on Amending the Law of the PRC on Wholly
Foreign-owned Enterprise (2000), and the Implementing Rules of the Wholly
Foreign-owned Enterprise Law (1990), as amended by the Decision of the State
Council on Amending the Implementing Rules of the Law of the PRC on Wholly
Foreign-owned Enterprises (2001).




Under
these regulations, foreign-invested enterprises in China may pay dividends only
out of their accumulated profits, if any, determined in accordance with Chinese
accounting standards and regulations. In addition, wholly foreign owned
enterprises in China are required to set aside at least 10% of their respective
after-tax profits based on PRC accounting standards each year, if any, to fund
its general reserves fund, until the accumulative amount of such reserves
reaches 50% of its registered capital. These reserves are not distributable as
cash dividends. A wholly foreign owned enterprise is also required to allocate a
portion of its after-tax profits, as determined by its board of directors, to
its staff welfare and bonus funds.




Share
Incentive Plan




On March
28, 2007, SAFE promulgated the Operating Procedures on Administration of Foreign
Exchange for PRC Individuals’ Participation in Employee Share Ownership Plans
and Employee Share Option Plans of Overseas Listed Companies, or the Share
Option Rules. Under the Share Option Rules, PRC citizens who are granted shares
or share options by an overseas-listed company according to its employee share
option or share incentive plan are required, through the PRC subsidiary of such
overseas-listed company or other qualified PRC agents, to register with SAFE and
complete certain other procedures related to the share option or other share
incentive plan. In addition, the overseas-listed company or its PRC subsidiary
or any other qualified PRC agent is required to appoint an asset manager or
administrator and a custodian bank, and open special foreign currency accounts
to handle transactions relating to the share option or other share incentive
plan. The General Administration of Taxation has also issued certain circulars
concerning employee share options. Pursuant to these circulars, our employees
working in China who exercise their share options will be subject to PRC
individual income tax. Our PRC subsidiaries have obligations to file documents
related to such employee share options with relevant tax authorities and
withhold individual income taxes of those employees who exercise their share
options. Failure to comply with such rules may subject such overseas-listed
company and the participants of share incentive plan who are PRC citizens to
fines and legal sanctions and prevent the overseas-listed company from further
granting options under its share incentive plan to its employees.




Intellectual
Property Rights




The
Patent Law (1984), as amended by the Decision on Amending the Patent Law (2000)
and the Decision on Amending the Patent Law (2008), and the Implementing Rules
of the Patent Law (2001), as amended by the Decision on Amending the
Implementing Rules of the Patent Law (2002) and the Decision on Amending the
Implementing Rules of the Patent Law (2010) provide for the application and
protection of patents. An invention patent shall be valid for twenty years and
an external design patent and a utility model patent shall be valid for ten
years, commencing on their application dates, respectively. Any persons or
entities using a patent without the consent of the patent owner, making
counterfeits of patented products, or conducting other activities which infringe
upon patent rights will be held liable for compensation to the patent owner,
fines charged by the administrative authorities and even criminal punishment. As
of the date of this annual report, our operating subsidiary, Sunergy Nanjing,
has seven patents in China, one of which relates to process technology for the
manufacture of N-type solar cells, two relate to process technology for the
improvement of cell performance, two relate to utility models for N-type solar
cells and the other two relate to utility model for improvement on performance
of solar cells.


41




The
Trademark Law of the PRC (1983), as amended in 1993 and 2001, respectively, and
the Implementing Regulations of the Trademark Law (2002) provide for the
application, protection and license of trademarks. A registered trademark shall
be valid for ten years, commencing on the date of registration and can be
renewed by an application made within six months before expiration. The renewed
registration shall also be valid for ten years and can be renewed unlimitedly.
As of the date of this annual report, we are the registered owner of the
trademarks “NPV” and “CSUN” and two logos in China.




Labor
and Work Safety




The laws
and regulations governing the labor relations for enterprises and institutions
in the PRC include Labor Law of the PRC (1995), or the Labor Law. Contracts must
be formed if labor relationships are established between entities and their
laborers. The Labor Law sets limits on the maximum number of hours a laborer can
work, and entities must establish and continuously develop its system for labor
safety and sanitation, strictly abide by national rules and standards on labor
safety and sanitation, provide laborers with safety and sanitation conditions
and educate laborers on labor safety and sanitation. The government provides
additional protection to female staff and workers and juvenile
workers.




On June
29, 2007, the National People’s Congress enacted the Labor Contract Law of the
PRC, or the Labor Contract Law, which came into effect as of January 1, 2008.
The Labor Contract Law imposes stricter requirements in terms of signing labor
contracts, paying remuneration, stipulating probation and penalties and
dissolving labor contracts.




The laws
and regulations governing the labor relations also include the Work Safety Law
of the PRC (2002), the Regulation on Occupational Injury Insurance (2004), the
Interim Measures Concerning the Maternity Insurance (1995), the Interim
Regulations on the Collection and Payment of Social Insurance Premiums (1999)
and its interim measures (1999), and the Regulation on the Administration of
Housing Fund (2002).




Sunergy
Nanjing is subject to the above laws and regulations.




C.
            Organizational
      Structure




The
following diagram illustrates our company’s organizational structure, and the
place of formation, ownership interest and affiliation of each of our
subsidiaries as of the date hereof.









42


In
November 2007, Sunergy BVI and CEEG jointly incorporated China Sunergy
(Shanghai) Co., Ltd., or Sunergy Shanghai., in which we hold a 95% interest, and
CEEG a 5% interest. In September 2008, Sunergy BVI transferred its 95% equity
interest in Sunergy Shanghai to Sunergy Hong Kong. In September 2008, CEEG
transferred its 5% equity interest in Sunergy Shanghai to Sunergy Hong Kong, as
a result of which Sunergy Hong Kong became the 100% holding company of Sunergy
Shanghai in April 2009.




According
to our current plan, Sunergy Shanghai will engage in high-efficiency solar cells
production, solar power research and development activities. We expect to begin
construction on our Shanghai facility, which includes a research and development
center, in the second half of 2010.




In
December 2007, Sunergy BVI incorporated Sunergy Hong Kong in Hong Kong. During
the same month, Sunergy BVI transferred all its equity interest in Sunergy
Nanjing to Sunergy Hong Kong, as a result of which Sunergy Hong Kong became the
direct holding company of our principal operating subsidiary, Sunergy Nanjing.
In November 2007, Sunergy BVI incorporated China Sunergy Europe GmbH in Munich,
Germany.




In March
2010, we entered into two share transfer agreements with CEEG and Sundex
Holdings Limited, pursuant to which we will acquire from CEEG and Sundex
Holdings Limited the 100% equity interests in CEEG (Shanghai) Solar Science
& Technology Co., Ltd. and the 100% equity interests in CEEG (Nanjing) New
Energy Co., Ltd., both of which are our affiliates and are controlled by Mr.
Tingxiu Lu, our chairman, at the consideration of RMB200 million (approximately
$29.3 million) and RMB120 million (approximately $17.6 million), respectively.
The two transactions are expected to close before June 30, 2010, subject to
customary closing conditions including obtaining necessary government
approvals.




D.
            Property, Plant and
      Equipment




As of
December 31, 2009, we conducted our research, development and manufacturing of
solar products at our facilities in Nanjing, China, where we occupied a site
area of approximately 79,800 square meters. These facilities include office
premises with a total floor space of approximately 9,600 square meters and
manufacturing facilities with a total floor space of approximately 21,500square meters that can
accommodate up to ten solar cell manufacturing lines. We have obtained all of
the construction approvals for these facilities.We
have also obtained land use rights to a plot of land in Shanghai with a site
area of approximately 96,500 square meters for the business operation of Sunergy
Shanghai in 2009.




In 2009,
we pledged raw materials with a total value of approximately RMB100 million
($14.6 million) to secure our repayment of short-term borrowings of
approximately $8.8 million, which was repaid in February 2010.




We
maintain property insurance policies with reputable insurance companies for
covering our equipment, facilities, buildings and their improvements, and office
furniture. These insurance policies cover losses due to fire, earthquake, flood
and a wide range of other natural disasters. We maintain director and officer
liability insurance for our directors and executive officers. We also maintain
business interruption insurance. Our insurance products contain various coverage
limits and deductibles. We do not currently maintain product liability
insurance. We have appointed an insurance broker to provide us with proposals
for insurance coverage for our company, and we plan to maintain our coverage
with the similar level of 2009 during 2010.




ITEM
      4A.
            UNRESOLVED
      STAFF COMMENTS




Not
Applicable.




ITEM
      5.
            OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS




The
following discussion of our financial condition and results of operations is
based upon and should be read in conjunction with our consolidated financial
statements and their related notes included in this annual report on Form 20-F.
This report contains forward-looking statements. See
“Introduction—Forward-Looking. Information.” In evaluating our business, you
should carefully consider the information provided under the caption “Risk
Factors” in this annual report on Form 20-F. We caution you that our businesses
and financial performance are subject to substantial risks and
uncertainties.


43




A.
            Operating
      Results




Overview




We sell
our solar cell products mostly to module manufacturers and, to a lesser extent,
to system integrators, who assemble our cells into solar modules and solar power
systems for use in various markets. Our management’s operational expertise and
execution capability, coupled with our strong research and development
capabilities, have allowed us to rapidly install our solar cell manufacturing
lines and expand our manufacturing capacity. As of the date of this annual
report, we have ten solar cell manufacturing lines with an aggregate production
capacity of 320 MW per year, assuming the use of 156-millimeter monocrystalline
silicon wafers. Our research and development efforts focus on continually
enhancing our solar cell conversion efficiencies, which measure the ability of
solar power products to convert sunlight into electricity, and improving our
manufacturing operations. We commenced business operations in August 2004. In
2005, we had only one solar cell manufacturing line. In 2006, we installed five
additional solar cell manufacturing lines and expanded our annual manufacturing
capacity by 160 MW, assuming the use of 156-millimeter monocrystalline silicon
wafers. Our fifth line, which achieved full scale manufacturing capacity in
November 2006, commenced commercial mass production of selective emitter cells
using monocrystalline silicon wafers in the fourth quarter of 2007. In December
2008, we installed four new solar cell lines for the production of selective
emitter cells. These four new lines are producing selective emitter cells with
performance similar to those from the first line which produces selective
emitter solar cells.  Hence, five of our manufacturing lines are
capable of producing high efficiency selective emitter cells.




During
the second half of 2009, our research team has made a concerted effort to
improve the performance of our standard HP solar cells.  In addition,
we continued focusing on the development of advanced process technology for
manufacturing other new products, such as N-type solar cells.  The
Matrix cells under development also demonstrated significant improvement during
2009.




In 2007,
the shipment of our solar power products amounted to 74.0 MW, including 70.0 MW
of solar cells sold, 2.4 MW of solar cells processed under OEM arrangements and
1.6 MW of modules sold. In 2008, the shipment of our solar power products
amounted to 107.2 MW, including 100.4 MW of solar cells sold, 4.2 MW of solar
cells processed under OEM arrangements and 2.6 MW of modules sold. In 2009, the
shipment of our solar power products amounted to 194.0 MW, including 181.5 MW of
solar cells sold, 4.2 MW of solar cells processed under OEM arrangements and 8.3
MW of modules sold. We had net revenues of $234.9 million, $350.9 million and
$284.9 million in 2007, 2008 and 2009, respectively. We incurred net losses of
$4.9 million, $22.9 million and $9.8 million in 2007, 2008 and 2009,
respectively.




We
operate and manage our business as a single segment.




Industry
Demand




The solar
power market grew rapidly in the past several years. During that period, our
business and revenue growth were primarily driven by industry demand and our
ability to retain existing customers, attract new customers and expand our
manufacturing capacity at the same time. According to Solarbuzz, the global
solar power market, as measured by annual volume of modules delivered to
installation sites, grew at a CAGR of 49.5% from approximately 1.5 gigawatts, or
GW, in 2005 to approximately 7.3 GW in 2009. Under the lowest of three different
projections, Solarbuzz expects the annual volume of modules delivered to
installation sites may further increase to 15.4 GW in 2014, and global solar
power industry revenue may increase from $38.5 billion in 2009 to $46.3 billion
in 2014 while market demand growth is partially offset by the market price
declines. According to a Solarbuzz forecast named “Green World,” the moderate
one of three possible scenarios, annual volume of modules delivered to
installation sites may further increase to approximately 24.7 GW in 2014, and
global solar power industry revenue may increase from $38.5 billion in 2009 to
$77.9 billion in 2014.




We
believe that the following factors have driven and may continue to drive the
growth of the solar power industry in the long run as projected by the Solarbuzz
“Green World” forecast:




•
            government
      incentives for solar power;




•
            growing
      demand for electricity, supply constraints and desire for energy security;
      and




•
            growing
      awareness of the advantages of solar
power.




44




In the
fourth quarter of 2008 and the first quarter of 2009, the global solar power
industry experienced a precipitous decline in demand due to decreased
availability of financing for downstream buyers of solar power products as a
result of the global economic crisis.  During the same period,
increased manufacturing capacity combined with decreased demand caused a decline
in the prices of solar power products.  The demand for solar products
is also influenced by macroeconomic factors such as the global economic
downturn, the supply and prices of other energy products, such as oil, coal and
natural gas, as well as government regulations and policies concerning the
electric utility industry.  A decrease in oil prices, for example, may
reduce demand for investment in alternative energy.  The global
economic downturn, which affects the availability of financing, also contributed
to decreased sales and shipments of solar power products and the slowdown of the
large solar project market segments.  Although global demand began to
recover in the second half of 2009, lower costs of raw materials have continued
to cause a decrease in the prices of solar power products, which will lower the
cost of producing renewable energy over time. We cannot assure you that demand
for solar products in 2010 will exceed the demand for solar products in 2009 or
that the oversupply of solar products will not continue to exist in
2010.  Pleases see “Item 3. Key Information – D. Risk Factors” for
discussions of the risks related to declining industry demand for solar
products.




We
believe that the near-term growth of the market for on-grid applications depends
in large part on the availability and size of government subsidies and economic
incentives. Today, the cost of solar power substantially exceeds the cost of
power provided by the electric utility grid in many locations, when upfront
system costs are factored into cost per kilowatt. As a result, governmental
bodies in many countries, most notably China, Germany, Italy, Japan, Spain,
South Korea and the United States, have provided subsidies and economic
incentives to reduce dependency on non-renewable sources of energy. These
subsidies and economic incentives have come in the form of capital cost rebates,
feed-in tariffs, tax credits and other incentives to end users, distributors,
system integrators and manufacturers of solar power products.




The
demand for our solar power products is affected significantly by government
subsidies and economic incentives in our targeted or potential markets.
According to Solarbuzz, Germany had the largest solar power market in 2009, with
a market size of 3.87 GW, which accounted for 53.0% of the global solar power
market demand in 2009.  Italy and Spain had a market size of 0.62 GW
and 0.10 GW, respectively, and accounted for 8.5% and 1.4%, respectively, of the
global solar power market demand in 2009. At the beginning of 2009, the German
government reduced solar feed-in tariffs by between 9% and 11%.  The
rapid expansion of the German market was largely due to decreasing prices of
solar modules in the first half of 2009 and the expectation of further
reductions in feed-in tariffs. In May
2010, German Parliament Lower House (Bundestag) approved a proposal of a further
mid-year reduction in solar feed-in tariffs of 16% for rooftop systems and 15%
for most open-field installations. If this proposal is later approved by German
Parliament Upper House (Bundesrat) and becomes law, a significant decrease in
the demand for solar power products in Germany will likely follow. The rise
of the Italian market in 2009 was largely due to an increase in the maximum
installation size that can be incentivized from 20 Kilowatts to 200 Kilowatts
and a reduction in the bureaucratic steps for securing incentives. The Spanish
market declined dramatically, primarily due to the cap of 500 MW for the feed-in
tariff in 2009 introduced by the Spanish government in September 2008, which has
resulted in limiting the demand in the grid-connected market in Spain, and
national and global issues such as more stringent project financing conditions
and banks becoming less willing to lend into Spain. According to Solarbuzz, if
Germany and Spain were excluded, the rest of the global market would grow
strongly by 89% from 1.76 GW in 2008 to 3.33 GW in 2009. Reductions in, or
eliminations of, subsidies and economic incentives for on-grid solar energy
applications could result in decreased demand for our products and cause our
revenues to decline.




In March 2009, the Chinese government
announced new rules to support solar power applications in rural and remote
areas, which would allow for meaningful development of the solar power market in
China.  The Chinese government offers subsidies to assist construction
of building integrated solar power applications in urban and remote areas,
establishment of the technical standards on the installation of solar power
products on buildings, as well as integration and promotion of key universal
solar power building technologies.  According to the rules, projects
with more than 50 Kilowatts and a conversion efficiency of their monocrystalline
solar panels of higher than 16% are eligible to receive the
subsidies.  Priority will be given to the usage of solar modules for
building integrated solar power projects and grid-type projects, as well as
projects for public buildings. On July 16, 2009, Chinese government issued
another Notice on Implementation of Demonstration Project of Golden Sun to
support the promotion of photovoltaic generation in China. Under this notice,
the photovoltaic projects which meet certain requirements will be provided with
subsidies. In August 2009, the Chinese government issued the Report on the Work
of Dealing with Climate Change, or the Report, and the Standing Committee of
National People’s Congress of China issued the Resolutions on Making Active
Responses to Climate Change, or the Resolutions. According to the Report and the
Resolutions, the renewable energy use including solar power is encouraged and
shall be expanded. We believe that some of our customers may be benefited by
these incentives, which may in turn affect their demand for our
products.


45




Availability,
Price and Quality of Silicon Raw Materials




Silicon
wafers are the most important raw material from which our solar cells are made.
To manufacture silicon wafers, polysilicon is melted and processed into
crystalline silicon ingots, which are then sliced into wafers. The procurement
costs of silicon raw materials have accounted for more than half of our cost of
revenues since we began our commercial production of solar cells in August 2005.
Fluctuation in the price of polysilicon have in the past impacted our production
costs and our cost of revenues and net income. According to Solarbuzz, the
average long-term supply contract price of polysilicon increased from
approximately $60-$65 per kilogram delivered in 2007 to $60-$75 per kilogram in
2008.  In addition, according to Solarbuzz, spot prices for solar
grade polysilicon were in the range of $230-$375 per kilogram for most of the
first half of 2008 and rose to a peak of $450-$475 per kilogram by mid-2008. The
average initial price range of long-term polysilicon supply contracts decreased
to $50-$60 in the fourth quarter of 2009, and spot prices for solar grade
polysilicon had decreased rapidly to $150-$200 per kilogram by the beginning of
2009 and further declined to $55-$60 per kilogram by the end of 2009. There is
no assurance that the price of polysilicon will continue to decline, especially
if the global solar power market regains its growth momentum.




We
purchase silicon wafers from various suppliers, most of which are wafer
manufacturers located in China. We also procure polysilicon from various
suppliers, and outsource the production of silicon wafers from these polysilicon
raw materials under toll manufacturing arrangements with third parties. Toll
manufacturing is a type of contract manufacturing frequently used in the solar
power industry, in which part of the manufacturing process is outsourced to
qualified third parties, or toll manufacturers.Sometimes,
we sell polysilicon raw materials to wafer manufacturers and purchase silicon
wafers from them under buy-and-sell arrangements. Due to the industry-wide
shortage of silicon raw materials experienced during the past few years, we
purchased silicon raw materials using short-term and long-term contracts from a
limited number of international and domestic suppliers. Currently we use
primarily short-term contracts to secure our silicon raw materials supply. Some
agreements provide for firm purchase commitments and fixed pricing or pricing
adjustable in a relatively small range. From the fourth quarter of 2008 to
mid-2009, the price of silicon raw materials decreased precipitously due to the
excess supply of silicon raw materials resulting from a slowed global solar
power market growth. In light of such excess supply, we have sought to
re-negotiate with our long-term supply partner in regard to certain long term
supply contracts signed in 2008. Given the current wafer price environment, we
also seek to exert greater control over incoming wafer quality while
establishing stable and long-term relationships with high quality
suppliers.




Historically,
given the state of the industry, suppliers of silicon raw materials typically
required customers to make payments in advance of shipment. Our suppliers
generally required us to make a prepayment at a certain percentage of the order
value prior to shipping. Due to the relative oversupply of polysilicon,
prepayment as a percentage of the entire contract has been reducing. In 2009,
most of our suppliers granted us credit terms under their contracts with us.
However, our purchases of silicon raw materials may continue to require us to
make certain working capital commitments. We are required to manage our
borrowings and equity contributions to support our raw material
purchases.




The
silicon wafers required for the manufacture of N-type solar cells are different
from those used for the manufacture of P-type solar cells. We cannot assure you
that, if we are successful in commencing large-scale commercial production of
N-type solar cells, we will be able to obtain adequate supply of such
wafers.




Manufacturing
Capacity




In order
to capture the market opportunity for our solar cell products, we have expanded
our manufacturing capacity. When the market demand for solar cells exceeded
supply, increased capacity had a significant effect on our results of
operations, by allowing us to produce and sell more solar cell products
generating higher revenues, and by lowering certain manufacturing costs
resulting from economies of scale. In June 2005, we completed our first solar
cell manufacturing line with a manufacturing capacity of 32 MW per year, and we
started generating revenues from the first line in August 2005. We completed our
second to sixth solar cell manufacturing lines and started generating revenues
from these lines in 2006. We further installed our seventh to tenth solar cell
manufacturing lines in December 2008. In 2007 we shipped 74.0 MW of solar power
products including 70.0 MW of solar cells sold, 2.4 MW of solar cells processed
under OEM arrangements and 1.6 MW of modules sold. In 2008, the shipment of our
solar power products amounted to 107.2 MW, including 100.4 MW of solar cells
sold, 4.2 MW of solar cells processed under OEM arrangements and 2.6 MW of
modules sold. In 2009, the shipment of our solar power products amounted to
194.0 MW, including 181.5 MW of solar cells sold, 4.2 MW of solar cells
processed under OEM arrangements and 8.3 MW of modules sold. We had net revenues
of $234.9 million, $350.9 million and $284.9 million in 2007, 2008 and 2009,
respectively.


46




When the
global supply of solar power products exceeds the global demand due to excess
production capacity, global economic downturn or other reasons, we may not be
able to fully utilize our manufacturing capacity due to declined demand for our
products. As we incur fixed costs associated with our facilities and equipment
whether they are being utilized, operating at less than full utilization will
result in expenses without corresponding revenue, which will reduce our
operating margins.




As of the
date of this annual report, we have ten solar cell manufacturing lines with an
aggregate manufacturing capacity of 320 MW per year, assuming the use of
156-millimeter monocrystalline silicon wafers. Our actual output of solar cells
depends on the size of the silicon wafers that we use. Historically, we have
used a mix of monocrystalline and multicrystalline silicon wafers, each in sizes
of 125 millimeters and 156 millimeters. Our actual output does not match our
production capacity because we cannot obtain sufficient supply of 156-millimeter
wafers, as most of our suppliers and most of the suppliers in China sell the
smaller wafers. To the extent we use smaller wafers or multicrystalline wafers,
our actual production will be less than our production capacity.




Pricing
of Our Solar Cells




Solar
cells are priced based on the number of watts of electricity they can generate
and on their conversion efficiency. Pricing per watt of solar cells is
principally affected by manufacturing costs per watt, comprising of primarily
the cost of silicon wafers, the overall market demand for solar cells, and some
other factors, such as the exchange rate. Increased economies of scale and
process technology advancements in the past resulted in a steady reduction in
manufacturing costs and the price per watt of solar cells. However, since 2004,
price per watt of solar cells began rising gradually due to rapid demand growth
worldwide and the resulting shortages of silicon raw materials. Following
several years of increases, prices of solar cells declined gradually in early
2007 mainly due to decreases in subsidies or feed-in tariffs in major
end-markets of solar power products, such as Germany, as well as increased
production output around the world. From the third quarter of 2007, average
selling prices of our solar cells have increased due to increasing demand for
solar power products and the appreciation of the Renminbi.  In the
fourth quarter of 2008 and the first quarter of 2009, the global solar power
industry experienced a precipitous decline in demand due to decreased
availability of financing for downstream buyers of solar power products as a
result of the global economic crisis.  During the same period,
increased manufacturing capacity combined with decreased demand contributed to a
decline in the average selling price of solar power products.  The
demand for solar power products is influenced by macroeconomic factors such as
the global economic downturn, the supply and prices of other energy products,
such as oil, coal and natural gas, as well as government regulations and
policies concerning the electric utility industry.  Although global
demand began to recover in the second half of 2009, lower costs of raw materials
continued to cause decreases in manufacturing costs and the selling prices of
solar power products.




We determine the power output of our
solar cells based on their size and measured conversion efficiencies. We
determine the price per watt of our solar cells based on the prevailing market
prices when we enter into sales contracts with our customers or when our
customers place purchase orders with us, taking into account the size of the
contract or the purchase order, the strength, history and prospects of our
relationship with the customer and our costs. Most of our customers pay premiums
over the price of cells with normal conversion efficiency such as the standard
P- type cells, for our high conversion efficiency cells such as the selective
emitter solar cells, due to their higher conversion efficiency
rates.





The average selling prices of our solar
cells decreased from $3.32 per watt in 2008 to $1.36 per watt in 2009, due
primarily to decreased prices of silicon raw materials, increased manufacturing
capacity, decreased demand for solar power products in the first quarter of 2009
caused by the global economic downturn and credit crisis. If demand for solar
products decline and the supply of solar products continues to grow, the average
selling price of our solar cells will be materially and adversely
affected.  See “Item 3. Key Information—D. Risk Factors—Risks Related
to Our Company and Our Industry—Volatile market and industry trends, in
particular, the decline in demand for solar products may cause the average
selling price of our products to decline, and reduce our revenues and
profitability.” for more details.


47


Pace
of Advancement in Process Technologies




Our cell
products are priced based on the number of watts of electricity they can
generate. Process technologies advancement is important because it helps
increase conversion efficiencies of solar cells and the resultant number of
watts of electricity solar cells can generate, thereby generating higher
revenues per solar cell, and helps reduce the manufacturing cost of solar cells
per watt. As a result, solar cell manufacturers, ourselves included, are
continuously developing advanced process technology for large-scale
manufacturing.




In the
fourth quarter of 2007, we commenced commercial production of selective emitter
cells, an improved version of the P-type solar cells that most solar cell
manufacturers produce. We began pilot production of HP solar cells during the
same quarter. In December 2008, we installed four new solar cell lines for the
production of selective emitter cells. These four new lines are producing
selective emitter cells with performance similar to those from the first line
which produces selective emitter solar cells.  Hence, five of our
manufacturing lines are capable of producing high efficiency selective emitter
cells.




During
the second half of 2009, our research team has made a concerted effort to
improve the performance of our standard HP solar cells.  In addition,
we continued focusing on the development of advanced process technology for
manufacturing other new products, such as N-type solar cells. Some of our
lab-manufactured N-type solar cells had been measured by Fraunhofer ISE, and
recorded a conversion efficiency rate of 19.13%.  The Matrix cells
under development also demonstrated significant improvement during
2009.  Some of our lab-manufactured Matrix cells recorded a conversion
efficiency rate of 19.04%, as measured by Fraunhofer ISE.




Seasonality
of Our Operations




We
believe that industry demand for solar power products may be affected by
seasonality. Demand tends to be lower during the winter season from December to
February, primarily because adverse weather conditions in certain regions make
installations of solar power systems more difficult. Furthermore, as there are
fewer working days for our China-based customers during Chinese New Year
holidays, usually in January or February, our sales volumes and revenues tend to
be lower during these periods. In addition, the prices of silicon raw materials
also tend to decrease during such periods.




Overview
of Financial Results




Net
Revenues




Our net
revenues are net of value-added tax. Factors affecting our net revenues include
average selling price per watt, unit volume sold and product demand for our
solar cells. In addition to sale of solar cells, in 2009 we derived revenues
from selling silicon raw materials under our buy-and-sell arrangements with
silicon wafer manufacturers. We also outsource to third parties the
manufacturing of solar modules from our solar cells or purchase solar modules
from third parties, and sell these solar modules to our customers.




In 2007,
2008 and 2009, customers contributing 10% or more of our total net sales
accounted for approximately 41.3%, 46.3% and 30.4% of our total net revenues,
respectively. CEEG (Shanghai) Solar Science and Technology Co., Ltd., an entity
controlled by Mr. Tingxiu Lu, our chairman, contributed 19.3% of our net
revenues in 2009.




The
following table sets forth by region our total net revenues derived from sales
of our products for the periods indicated:




Year Ended December 31,2007
              
              
              2008
              
              
              2009(in thousands, except percentages)Europe:—
      Germany
              
              $
              62,314
              
              
              
              26.5
              %
              
              $
              126,860
              
              
              
              36.2
              %
              
              $
              67,120
              
              
              
              23.5
              %—
      Italy
              
              
              8,980
              
              
              
              3.8
              
              
              
              6,128
              
              
              
              1.7
              
              
              
              7,557
              
              
              
              2.7—
      Spain
              
              
              —
              
              
              
              —
              
              
              
              9,399
              
              
              
              2.7
              
              
              
              2,743
              
              
              
              1.0—
      Others
              
              
              1,803
              
              
              
              0.8
              
              
              
              51
              
              
              
              0
              
              
              
              1,783
              
              
              
              0.6Europe
      Total
              
              
              73,097
              
              
              
              31.1
              
              
              
              142,437
              
              
              
              40.6
              
              
              
              79,203
              
              
              
              27.8




48




Year Ended December 31,2007
                  
                  
                  2008
                  
                  
                  2009(in thousands, except percentages)PRC
                  
                  
                  151,058
                  
                  
                  
                  64.3
                  
                  
                  
                  196,628
                  
                  
                  
                  56.0
                  
                  
                  
                  185,177
                  
                  
                  
                  65.0South
      Africa
                  
                  
                  83
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —India
                  
                  
                  2,332
                  
                  
                  
                  1.0
                  
                  
                  
                  1,154
                  
                  
                  
                  0.3
                  
                  
                  
                  1,657
                  
                  
                  
                  0.6South
      Korea
                  
                  
                  6,419
                  
                  
                  
                  2.8
                  
                  
                  
                  10,257
                  
                  
                  
                  2.9
                  
                  
                  
                  409
                  
                  
                  
                  0.1Australia
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  11,947
                  
                  
                  
                  4.2America
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,568
                  
                  
                  
                  0.9Others
                  
                  
                  1,919
                  
                  
                  
                  0.8
                  
                  
                  
                  444
                  
                  
                  
                  0.1
                  
                  
                  
                  3,904
                  
                  
                  
                  1.4Total
      net revenues
                  
                  $
                  234,908
                  
                  
                  
                  100
                  %
                  
                  $
                  350,920
                  
                  
                  
                  100
                  %
                  
                  $
                  284,865
                  
                  
                  
                  100
                  %




Cost
of Revenues and Operating Expenses




The
following table sets forth our cost of revenues and our operating expenses as a
percentage of our total net revenues for the periods indicated.




Year Ended December 31,2007
              
              
              2008
              
              
              2009Cost
      of revenues
              
              
              92.3
              %
              
              
              95.6
              %
              
              
              94.2
              %Operating
      expenses:Selling
      expenses
              
              
              0.7
              
              
              
              1.1
              
              
              
              1.0General
      and administrative expenses
              
              
              5.8
              
              
              
              4.8
              
              
              
              8.6Research
      and development expenses
              
              
              1.1
              
              
              
              0.5
              
              
              
              1.5Total
      operating expenses
              
              
              7.6
              %
              
              
              6.4
              %
              
              
              11.1
              %




Our cost
of revenues increased in 2008 as a percentage of our total net revenues in 2008
primarily due to higher inventory write-down we recorded. Our cost of revenues
decreased slightly in 2009 as a percentage of our total net revenues in 2009
primarily due to the relatively stable prices of silicon raw materials in 2009.
In comparison with 2009, in the fourth quarter of 2008, cost of revenues
remained high as a percentage of our net revenues, because the prices of our
solar cells decreased then as a result of the reduced market demand while we
were using our raw material inventory previously purchased at higher prices and
could not take full advantage of the then reduced silicon raw material
prices.




Our
operating expenses include general and administrative expenses, selling expenses
and research and development expenses.




Our total
operating expenses as a percentage of our total net revenues was 7.6%, 6.4% and
11.1% in 2007, 2008 and 2009, respectively. Our total operating expenses
increased in 2009 as a percentage of our total net revenues primarily due to the
reserve for the proposed settlement of the 2007 shareholder class action of $1.1
million and allowance for doubtful accounts receivable of $7.3
million.


49


Cost
of Revenues




Our cost
of revenues consists primarily of:




•
            Direct
      raw materials cost. Silicon raw materials, primarily in the form of
      silicon wafers, comprise a substantial majority of our cost of revenues.
      In addition to silicon raw materials, direct raw materials involved in our
      production also include metallic paste and
  chemicals.




•
            Direct
      labor cost. Direct labor costs include salaries and benefits for
      manufacturing personnel. We expect direct labor costs to increase as we
      hire additional manufacturing personnel as we expand our
      production.




•
            Overhead.
      Overhead costs include maintenance, utilities such as electricity and
      water used in manufacturing, and other support expenses associated with
      the manufacturing.




•
            Depreciation
      and amortization of manufacturing facilities and equipment. Due to our
      capacity expansion, our depreciation and amortization expenses have
      increased. We expect depreciation to increase in absolute terms in the
      near future following the expansion of our manufacturing
      capacity.




•
            Warranty
      costs. With respect to solar cell sales made with contractual warranty
      provisions, we accrue 0.5% of our net revenues as warranty costs at the
      time revenue is recognized. Our sales contracts concluded after December
      2006 do not contain warranty provisions, which we believe is in line with
      the practice of other solar cell manufacturers in China. We do not expect
      to enter into solar cell sales contracts with warranty provisions in the
      future. We still accrue warranty costs for deliveries of solar cells under
      the contracts concluded before December 2006. With respect to solar
      modules, which are typically sold with a five-year warranty for defects in
      material and workmanship and a minimum power output warranty of up to 25
      years following the date of purchase, we accrue 1.0% of our net revenues
      generated from module sales based on our competitors’ accrual history and
      industry practice. We expect warranty costs to increase in absolute terms
      as module sales will account for a larger portion of our net revenues
      following our expansion into downstream solar power
    business.




•
            Shipping
      and handling costs. Cost of revenues also includes shipping and handling
      costs of products bought from suppliers or sold to
    customers.




General
and Administrative Expenses




General
and administrative expenses consist primarily of salaries and benefits for our
administrative and finance and human resources personnel, expenses associated
with our administrative offices, professional advisory fees and other
compliance-related costs, bad debt provision as well as depreciation of
equipment used for administrative purposes. Pursuant to PRC law, our board of
directors has the discretion to allocate a portion of our after-tax profit to
staff welfare and bonus funds, which may not be distributed to equity
owners.




General
and administrative expenses account for the largest part of our operating
expenses. In 2007, 2008 and 2009, we also recorded share-based compensation
expenses of $0.5 million, $3.2 million and $1.3 million, respectively, in
connection with the grants of share options to certain employees. Since 2007,
our general and administrative expenses increased due to higher salaries,
benefits, depreciation and other administrative costs we have incurred as a
result of the expansion of our manufacturing capacity and sales volume. In 2009,
our general and administrative expenses increased also due to the reserve for
the proposed settlement of the 2007 shareholder class action of $1.1 million and
allowance for doubtful accounts receivable of $7.3 million.




Selling
Expenses




Selling
expenses consist primarily of post-sale service expenses, sales employee
salaries, travel and entertainment expenses, freight expenses, and other sales
and marketing expenses.




We expect
that our selling expenses will increase in absolute terms in the near term as we
increase our sales efforts, hire additional sales personnel, develop new markets
and initiate additional marketing programs to establish our brand
name.


50


Research
and Development Expenses




Research
and development expenses consist primarily of cost of raw materials used in our
research and development activities, salaries and benefits for research and
development personnel, and prototype costs and depreciation of equipment related
to the design, development, testing and enhancement of our products and
manufacturing processes. We expect our research and development expenses to
increase as we purchase more raw materials to be used in our research and
development activities, and plan to hire additional personnel for the research
and development of our process technology.




Share-based
Compensation Expenses




In 2007,
2008 and 2009, we entered into option award agreements pursuant to our first
share incentive plan. Under these option award agreements, we had outstanding
options to purchase 1,609,071 ordinary shares as of December 31, 2009. We also
entered into two restricted share award agreements pursuant to our second share
incentive plan. Under these restricted share award agreements, we had an
aggregate of 799,101 outstanding restricted shares as of December 31, 2009. See
Item 6, “Directors, Senior Management and Employees—Compensation of Directors
and Executive Officers—Share Incentive Plan.” Changes in the amount of
share-based compensation will primarily affect our general and administrative
expenses, reported net income and earnings per share.




We are
required to recognize share-based compensation as compensation expense in our
statement of operations based on the fair value of equity awards on the grant
date, with the compensation expense recognized over the period in which the
recipient is required to provide service in exchange for the award (usually the
vesting period). We are also required to adopt a fair value-based method of
measuring the compensation expense related to share-based compensation. We
record share-based compensation expenses for the fair value of the options and
restricted shares at the grant date. We recognize such share-based compensation
expenses over the grant recipient’s requisite service periods.




As of
December 31, 2009, there was $1.4 million in total unrecognized compensation
expense related to unvested share-based compensation arrangements granted under
the plan, which is expected to be recognized over a weighted-average period of
1.0 years.




Taxation




Under the
current laws of the Cayman Islands and the British Virgin Islands, we and
Sunergy BVI are not subject to tax on income or capital gain. Additionally,
dividend payments made by us and Sunergy BVI are not subject to withholding tax
in those jurisdictions.




Under the
current Hong Kong Inland Revenue Ordinance, Sunergy Hong Kong is subject to Hong
Kong profit tax at a rate of 17.5% as of March 31, 2008 and 16.5% effective from
April 1, 2008 on its taxable income generated from operations in Hong Kong.
Additionally, payments of dividends by Sunergy Hong Kong to us are not subject
to any Hong Kong withholding tax.




The New
EIT Law and the New EIT Law Implementation Rules provides that enterprises
established under the laws of foreign countries or regions whose "de facto
management bodies" are located within the PRC are considered PRC resident
enterprises and will be subject to the PRC enterprise income tax at the rate of
25% on their worldwide income.  Under the New EIT Law Implementation
Rules, a "de facto management body" is defined as “establishments that carry out
substantial and overall management and control over the manufacturing and
business operations, personnel, accounting, properties, etc. of an
enterprise.”  If we are treated as PRC resident enterprises for PRC
tax purposes, we will be subject to PRC enterprise income tax on our worldwide
income at the 25% tax rate, which would have an impact on our effective tax
rate.  Additionally, under such circumstances that Sunergy Hong Kong
is also treated as a PRC resident enterprise, dividends distributed from our PRC
subsidiaries to Sunergy Hong Kong and ultimately to us could be exempt from
withholding tax, and dividends from us to our foreign investors would be subject
to a withholding tax at 10%, unless any such foreign investor’s jurisdiction of
incorporation has a tax treaty with China that provides for a reduced
withholding arrangement.


51


PRC
Enterprise Income Tax




Prior to
January 1, 2008, a foreign-invested enterprise in China was typically subject to
enterprise income tax at a statutory rate of 33%, which comprised 30% national
income tax and 3% local income tax. Sunergy Nanjing, a foreign-invested
enterprise engaged in a manufacturing business and established in Nanjing, which
is within a coastal economic zone, was entitled to a preferential enterprise
income tax rate of 24% before January 1, 2008. As a wholly foreign owned
enterprise engaged in a manufacturing business, Sunergy Nanjing was also
entitled to two years of exemption followed by three years of 50% deduction
starting from its first profitable year which was 2006.  On March 16,
2007, the National People’s Congress issued the New EIT Law, under which
foreign-invested enterprises and domestically-owned companies would be subject
to enterprise income tax at a uniform rate of 25%. On December 6, 2007, the
Congress also promulgated the New EIT Law Implementation Rules. Both the New EIT
Law and the New EIT Law Implementation Rules became effective on January 1,
2008. On December 26, 2007, State Council of China promulgated the Circular.
Under the New EIT Law, the New EIT Law Implementation Rules and the Circular,
enterprises which were established and already enjoyed preferential income tax
treatments before March 16, 2007 will continue to enjoy them (i) in the case of
preferential tax rates, for a period of five years from January 1, 2008, and the
enterprises which previously enjoy the tax rate of 24% shall be subject to the
tax rate of 25% in 2008, and (ii) in the case of preferential tax exemption or
reduction for a specified term, until the expiration of such term, or 2012,
whichever is earlier. However, the Circular also prescribes that if the above
transitional relief of enterprise income tax overlaps with the preferential
treatments provided by the New EIT Law, an enterprise may choose the more
favorable treatment, and shall not enjoy both.  The treatment cannot
be changed once it is chosen.




On April
14, 2008, the Ministry of Finance, the Ministry of Science and Technology and
the State Administration of Taxation jointly promulgated the Recognition
Measures. Pursuant to the New EIT Law, the New EIT Law Implementation Rules and
the Recognition Measures, HNTE is eligible for a preferential tax rate of 15%.
On October 21, 2008, Sunergy Nanjing obtained a HNTE certificate with a
three-year validity term, from 2008 to 2010. Therefore, Sunergy Nanjing is
eligible for a 15% preferential tax rate during above period




Based on
the Circular, the management chooses to enjoy the transitional relief (i.e.
12.5% from 2008 to 2010).  The management believes it is
more-likely-than-not to renew its HNTE status in 2011 and will be eligible for
the 15% preferential rate for the following three years from 2011 to
2013.  Therefore, the management applied the 15% income tax rate in
deferred tax calculations. If the renewal is not received for 2011 to 2013, then
the net deferred tax asset balance as of December 31, 2009 would change from the
current $4.4 million to $5.5 million. The difference would be an increase of
$1.1 million to current net earnings. Sunergy Nanjing was in a tax loss position
under PRC tax law in 2004, 2005, 2007, 2008 and 2009, and thus was not subject
to any enterprise income tax during these periods.




Sunergy
Shanghai was established in November 2007 and its applicable enterprise income
tax rate is 25%. Sunergy Shanghai did not have substantive operations and had
incurred minimal non-operating related losses in 2007, 2008 and
2009.




Critical
Accounting Policies




We
prepare financial statements in accordance with U.S. GAAP, which requires us to
make judgments, estimates and assumptions that affect (a) the reported amounts
of our assets and liabilities, (b) the disclosure of our contingent assets and
liabilities at the end of each fiscal period and (c) the reported amounts of
revenues and expenses during each fiscal period. We continually evaluate these
estimates based on our own historical experience, knowledge and assessment of
current business and other conditions, our expectations regarding the future
based on available information and reasonable assumptions, which together form
our basis for making judgments about matters that are not readily apparent from
other sources. Since the use of estimates is an integral component of the
financial reporting process, our actual results could differ from those
estimates. Some of our accounting policies require a higher degree of judgment
than others in their application.




When
reviewing our financial statements, you should consider (a) our selection of
critical accounting policies, (b) the judgment and other uncertainties affecting
the application of such policies and (c) the sensitivity of reported results to
changes in conditions and assumptions. We believe the following accounting
policies involve the most significant judgment and estimates used in the
preparation of our financial statements.




Revenue
Recognition




Sales of
solar cells and modules are recorded when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and
collectability is reasonably assured. We sell our solar products at agreed upon
prices to our customers, which reflect prevailing market prices. Our
considerations for recognizing revenue are based on the
following:


52


·
            Persuasive
      evidence that an arrangement (sales contract) exists between a willing
      customer and us that outlines the terms of the sale (including customer
      information, product specification, quantity of goods, purchase price and
      payment terms). Customers do not have any general rights of return but may
      be allowed to exchange for goods that are not defective but may not meet
      certain minor specifications such as color or sizes of the products for a
      30 to 45 day period.  We have recorded the estimated replacement
      costs, which have been immaterial for all periods as a result of the
      product exchanges in cost of revenue upon the recognition of
      revenue.




·
            Our
      price to the customer is fixed and determinable as specifically outlined
      in the sales contract.




·
            For
      customers to whom credit terms are extended, we assess a number of factors
      to determine whether collection from them is probable, including past
      transaction history with them and their credit-worthiness. All credit
      extended to customers is pre-approved by management. If we determine that
      collection is not reasonably assured, we defer the recognition of revenue
      until collection becomes reasonably assured, which is generally upon
      receipt of payment.




Warranty
Costs




Historically, some of our sales
contracts with overseas customers provided for a 10- or 20-year warranty for the
performance of our solar cells against declines in certain technical
specifications, primarily the minimum power generation capacity specified at the
time of delivery. Since the beginning of 2007, we have aborted such warranty
terms in solar cell sales contracts. We also sell our module products to
customers along with a warranty on the performance of solar module products at
certain levels of conversion efficiency for an extended period. Our solar
modules are typically sold with a 20 to 25 year warranty against specified
declines in the initial minimum power generation capacity at the time of sale.
In addition, we provided warranty for our solar modules against defects in
materials and workmanship for a period of five years from the date of sale. We,
therefore, maintain warranty reserves (recorded as accrued warranty costs) to
cover potential liabilities that could arise from these warranties. We accrue
the estimated costs of warranties at 0.5% of our solar cell sales made with
warranty provisions and 1.0% of our solar module sales, respectively, and
include that amount in our cost of revenue.Because we are a
relatively new company, we have a limited warranty claim period. We also engage
in product quality assurance programs and processes, including monitoring and
evaluating the quality of suppliers, in an effort to ensure the quality of our
products and reduce our warranty exposure. As we have not experienced
significant warranty claims to datein connection with declines of the
power generation capacity or other technical specifications of our solar cells
or solar modules, we estimate our warranty costs based on our actual
historical cost data, competitor data and academic research which are reviewed
by our quality review staff. Although we conduct quality testing and
inspection of our solar cell products, our solar cell products have not been
tested in an environment simulating the up to 20-year warranty periods.We acknowledge that such estimates are subjective, and we will continue
to analyze our claim history and the performance of our products compared to our
competitors and academic research to determine whether our accrual is adequate.
Actual warranty costs are accumulated and charged against accrued warranty
liability. Our warranty obligation will be affected not only by our product
failure rates, but also by costs incurred to repair or replace failed products
as well as any service delivery costs incurred in correcting a product failure.
If our actual product failure rates, material usage or service delivery costs
differ from our estimates, we will need to prospectively revise our estimated
warranty liability accrual rate.





Valuation
of Share-based Compensation




We record
share-based compensation expense based on the fair value of the options and
other awards on the date of grant.




In 2007,
2008 and 2009, we granted share options and restricted shares to certain of our
employees. We incurred share-based compensation expenses of $0.5 million, $3.2
million and $1.3 million for the years ended December 31, 2007, 2008 and 2009,
respectively. We used the binomial option-pricing method to determine the amount
of employee share-based compensation expenses. This approach requires us to make
assumptions on such variables as share price volatility, expected lives of
awards and discount rates.Changes in these
assumptions could significantly affect the amount of employee share-based
compensation expenses we recognize in our consolidated financial statements. See
Item 5, “—Overview of Financial Results—Share-based Compensation
Expenses.”


53




Allowance for
Doubtful Accounts





We
conduct credit evaluations of customers and generally do not require collateral
or other security from them. We establish an allowance for doubtful accounts
primarily based upon the age of the receivables and factors surrounding the
credit risk of specific customers. We generally do not require collateral or
other security interests from our customers when we grant them credit. However,
we maintain a reserve for potential credit losses and such losses have
historically been within our expectations. We raise an allowance for doubtful
accounts primarily based on the age of the receivables or prepayments and other
factors like the length of time receivables are passing due, previous loss
history and the counterparty’s current ability to fulfill its obligation. In
2009, we recorded $7.3 million allowance for doubtful accounts, primarily
attributable to the doubtful accounts in connection with our sales to a major
client of us in 2008.




With
respect to advances to suppliers, our suppliers are primarily suppliers of
silicon raw materials. We perform ongoing credit evaluations of our suppliers’
financial conditions. We generally do not require collateral or security against
advances to suppliers.




Inventories




Our inventories are stated at the lower
of cost or market value.The valuation of inventory requires us to
estimate excess and slow moving inventory. The determination of the value of
excess and slow moving inventory is based upon assumptions of future demands and
market conditions. If actual market conditions are less favorable than those
projected by management, inventory write-downs may be required. We routinely
evaluate quantities and value of our inventories in light of current market
conditions and market trends, and record write-down against the cost of
inventories for a decline in net realizable value. Inventory write-down charges
establish a new cost basis for inventory. In estimating obsolescence, we
estimate future market demand by referring to our backlog sales orders and our
historical inventory turnover ratio. We estimate sales prices for the next
quarter through our market analysis. Market conditions are subject to change and
actual consumption of inventories could differ from forecasted demand. Furthermore,
spot prices of polysilicon are primarily a result of market supply and demand.
Our management continually monitors the changes in the purchase price paid for
polysilicon, including prepayments to suppliers. Our products have a long life
cycle and obsolescence has not historically been a significant factor in the
valuation of inventories.





Income
Taxes




As required by Accounting Standards
Codification 740, “Income Taxes,” we periodically evaluate the likelihood of the
realization of deferred tax assets, and reduce the carrying amount of these
deferred tax assets by a valuation allowance to the extent we believe a portion
will not be realized. We consider many factors when assessing the likelihood of
future realization of our deferred tax assets, including our recent cumulative
operating experience by taxing jurisdiction, expectations of future taxable
income, the carry-forward periods available to us for tax reporting purposes,
and other relevant factors. Deferred income taxes are recognized for temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements, net operating loss carry forwards and
credits by applying enacted tax rates applicable to future years. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more-likely-than-not that some portion or all of the deferred tax assets
will not be realized. Current income taxes are provided for in accordance with
the laws of the relevant taxing authorities. On October 21, 2008, Sunergy
Nanjing obtained a HNTE certificate with a three-year validity term, from 2008
to 2010. The management believes that more-likely-than-not Sunergy Nanjing will
be able to renew its HNTE status in 2011 and will be eligible for the 15%
preferential rate for the following three years from 2011 to
2013.  Therefore, management applied the 15% income tax rate in
deferred tax calculations. If the renewal is not received for 2011 to 2013, then
the net deferred tax asset balance as of December 31, 2009 would change from the
current $4.4 million to $5.5 million. The difference would be an increase of
$1.1 million to current net earnings. The components of the deferred tax assets
and liabilities are individually classified as current and non-current based on
the characteristics of the underlying assets and liabilities, or the expected
timing of their use when they do not relate to a specific asset or
liability.


54


Impairment
of Long-lived Assets




We evaluate our long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When these events occur, we
measure 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, we recognize an impairment loss
based on the fair value of the assets. The determination of fair value of the
long lived assets acquired involves certain judgments and estimates. These
judgments can include, but are not limited to, the cash flows that an asset is
expected to generate in the future. This analysis also relies on a number of
factors, including changes in strategic direction, business plans, regulatory
developments, economic and budget projections, technological improvements, and
operating results. Any write-downs would be treated as permanent reductions in
the carrying amounts of the assets and an operating loss would be recognized. As
of December 31, 2009, we identified certain long-lived assets that were no
longer actively used due to obsolete technology or poor physical conditions and
recorded a loss of $0.8 million on such assets.




Derivative
Financial Instruments




One of
our long-term supply contracts provided that the purchase price of the wafer to
be acquired was denominated in U.S. dollars, which was not the functional
currency of either of the contracting parties. Accordingly, the contract
contained an embedded foreign currency forward contract, which was required to
be bifurcated and accounted for at fair value. Changes in fair value are
recorded in the consolidated statements of operations.





Because
of the monetary controls imposed by the PRC, the determination of the fair value
of a long-term foreign currency derivative requires the input of highly
subjective assumptions, including estimates of forward foreign exchange rates
between the U.S. dollar and Renminbi.





In calculating the fair value of the
embedded derivatives, we (i) estimated the monthly purchases and the
corresponding payments, based on historical usage rates, (ii) applied the
estimated exchange forward rates between the U.S. dollar and Renminbi associated
with each of the estimated monthly payment dates from (i) above, and
(iii) applied an appropriate discount rate to the amounts obtained in
(ii) above. We estimate the on-shore U.S. dollar / Renminbi forward
exchange rates based on the Tokyo Composite rates. The adopted discount rates
represent the yields of Renminbi PRC government bonds with comparable
terms.




In 2008, we recorded a loss on the
change in fair value of the embedded derivatives related to the supply agreement
of $7.6 million, which was included in the line item “Changes
in fair value of derivative” in the consolidated statements of
operations.




As of
December 31, 2009, the derivative liability related to this long term
supply contract was reversed to zero as a result of the termination of this long
term supply contract in September 2009, resulting in a gain on change in fair
value of derivative of $7.6 million recorded in 2009.




Results
of Operations




The
following table sets forth a summary, for the periods indicated, of our
consolidated results of operations, with each item expressed as a percentage of
our total net revenues. Our limited operating history makes the prediction of
future operating results very difficult. Period-to-period comparisons of our
operating results should not be relied upon as indicative of future performance.
Item 3 “Key Information—Risk Factors—Risks Related to Our Company and Our
Industry—Our limited operating history may not serve as an adequate measure of
our future prospects and results of operations.”




Year Ended
      December 31,2007
              
              
              2008
              
              
              2009(in
      thousands, except percentages)Net
      revenues
              
              $
              234,908
              
              
              
              100.0
              %
              
              $
              350,920
              
              
              
              100.0
              %
              
              $
              284,865
              
              
              
              100.0
              %Cost
      of revenues
              
              
              (216,881
              )
              
              
              (92.3
              )
              
              
              (335,454
              )
              
              
              (95.6
              )
              
              
              (268,252
              )
              
              
              (94.2
              )Gross
      profit
              
              
              18,027
              
              
              
              7.7
              
              
              
              15,466
              
              
              
              4.4
              
              
              
              16,613
              
              
              
              5.8Operating
      expensesSelling
      expenses
              
              
              (1,644
              )
              
              
              (0.7
              )
              
              
              (3,866
              )
              
              
              (1.1
              )
              
              
              (2,920
              )
              
              
              (1.0
              )General
      and administrative expenses
              
              
              (13,664
              )
              
              
              (5.8
              )
              
              
              (16,779
              )
              
              
              (4.8
              )
              
              
              (24,517
              )
              
              
              (8.6
              )Research
      and development expenses
              
              
              (2,555
              )
              
              
              (1.1
              )
              
              
              (1,871
              )
              
              
              (0.5
              )
              
              
              (4,382
              )
              
              
              (1.5
              )Total
      operating expenses
              
              
              (17,863
              )
              
              
              (7.6
              )
              
              
              (22,516
              )
              
              
              (6.4
              )
              
              
              (31,819
              )
              
              
              (11.1
              )Income
      (loss) from operations
              
              
              164
              
              
              
              0.1
              
              
              
              (7,050
              )
              
              
              (2.0
              )
              
              
              (15,206
              )
              
              
              (5.3
              )




55




Year Ended
      December 31,2007
              
              
              2008
              
              
              2009(in
      thousands, except percentages)Interest
      expense
              
              
              (7,394
              )
              
              
              (3.2
              )
              
              
              (8,069
              )
              
              
              (2.3
              )
              
              
              (7,296
              )
              
              
              (2.
      6
              )Interest
      income
              
              
              1,577
              
              
              
              0.7
              
              
              
              1,665
              
              
              
              0.5
              
              
              
              1,633
              
              
              
              0.6Changes
      in fair value of derivatives
              
              
              —
              
              
              
              —
              
              
              
              (9,864
              )
              
              
              (2.8
              )
              
              
              8,020
              
              
              
              2.8Other
      income (expense), net
              
              
              93
              
              
              
              0.0
              
              
              
              (2,268
              )
              
              
              (0.6
              )
              
              
              2,100
              
              
              
              0.7(Loss)
      income before income taxes
              
              
              (5,560
              )
              
              
              (2.4
              )
              
              
              (25,586
              )
              
              
              (7.3
              )
              
              
              (10,749
              )
              
              
              (3.8
              )Tax
      benefit
              
              
              705
              
              
              
              0.3
              
              
              
              2,648
              
              
              
              0.8
              
              
              
              903
              
              
              
              0.3Net
      (loss) income
              
              $
              (4,855
              )
              
              
              (2.1
              )
              
              
              (22,938
              )
              
              
              (6.5
              )
              
              
              (9,846
              )
              
              
              (3.5
              )Net
      loss attributable to China Sunergy Co., Ltd.
              
              
              (4,855
              )
              
              
              (2.1
              )
              
              
              (22,938
              )
              
              
              (6.5
              )
              
              
              (9,846
              )
              
              
              (3.5
              )Dividend
      on Series A redeemable convertible preferred shares
              
              
              (155
              )
              
              
              (0.1
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Dividend
      on Series B redeemable convertible preferred shares
              
              
              (330
              )
              
              
              (0.1
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Dividend
      on Series C redeemable convertible preferred shares
              
              
              (233
              )
              
              
              (0.1
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Net
      loss attributable to China Sunergy Co., Ltd. ordinary
      shareholders
              
              $
              (5,573
              )
              
              
              (2.4
              )%
              
              $
              22,938
              
              
              
              (6.5
              )
      %
              
              
              (9,846
              )
              
              
              (3.5
              )%




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




Net
Revenues. Our total net revenues decreased by 18.8%, from $350.9 million
in 2008 to $284.9 million in 2009. Our net revenues decreased primarily due to a
decrease in the average selling price of the solar power products we sold as a
result of the impact on pricing caused by the macroeconomic conditions and
over-supply of solar power products experienced during 2009. Our average selling
price for solar cells decreased from $3.32 per watt in 2008 to $1.36 per watt in
2009.




In 2009,
we shipped 194.0 MW of solar power products, including 181.5 MW of solar cells
sold, 4.2 MW of solar cells processed under OEM arrangements and 8.3 MW of
modules sold, compared to sales of 107.2  MW of solar power products,
including 4.2 MW of solar cells processed under OEM arrangements and 2.6 MW of
solar modules in 2008. The increase in our sales of solar power products was due
primarily to the increase of our available manufacturing capacity and production
output.




Cost of
Revenues. Our cost of revenues decreased by $67.2 million from $335.5
million in 2008 to $268.3 million in 2009. Our cost of revenues decreased
primarily due to the reduced prices of silicon raw materials as a result of the
industry wide over supply of polysilicon.




Silicon
raw materials, primarily silicon wafers, accounted for approximately 76.6% of
our cost of revenue in 2009 compared to 90.2% in 2008 due primarily to the
declining wafer spot price in 2009. As a percentage of our total net revenues,
our cost of revenues decreased from 95.6% in 2008 to 94.2% in 2009.




Gross
Profit. As a result of the foregoing, our gross profit in 2009 increased
by $1.1 million to $16.6 million, from $15.5 million in 2008. Our gross margin
increased from 4.4% in 2008 to 5.8% in 2009.




Operating
Expenses. Our operating expenses increased by $9.3 million, from $22.5
million in 2008 to $31.8 million in 2009. The increase in operating expenses was
due to increases in general and administrative expenses and research and
development expenses. As a percentage of our total net revenues, operating
expenses increased from 6.4% in 2008 to 11.2% in 2009.


56


General and administrative
expenses. Our general and administrative expenses increased by $7.7
million, from $16.8 million in 2008 to $24.5 million in 2009. The increase in
our general and administrative expenses was due primarily to the reserve for the
proposed settlement of the 2007 shareholder class action of $1.1 million and
allowance for doubtful accounts receivable of $7.3 million, offset in part by a
decrease in share based compensation expenses from $3.2 million in 2008 to $1.3
million in 2009.




Selling expenses.Our selling
expenses decreased by $1.0 million from $3.9 million in 2008 to $2.9 million in
2009. The relatively high selling expenses in 2008 were due primarily to
compensation we made to certain customer in connection with the quality
deficiencies of our solar cells. Selling expenses as a percentage of net
revenues decreased slightly from 1.1% in 2008 to 1.0% in 2009.




Research and development expenses.Research and development expenses increased by $2.5 million from $1.9
million in 2008 to $4.4 million in 2009. The increase in research and
development expenses was due primarily to our purchase more raw materials used
in our research and development activities, and hiring of additional personnel
for the research and development of our process technology.




Interest Expense.Our interest expenses decreased from $8.1 million in 2008 to $7.3 million
in 2009. The decrease was due primarily to a decrease in average interest rate
of our short-term bank borrowings.




Interest
Income. Our interest income decreased slightly from $1.7 million in 2008
to $1.6 million in 2009, due primarily to a decrease in average interest rate of
our bank deposits.




Change in Fair
Value of Derivative.  In 2009, we had a gain on the change in
fair value of derivative of $8.0 million, compared to a loss on the change in
fair value of derivative of $9.9 million in 2008.  The gain was mainly
attributable to the termination of the embedded foreign currency derivative
instruments in connection with the termination of one of our long term supply
contract in September 2009. See“—Critical Accounting Policies—Derivative
Financial Instruments” for more details.




Net Other Income
(Expense). In June 2009, we conducted open market repurchase of $4.0
million aggregate principal amount of the convertible senior notes for a total
cash consideration of $1.8 million, compared to our repurchase of $6.5 million
aggregate principal amount of the convertible senior notes for a total cash
consideration of $2.0 million during the fourth quarter of 2008. We recorded the
gain of $2.2 million from the repurchases as other income in our consolidated
income statement, compared to a gain of $4.5 million in 2008.




In 2009,
we recorded net other income of $2.1 million, due primarily to the above gain of
$2.2 million from the repurchases of the convertible senior notes, which was
partially offset by the foreign exchange loss of $0.5 million in the same year.
In 2008, we recorded net other expense of $2.3 million, due primarily to the
gain of $4.5 million from the repurchases of the convertible senior notes, which
was offset by the foreign exchange loss of $6.9 million in the same year as a
result of devaluation of Euro against Renminbi during 2008.




Net Income
(Loss).As a result of the foregoing, we incurred a net loss of $9.8
million in 2009, compared to net loss of $22.9 million in 2008, because the
business conditions have been improving from the second quarter of
2009.




Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007




Net
Revenues. Our total net revenues increased by 49.4%, from $234.9 million
in 2007 to $350.9 million in 2008. Our net revenues increased primarily due to
an increase in the volume of the solar power products we sold.




In 2008,
we shipped 107.2  MW of solar power products, including 4.2 MW of
solar cells processed under OEM arrangements and 2.6 MW of solar modules,
compared to sales of 74.0 MW of solar power products, including 2.4 MW of solar
cells processed under OEM arrangements and 1.6 MW of solar modules in 2007. The
increase in our sales of solar power products was due to the expansion of our
manufacturing capacity and production output. Our average selling price
increased from $2.92 per watt in 2007 to $3.32 per watt in 2008 due primarily to
an increase in the average selling price of our solar cells in the first three
quarters of 2008, which was offset by a decrease in the average selling price of
our solar cells in the fourth quarter of 2008 as a result of weaken demand
caused by global economic downturn and credit market crisis.


57


Cost of
Revenues. Our cost of revenues increased by $118.6 million, from $216.9
million in 2007 to $335.5 million in 2008. Our cost of revenues increased
primarily due to increases in expenditures in silicon raw materials as a result
of the rapid expansion of production. The increase in our cost of revenues was
also impacted by the rising prices of silicon raw materials in the first eight
months of 2008 due to the industry-wide shortage of polysilicon, partially
offset by reduction in silicon raw material costs as a result of improved market
supply conditions in the fourth quarter of 2008. In the last quarter of 2008,
our cost of revenues decreased primarily due to significant reduction in silicon
raw material costs as a result of improved market supply conditions, offset by a
non-cash inventory provision of $10.6 million based on a revaluation of our
silicon inventory as a result of market price declines.




Silicon
raw materials, primarily silicon wafers, accounted for 90.2% of our cost of
revenue in 2008 compared to 89.9% in 2007. As a percentage of our total net
revenues, our cost of revenues increased from 92.3% in 2007 to 95.6% in
2008.




Gross
Profit. As a result of the foregoing, our gross profit in 2008 decreased
by $2.5 million to $15.5 million, from $18.0 million in 2007. Our gross margin
decreased from 7.7% in 2007 to 4.4% in 2008.




Operating
Expenses. Our operating expenses increased by $4.6 million, from $17.9
million in 2007 to $22.5 million in 2008. The increase in operating expenses was
due to increases in general and administrative expenses and selling expenses. As
a percentage of our total net revenues, operating expenses decreased from 7.6%
in 2007 to 6.4% in 2008.




General and administrative
expenses. Our general and administrative expenses increased by $3.1
million, from $13.7 million in 2007 to $16.8 million in 2008. The increase in
our general and administrative expenses was due primarily to increases in
share-based compensation expenses from $0.5 million in 2007 to $3.2 million in
2008 in connection with the grants of share options and restricted shares to
certain employees, and compliance related consulting and professional fees from
$0.4 million in 2007 to $1.3 million in 2008, offset in part by a decrease in
bad debt provision from $1.1 million in 2007 to a reverse of bad debt provision
of $76,000 in 2008.




Selling expenses.Our selling
expenses increased by $2.3 million from $1.6 million in 2007 to $3.9 million in
2008, due primarily to compensation we made to certain customer in connection
with the quality deficiencies of our solar cells, as well as increases in sales
services expenses and advertising expenses associated with growing our solar
module business and increased marketing efforts and overseas expansion. With the
growth of our net revenues, selling expenses as a percentage of net revenues
increased from 0.7% in 2007 to 1.1% in 2008.




Research and development expenses.Research and development expenses decreased by $0.7 million from $2.6
million in 2007 to $1.9 million in 2008. The decrease in research and
development expenses was due primarily to a decrease in costs of raw materials
used in our research and development activities.




Interest Expense.Our interest expenses increased from $7.4 million in 2007 to $8.1 million
in 2008. The increase was due to the interests accrued on the convertible senior
notes offered in July 2008, the offering expenses of the convertible senior
notes offerings amortized in 2008, and the expenses associated with the open
market repurchases of the convertible senior notes during the fourth quarter of
2008, offset in part by the interest cost capitalized in respect of construction
of new facilities in 2008.




Interest
Income. Our interest income slightly increased from $1.6 million in 2007
to $1.7 million in 2008, due primarily to an increase in our cash balances after
the completion of our convertible senior notes offerings in July
2008.




Change in Fair
Value of Derivative.  In 2008, we had a loss on the change in
fair value of derivative of $9.9 million, compared to nil in
2007.  The loss reflects the change in the fair value of an embedded
foreign currency derivative in one of our long-term raw material supply
contracts, and the change in fair value of our forward foreign currency exchange
contract entered into in the fourth quarter of 2008. See“—Critical Accounting
Policies—Derivative Financial Instruments” for more details.




Net Other Income
(Expense). During the fourth quarter of 2008, we conducted open market
repurchases of the convertible senior notes, and through December 31, 2008, we
repurchased $6.5 million aggregate principal amount of the convertible senior
notes for a total cash consideration of $2.0 million. We recorded the gain of
$4.5 million from the repurchases as other income in our consolidated income
statement.




In 2008,
we recorded net other expense of $2.3 million, due primarily to the gain of $4.5
million from the repurchases of the convertible senior notes, which was offset
by the foreign exchange loss of $6.9 million in the same year as a result of
devaluation of Euro against Renminbi during 2008. In 2007, we recorded net other
income of $93,000.


58




Net Income
(Loss). As a result of the foregoing, we incurred a net loss of $22.9
million in 2008, compared to net loss of $4.9 million in 2007.




B.
            Liquidity and Capital
      Resources




Cash
Flows and Working Capital




To date,
we have financed our operations primarily through cash flows from equity
contributions by our shareholders, operations, short-term borrowings, and
proceeds from our convertible senior notes offering in July 2008.




In July
2008, we completed an offering of $54.5 million aggregate principal amount of
4.75% convertible senior notes. The notes are convertible at any time prior to
the close of business on the third business day immediately preceding the
maturity date, unless previously redeemed, at the option of the holders into our
ADSs at a conversion price of $12.30 per ADS, subject to certain adjustments. In
connection with the convertible senior notes offering, we also offered 4,431,000
ADSs in an ADS borrow facility.  During the fourth quarter of 2008, we
conducted open market repurchases of the convertible senior notes, and through
December 31, 2008, we repurchased $6.5 million aggregate principal amount of the
convertible senior notes for a total cash consideration of $2.0 million. In June
2009, we conducted open market repurchases of $4.0 million aggregate principal
amount of the convertible senior notes for a total cash consideration of $1.8
million.




As of
December 31, 2007, 2008 and 2009, we had $$60.5 million, $94.8 million and
$123.9 million, respectively, in cash and cash equivalents, $121.8 million,
$97.3 million and $102.5 million, respectively, in outstanding borrowings. Our
cash and cash equivalents primarily consist of cash on hand and demand deposits
placed with banks. As of December 31, 2007, 2008 and 2009, $121.8 million, $97.3
million and $102.5 million, respectively, of our outstanding borrowings were due
within one year. These borrowings expire at various times throughout the year.
Our short-term borrowings outstanding as of December 31, 2007, 2008 and 2009
bore an average interest rate of 6.27%, 7.42% and 5.62%, respectively. We did
not have any long-term borrowings as of December 31, 2007, 2008 and 2009. We
have historically been able to repay our borrowings as they became due from
capital contributions from our shareholders, proceeds from short-term and
long-term borrowings and note offering, and our operating cash flows. See Item
3, “Key Information—Risk Factors—Risks Related to Our Company and Our
Industry—We have significant outstanding bank borrowings, and we may not be able
to arrange adequate financing when they mature or may encounter other
difficulties in maintaining liquidity.”




As of
December 31, 2009, approximately $8.8 million of the short-term bank borrowings
have been secured by the pledge of our raw materials and the guarantee by Mr.
Tingxiu Lu, our chairman. The remaining short-term borrowings have been
guaranteed by Mr. Tingxiu Lu, CEEG and Jiangsu CEEG Electrical Equipment
Manufacturing Co., Ltd., both controlled by Mr. Lu. In an agreement between
Sunergy Nanjing and CEEG dated December 18, 2006, CEEG had undertaken to
guarantee the bank borrowings of Sunergy Nanjing for up to RMB1 billion, subject
to adjustment in the event of the material change of CEEG’s credit or operation
status, for one year after our initial public offering. In May 2008, Sunergy
Nanjing and CEEG signed an agreement to further extend the term of the above
agreement to May 16, 2010. In April 2010, Sunergy Nanjing and CEEG further
extended the term of this agreement to May 31, 2011.




Historically,
we have significant working capital commitments because suppliers of silicon
wafers and other silicon-based raw materials require us to make prepayments in
advance of shipment. Due to the industry-wide shortage of silicon raw materials
in the past several years, working capital and access to financings for the
purchasing of silicon raw materials were critical to growing our business. Our
advances to suppliers were $79.9 million as of December 31, 2007. However, due
to the relative oversupply of polysilicon, prepayment as a percentage of the
entire contract has been reducing. In 2009, most of our suppliers granted us
credit terms under their contracts with us. Our advances to suppliers decreased
significantly to $0.2 million as of December 31, 2009 from $7.3 million as of
December 31, 2008. Depending on the supply and demand situation, going forward,
our purchases of silicon raw materials may continue to require us to make
certain working capital commitments from time to time as we expand our
production.




Inventories,
one of the principal components of our current assets, increased from $56.1
million as of December 31, 2007 to $59.1 million as of December 31, 2008, due to
increased production volume, partially offset by an inventory provision of $11.8
million based on a revaluation of our silicon inventory as a result of market
price declines. Inventories decreased to $22.6 million as of December 31, 2009
due to the quickened asset turnover speed and our efforts to lower the inventory
level to minimize the price fluctuation risk.


59




We
generally require customers to make prepayment before delivery. However,
depending on their credit history with us, we historically granted our large
customers credit terms of 30 to 45 days. Our accounts receivable increased from
$8.9 million as of December 31, 2008 to $15.3 million as of December 31, 2009.
The increase in our accounts receivable was primarily due to the relatively low
shipment in 2008, especially in the fourth quarter of 2008, when the global
solar power market demand decreased rapidly, as well as longer credit term we
granted to some of our customers in 2009 as compared to 2008 for purpose of
retaining the existing clients and attracting new clients. Our accounts
receivable significantly decreased from $26.8 million as of December 31, 2007 to
$8.9 million as of December 31, 2008. The decrease in our accounts receivable
was primarily due to payment we received for deliveries previously
made.




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




Year Ended December 31,2007
                
                
                2008
                
                
                2009(in thousands)Net
      cash used in or generated from operating activities
                
                $
                (62,768
                )
                
                $
                91,954
                
                
                $
                28,965Net
      cash used in investing activities
                
                
                (35,272
                )
                
                
                (88,244
                )
                
                
                (3,140
                )Net
      cash provided by financing activities
                
                
                135,033
                
                
                
                15,899
                
                
                
                2,978Net
      increase in cash and cash equivalents
                
                
                45,708
                
                
                
                34,342
                
                
                
                29,055Cash
      and cash equivalents at the beginning of the year
                
                
                14,750
                
                
                
                60,458
                
                
                
                94,800Cash
      and cash equivalents at the end of the year
                
                $
                60,458
                
                
                $
                94,
      800
                
                
                $
                123,855




Operating
Activities




Operating activities during the year
ended December 31, 2009 provided $29.0 million of cash inflow in 2009. Operating
cash inflows are largely attributable to revenues derived from the sales of our
solar power products. Operating cash outflows are largely attributable to
recurring expenditures for raw materials, labor, administration, marketing, and
other activities. Changes in the components of our working capital also impact
cash flow from operating activities. For the year ended December 31, 2009, our
business generated substantial cash inflow as we recorded net revenue of $284.9
million. Our cost of revenues and operating expenses, after deducting non-cash
operating items, decreased by 17.0% from $337.2 million in 2008 to $279.8
million in 2009. We had a net operating cash inflow in working capital of $27.7
million for the year ended December 31, 2009. The cash inflow in working capital
was primarily due to a significant decrease in inventories due to a decreased
inventory level and a reduced average price of our inventory, a decrease in
prepaid expenses and other current assets, a decrease in advances to suppliers
as a result of the improved silicon raw material supply conditions, an increase
in accounts payable due to increased payment periods in connection with the
purchases of silicon raw materials, partially offset by an increase in amounts
due from related parties and accounts receivables due to the longer credit term
we granted to our customers in respect of sales of our products.





Operating activities during the year
ended December 31, 2008 provided $92.0 million of cash inflow in 2008. For the
year ended December 31, 2008, our growing business generated substantial cash
inflow as we increased net revenues by 49.4% from $234.9 million in 2007 to
$350.9 million in 2008. Our cost of revenues and operating expenses, after
deducting non-cash operating items which included inventory write-down of $11.8
million, increased by 48.5% from $227.1 million in 2007 to $337.2 million in
2008. We had a net operating cash inflow in working capital of $88.0 million for
the year ended December 31, 2008. The cash inflow in working capital was
primarily due to a significant decrease in advances to suppliers as a result of
improved silicon raw material supply conditions, a decrease in accounts
receivable as we received payment for deliveries previously made, an increase in
accounts payable due to increased payment periods in connection with the
purchases of silicon raw materials, partially offset by an increase in
inventories as a result of increased requirement for more silicon raw materials
in line with the expansion of production capacity, and a decrease in advances
from customers as we lowered the prepayment ratio and not requesting prepayment
under several sales contracts.





Net cash
used in operating activities amounted to $62.8 million in 2007. Net cash used in
operating activities in 2007 was mainly attributable to a significant increase
in advances to suppliers, an increase in prepaid value-added-tax expenses and an
increase in inventories primarily due to our expanded manufacturing capacity and
the resultant requirement for more silicon raw materials. However, our net cash
used in operating activities in 2007 was partly offset by a decrease in accounts
receivable due to payment we received for deliveries previously made and the
shorter credit term we granted to our customers in 2007 as compared to
2006.


60




Investing
Activities




Net cash
used in investing activities in 2009 was $3.1 million, as compared to $88.2
million and $35.3 million in 2008 and 2007, respectively. Net cash used in
investing activities in 2009 was primarily attributable to our purchases of
property, plant and equipment in the amount of $9.9 million, partly offset by a
decrease in restricted cash of $6.7 million in connection with the release of
certain promissory note facilities.  Net cash used in investing
activities in 2008 was primarily attributable to our purchases of property,
plant and equipment in the amount of $44.1 million in connection with the
expansion of our solar cell manufacturing lines, as well as an increase in
restricted cash of $38.9 million in connection with deposit with banks for
securing letter of credit and promissory note facilities for procurement of
silicon raw materials. Net cash used in investing activities in 2007 was
primarily due to our purchases of property, plant and equipment in the amount of
$15.6 million in connection with the expansion of our solar cell manufacturing
lines, as well as an increase in restricted cash of $18.5 million in connection
with deposit of US dollars as security for our RMB loans.




Financing
Activities




Net cash
provided by financing activities was $3.0 million in 2009, primarily
attributable to proceeds from short-term borrowings in the amount of $131.0
million, partly offset by repayment of bank borrowing in the amount of $125.9
million. Net cash provided by financing activities was $15.9 million in 2008,
primarily attributable to proceeds from short-term borrowings in the amount of
$142.5 million and proceeds from our issuance of convertible senior notes in the
amount of $54.5 million, partly offset by repayment of bank borrowing in the
amount of $175.1 million. Net cash provided by financing activities was $135.0
million in 2007, primarily attributable to proceeds from short-term borrowings
in the amount of $168.0 million and net proceeds of $95.9 million received from
our initial public offering.




We
believe that our current cash, cash equivalents, short-term borrowings, proceeds
from our convertible senior notes offering in July 2008 and anticipated cash
flow from operations will be sufficient to meet our anticipated cash needs,
including our cash needs for working capital and capital expenditures for at
least the next 12 months. We may, however, require additional cash due to
changing business conditions or other future developments, including any
investments or acquisitions we may decide to pursue.  If our existing
cash is insufficient to meet our requirements, we may seek to sell additional
equity securities, debt securities or borrow from banks.  However, any
future financial downturn may significantly restrict our ability to obtain
financing in the capital markets or from financial
institutions.   Furthermore, we cannot assure you that financing
will be available in the amounts we need or on terms acceptable to us, if at
all. The sale of additional equity securities, including convertible debt
securities, would dilute our earnings per share. The incurrence of debt would
divert cash for working capital and capital expenditures to service debt
obligations and could result in operating and financial covenants that restrict
our operations and our ability to pay dividends to our
shareholders.




Capital
Expenditures




We
incurred capital expenditures of $16.8 million, $49.3 million and $9.9 million,
in 2007, 2008 and 2009, respectively. Our capital expenditures have been used
primarily to build our plant, and purchase equipment and land use right for our
solar cell manufacturing lines. We estimate that our capital expenditures will
be approximately $20 million to $30 million in 2010, and will be used primarily
to expand our solar cell manufacturing lines and modify our existing solar cell
manufacturing lines.




C.           Research and
Development




Our
senior management team heads our research and development efforts and sets
strategic directions for the advancement of our products and manufacturing
processes. Dr. Jianhua Zhao, our vice chairman and chief technology officer, and
Dr. Aihua Wang, our vice president are all experienced solar power researchers.
Under their guidance, our research and development plans include the following
areas:


61


•
            Development
      of solar cell structures. We commenced commercial mass production of
      selective emitter cells, an improved version of P-type solar cells that
      most solar cell manufacturers produce, by using monocrystalline wafers in
      the fourth quarter of 2007. In December 2008, we installed four new solar
      cell lines for the production of selective emitter cells. These new lines
      are producing selective emitter solar cells with performance similar to
      those from the first line for selective emitter cells.  Hence,
      as of the date of this annual report, five manufacturing lines out of the
      total 10 lines are capable of producing high efficiency selective emitter
      cells.  In addition, we are developing Matrix cells on standard
      P-type silicon wafers, for mass production in the future. The Matrix cells
      under development demonstrated significant improvement during
      2009.  Some of our lab-manufactured Matrix cells recorded a
      conversion efficiency rate of 19.04% as measured by Fraunhofer
      ISE.




•
            Development
      of the manufacturing process for N-type solar cells. We also focus our
      research and development efforts on the process technology of N-type solar
      cells. Based on Dr. Zhao and Dr. Wang’s previous experience working with
      N-type solar cells, including developing what were the most efficient
      N-type solar cells in the world, we have successfully conducted research
      and a large number of experiments on solving the technical problems
      associated with manufacturing N-type solar cells. In 2009, some of our
      lab-manufactured N-type solar cells recorded a conversion efficiency rate
      of 19.13% as measured by Fraunhofer
ISE.




•
            Increase
      our solar cell manufacturing efficiency and reduce the manufacturing
      costs. During the second half of 2009, our research team has made
      substantial efforts to improve the performance of our standard HP solar
      cells.  We also made effort in continuously optimizing the
      processing parameters and conditions for each manufacturing step to
      streamline our manufacturing process and reduce the manufacturing costs.
      In the first quarter of 2009, three of the four HP solar cell
      manufacturing lines were refurnished, enabling multicrystalline wafers to
      be used in these lines. This provides us with more flexibility in both the
      procurement of raw materials and product offerings. We are also working
      collaboratively with metallic paste manufacturers to reduce the paste used
      for our manufacturing without affecting solar cell
      performance.




We
believe that the continual improvement of our technology is vital to maintaining
our long-term competitiveness. Therefore, we have established our own solar
power research center and have installed an experimental manufacturing line
dedicated to our research and development.




To
further leverage our internal advanced research and development capability, we
have established cooperative relationships with several universities and
institutions in China, including Nanjing University and Southeast University,
each a leading science and engineering university in China. We have also entered
into cooperation agreement with CEEG (Nanjing) Semiconductor Co., Ltd., an
entity controlled by our chairman, and Nanjing University of Aeronautics and
Astronautics, one of the leading science and engineering universities in China,
to jointly develop solar wafer cutting and texture technology. In addition, we
have also entered into cooperation agreement with Intelume Laser Systems
(Shenzhen) Co.,Ltd., a China based laser system development Company, to jointly
develop solar cells laser edge isolation equipment.  We believe our
collaborative efforts with these institutions have kept us apprised of the
latest industry trends and developments, helped implement our own innovation
initiatives and will continue to contribute to our technological
advancement.




In
addition, several government authorities in China, including State Development
and Reform Commission, Ministry of Science and Technology, Ministry of Finance
and Jiangsu Science and Technology Department, have provided us or committed to
provide us with grants for our research in solar power technologies. Jiangsu
Science and Technology Department also recognized our research and development
capability by establishing the photovoltaic engineering technology research
center in our company, which has passed the acceptance of Jiangsu Science and
Technology Department in August 2009. We have invited solar power experts from
external research institutes to form the expert commission for such research
center.




Our gross
expenditures on research and development were $2.6 million, $1.9 million and
$4.4 million in 2007, 2008 and 2009, respectively.




D.           Trend
Information




Other
than as disclosed elsewhere in this annual report, we are not aware of any
trends, uncertainties, demands, commitments or events since January 1, 2009 that
are reasonably likely to have a material effect on our net revenues, income,
profitability, liquidity or capital resources, or that caused the disclosed
financial information to be not necessarily indicative of future operating
results or financial conditions.


62


E.           Off-balance Sheet
Commitments and Arrangements




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




F.           Contractual Obligations and
Commercial Commitments




The
following table sets forth our contractual obligations and commercial
commitments as of December 31, 2009:




Payment Due by PeriodTotal
                
                
                Less than
                  1 Year
                
                
                1-3 Years
                
                
                3-5 Years
                
                
                More than
                  5 Years(in
      thousands)Operating
      lease obligations
                
                $
                660
                
                
                $
                237
                
                
                $
                210
                
                
                $
                53
                
                
                $
                160Purchase
      obligations(1)
                
                $
                2,743
                
                
                $
                2,743
                
                
                
                —
                
                
                
                —
                
                
                
                —Convertible
      senior notes(2)
                
                $
                51,228
                
                
                $
                2,090
                
                
                $
                4,180
                
                
                $
                44,958
                
                
                
                —Total
                
                $
                54,631
                
                
                $
                5,070
                
                
                $
                4,390
                
                
                $
                45,011
                
                
                $
                160







(1)
            Includes
      commitments to purchase production equipment in the amount of $2.7
      million. Other than the contractual obligations and commercial commitments
      set forth above, we did not have any other material long-term debt
      obligations, operating lease obligations, purchase obligations or other
      material long-term liabilities as of December 31, 2009. This table does
      not reflect our short-term debt obligations, which as of December 31, 2009
      totaled $102.5 million.




(2)
            Assumes
      redemption of $44.0 million
      aggregate principal amount of 4.75% convertible senior notes due June
      2013. Assumes none of the convertible senior notes have been converted
      into ordinary shares. This figure also includes interest payable until
      June 15, 2013.




G.
            Safe
      Harbor




This
annual report on Form 20-F contains statements of a forward-looking nature.
These statements relate to events involving known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from those expressed or implied by
the forward-looking statements. These statements are made under the “safe
harbor” provisions of the Section 27A of the Exchange Act. Whenever you read a
statement that is not simply a statement of historical fact (such as when we
describe what we “believe,” “expect” or “anticipate” will occur, and other
similar statements), you must remember that our expectations may not
materialize, even though we believe that they are reasonable.




Whether
actual results will conform with our expectations and predictions is subject to
a number of risks and uncertainties, many of which are beyond our control, and
reflect future business decisions that are subject to change. Some of the
assumptions, future results and levels of performance expressed or implied in
the forward-looking statements we make inevitably will not materialize, and
unanticipated events affecting our results may occur.




We
caution you not to place undue reliance on forward-looking statements. You
should read these statements in conjunction with the risk factors disclosed in
Item 3 of this annual report, “Key Information—Risk Factors.” We do not
undertake any obligation to update or revise the forward-looking statements
except as required under applicable law.


63


ITEM
      6.
            DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES




A.           Directors and Senior
Management




Directors
and Executive Officers




The
following table sets forth information regarding our directors and executive
officers as of the date of this annual report.




Directors and Executive Officers
                  
                  Age
                  
                  PositionTingxiu
      Lu
                  
                  48
                  
                  ChairmanJianhua
      Zhao
                  
                  54
                  
                  Vice
      Chairman and Chief Technology OfficerStephen
      Zhifang Cai
                  
                  48
                  
                  Director
      and Chief Executive OfficerSiegfried
      Yi Chou Hsu
                  
                  42
                  
                  Chief
      Financial OfficerShiliang
      Guo
                  
                  46
                  
                  DirectorMerry
      Tang
                  
                  50
                  
                  Independent
      DirectorXiaoqian
      Zhou
                  
                  69
                  
                  Independent
      DirectorJian
      Li
                  
                  56
                  
                  Independent
      DirectorSteve
      Morgan
                  
                  59
                  
                  Independent
      DirectorWenze
      Wang
                  
                  68
                  
                  Independent
      DirectorAihua
      Wang
                  
                  56
                  
                  Vice
      President and General Manager of Research and Development
      DivisionRichard
      Yumin Gu
                  
                  46
                  
                  Vice
      President and General Manager of Sales & Marketing
      DivisionFang
      Yang
                  
                  38
                  
                  Vice
      President and General Manager of Operation
  Division




Directors




Mr. Tingxiu Lu is chairman of
our board of directors and has been with our company since 2004. Since 2009, Mr.
Lu has served as chairman of the board of directors and chief executive officer
of China Electric Equipment (Jiangsu) Co., Ltd., a Chinese company that mainly
manufactures power transformers. Since 2003, Mr. Lu has served as a director of
CEEG, a Chinese company that mainly manufactures power transformers. He has been
chairman and general manager of Jiangsu CEEG Transformer Manufacturing Co., Ltd.
since 2002, and has been a member of the supervisory board of Jiangsu CEEG
Electrical Transmission and Distribution Equipment Co., Ltd. since 2003. Mr. Lu
has been chairman of Jiangsu Xinde Assets Management Co., Ltd. and Nanjing Xinde
Assets Management Co., Ltd., two investment management and investment holding
companies, since 2006. From 1991 to 2003, Mr. Lu was the general manager of
Jiangsu CEEG Electrical Equipment Manufacturing Co, Ltd, the predecessor of
CEEG. Mr. Lu was awarded the China Excellent Entrepreneur award by the China
Entrepreneur Confederation in 2005. He was also named as a 2005 Top Ten
Distinguished Youth Entrepreneur of Jiangsu Province in 2005 by Jiangsu Province
Development and Reform Commission and other government bodies. Mr. Lu graduated
from an executive business management program at Tsinghua University in
2006.




Dr. Jianhua Zhao is vice
chairman of our board of directors and chief technology officer of our company
and has been with our company since 2004. From 2002 to June 2006, he was an
associate professor of the Centre of Excellence for Advanced Silicon
Photovoltaics and Photonics, formerly known as the Photovoltaics Special
Research Centre, at the University of New South Wales in Australia, and also
served as its deputy director from 1999 to June 2006. At the Photovoltaics
Special Research Centre, he was a senior lecturer (senior research fellow) from
1991 to 2001. Dr. Zhao is a senior member of IEEE Electron Device Society, a
member of Australia and New Zealand Solar Energy Society and a member of Chinese
Renewable Energy Society. Dr. Zhao graduated from Nanjing Institute of
Technology in 1978 and received his master’s degree from the same university in
1982, and received a Ph.D. degree in electrical engineering from the University
of New South Wales in Australia in 1989. Dr. Zhao started solar research in 1979
and has published 65 papers in scientific journals, including one published in
Nature magazine, 111 papers in international scientific conferences, and 32
research reports. Dr. Zhao is the husband of Dr. Aihua Wang.




Mr. Stephen Zhifang Cai has
been our chief executive officer since March 2010 and our director since April
2010. Mr. Cai has served as a director of CEEG since March 2008, and served as
vice president of CEEG and chief executive officer of CEEG PV Business from
March 2008 to March 2010. From 2007 to 2010, he also served as the chairman of
CEEG (Shanghai) Solar Science and Technology Co., Ltd., an entity controlled by
our chairman. Mr. Cai has also served as a director of Shanghai X-fort Composite
Material Co., Ltd., a China based composite material manufacturer, since
2008.  From 1996 to 2007, Mr. Cai served in several management roles
within DuPont China Group Co., Ltd., including general manager of the safety and
protection business of Asia-Pacific area (east Asia region), leader of DuPont
China’s Aramid fiber project and general manager of advanced fiber business for
Greater China. Mr. Cai  received a bachelor’s degree in Chemical Fiber
from the East China Institute of Textile Science and Technology in 1982. He also
received an MBA from Fudan University in 2002.


64


Mr. Shiliang Guo has been a
director of our company since May 2009. Mr. Guo once served as a director of our
company from May 2006 to July 2007 and he served as our acting chief financial
officer from May to October 2009. Since 2009, Mr. Guo has served as the vice
president and chief financial officer of China Electric Equipment (Jiangsu) Co.,
Ltd. Mr. Guo has also served as a director of CEEG since 2008 and the chief
financial officer of CEEG from 2004 to 2009. From 1993 to 2004, Mr. Guo served
as chief accountant with Yangzhou Zhengxin Certified Public Accountant Co.,
Ltd., Yangzhou Xingda Certified Public Accountant Co., Ltd. and Yangzhong
Certified Public Accountant Co., Ltd., respectively. Mr. Guo received a
bachelor's degree in finance from Suzhou University in 1984. He obtained the
qualification of PRC Certified Public Accountant in 1993.




Independent
Directors




Ms Merry Tanghas been an
independent director of our company since June 2008. She is currently a
principal and managing partner of GTZY CPA Group, LLC. Ms. Tang served a
managing director at GTA International, LLC and Partner at Tang & Company,
PC – both U.S.-based CPA firms offering services in risk assessment, audit
engagements and Sarbanes-Oxley–related documentation to leading banks, financial
service providers and telecommunications firms from 2006 to 2008. Prior to that,
Ms. Tang gained “Big 4” experience at PricewaterhouseCoopers LLP where she
served as senior auditor and engaged in various high profile clients’ financial
and IT audits from 2004 to 2006. Ms. Tang also worked at Lucent Technologies,
Inc. as a finance manager from 1996 to 2004. Ms. Tang graduated from the Central
University of Finance & Banking, Beijing, China with a bachelor degree in
banking in 1983 and an master degree in Finance in 1986, before going on to
receive her master degree in accounting from the State University of New York at
Albany in 1993.




Mr. Xiaoqian Zhou has been an
independent director of our company since May 2007. Mr. Zhou is an independent
director of Xuji Electric Stock Co., Ltd. and Tebian Electric Appliance Stock
Co., Ltd. He is a vice director of Chinese Energy Research Society and chairman
of the Chinese Society for the Development of Power. Mr. Zhou has over 40 years
of experience in the power industry in China. He was a consultant to the State
Grid Corporation of China from 2001 to 2004, and was an assistant general
manager of the same company from 1998 to 2001. From 1996 to 1999, Mr. Zhou was
the general manager of China Grid Construction Co., Ltd. Mr. Zhou graduated from
Zhejiang University with a major in thermal power equipment in
1964.




Ms. Jian Li has been an
independent director of our company since May 2008. Ms. Li has worked in
education with the Central University of Finance and Economics since 1983. Ms.
Li is a professor, the head of department of finance, a doctoral supervisor and
a supervisor of postdoctoral research station of Central University of Finance
and Economics. She is also an independent director of Citic Securities Co.,
Ltd., a company listed on the Shanghai Stock Exchange. Ms. Li has been involved
in the publishing of a number of academic papers both in China and overseas
during the past ten years, mainly on finance and the capital markets. Ms. Li
received her bachelor’s degree in finance and doctor’s degree in economics from
the Central University of Finance and Economics and Xi’an Communication
University in 1983 and 1997, respectively.




Mr. Steve Morgan has been an
independent director of our company since May 2008. Mr. Morgan was foreign legal
advisor for Zhonglun W&D Law Firm in Beijing from 2007 to January
2010. Mr. Morgan was a special advisor on a number of projects for the
Carlyle Group, Mitsubishi Corporation and Finmeccanica SpA. from 2004 to 2006,
and was appointed as a Visiting Professor of the Graduate Business School of
Seoul National University in 2007. From 2000 to 2004, he served as senior
executive vice president for Hyundai Motor Company in Seoul and served in other
executive positions in Hyundai group companies since 1998. Mr. Morgan graduated
from Fordham College, New York, with a bachelor degree in political science in
1973 and received his Juris Doctorate from Northwestern University School of Law
in 1976.




Mr. Wenze Wang has been our
independent director since May 2008. Mr. Wang was an executive vice chairman of
China Investment Association from 2002 to 2009. Mr. Wang was the Commissioner of
the Finance and Economics Committee of the National People’s Congress from 2003
and resigned from this role in March 2008. From 1994 to 2003, Mr. Wang served as
general manager of the State Development and Investment Corporation. Mr. Wang
graduated from Shandong Technical College with a bachelor’s degree in thermal
power in 1965.


65


Executive
Officers




Mr. Siegfried Yi Chou Hsu has
been our chief financial officer since October 2009. Prior to joining us, Mr.
Hsu was the vice president of structured finance of China Development Industry
Bank in Taipei from 2007 to 2008. Mr. Hsu is also a director of MOLZ Group, a
greater China e-commerce company, from 2005 to 2006. From 2004 to 2005, Mr. Hsu
served as the vice president of Phycos Consulting, a cross border consulting
firm based in Taipei, and Suzhou Yi-Fu Investment Guarantee Co., Ltd., a cross
border investment guarantee firm based in Suzhou. Mr. Hsu served as the chief
financial officer of Smart Net Technology, a Taipei based internet commerce
company, from 2000 to 2002. Mr. Hsu also served as the investment and investor
relationship manager of United Microelectronics Corporation in Taiwan, a
world-leading semiconductor foundry, from 1997 to 2000. Mr. Hsu graduated from
the National Chiao Tung University in Taiwan with a bachelor’s degree in Electro
Physics in 1990, and received his MBA degree from National Taiwan University in
1995. Mr. Hsu also received an MBA degree from the Sloan Fellows Program of MIT
Sloan School of Management in 2003.




Dr. Aihua Wang is a vice
president and general manager of our company in charge of research and
development and has been with our company since 2004. From 2000 to June 2006,
she was a research fellow at the Centre of Excellence for Advanced Silicon
Photovoltaics and Photonics, formerly known as the Photovoltaics Special
Research Centre, at the University of New South Wales in Australia. At the
Photovoltaics Special Research Centre, she was a project scientist from 1991 to
2000. She was an engineer at Applied Solar Energy, Inc. in California from 1990
to 1991. Dr. Wang published a number of research articles and papers on solar
cells. Dr. Wang graduated from Nanjing Institute of Technology in China in 1978
and received a Ph.D. degree in electrical engineering from the University of New
South Wales in Australia in 1992.




Mr. Richard Yumin Gu is a
vice president and general manager of our company in charge of sales and
marketing and has been with our company since January 2007. From 2001 to 2006,
Mr. Gu was the general manager of Shanghai Ever-rich Electric Equipment Co.
Ltd., a company engaging in the electric equipment business. From 1992 to 2001,
Mr. Gu worked with various subsidiaries and a joint venture of DuPont, a
multinational chemicals and health care conglomerate. From 1999 to 2001, he was
a regional business manager of DuPont China Limited, serving for its department
in charge of electrical insulation and advance fiber system business. From 1996
to 1999, he served as a technical consultant and marketing manager of DuPont
Teijin Paper Asia Limited. From 1992 to 1996, he served as an account manager of
DuPont China Holding Company Limited. Mr. Gu received his bachelor’s degree in
electrical engineering from Xi’an Jiao Tong University in China and completed
MBA correspondence courses with Auckland University of New Zealand in
1999.




Mr. Fang Yang has been our
vice president in charge of strategy and planning and special assistant to the
chief executive officer since August 2007 and later served as a general manager
of operation division since December 2008. Prior to joining us, Mr. Yang served
as a director of the business management department and operation division with
NEC Telecommunications (China) Co., Ltd. from 2004 to 2007. From 1995 to 2004,
Mr. Yang worked as a director of sales and business management with Lucent
Technologies (China) Co., Ltd., a communication equipment manufacturing company
in China. Mr. Yang received his bachelor’s degree in engineering, his master in
system engineering and MBA from Northwest Polytechnic University in Xi’an, China
in 1992, 1995 and 1995, respectively.




The
address of our directors and executive officers is c/o China Sunergy Co., Ltd.,
No. 123 Focheng West Road, Nanjing Jiangning Economic & Technical
Development Zone, Nanjing, Jiangsu Province 211100, People’s Republic of
China.




B.           Compensation of Directors
and Executive Officers




For the
year ended December 31, 2009, the aggregate cash compensation that we paid to
our executive officers was RMB10.9 million (approximately $1.6
million).  There are no service contracts between us and our
directors, except for those directors who are also our executive officers. For
the year ended December 31, 2009, we paid an aggregate of RMB0.4 million
(approximately $58,600) for pension and other social insurance contribution for
our senior executive officers. For option grants to our officers and directors,
see Item 6, “Directors, Senior Management and Employees—Compensation of
Directors and Executive Officers—Share Incentive Plan.”


66


Employment
Agreements




We have
entered into employment agreements with each of our executive officers. Under
these agreements, each of our executive officers is employed for a specified
time period. We may terminate the employment for cause, at any time, without
remuneration, for certain acts of the employee, including but not limited to a
conviction or plea of guilty to a felony, willful dishonesty to us and willful
and continued failure to perform substantially all his agreed-to duties after a
reasonable opportunity to cure the failure. An executive officer may terminate
his employment at any time without penalty if there is any failure by us to
comply with any material provisions of the employment agreement, any change in
his duties or responsibilities in any material and adverse respect. Furthermore,
either party may terminate the employment at any time without cause upon advance
written notice to the other party. If we terminate the employment of an
executive officer without cause, the executive officer will be entitled to a
severance payment equal to a certain specified number of months of his or her
then base salary.




Each
executive officer has agreed to hold in confidence and not to use, except as
required in the performance of his duties in connection with the employment, any
confidential information relating to the business of our company, affiliates or
customers. The executive officers have also agreed to disclose to us all
inventions, designs and trade secrets which they conceive, develop or reduce to
practice during the employment and to assign all right, title and interest in
them to us.




Share
Incentive Plan




In
October 2006, our board of directors adopted a share incentive plan, or the
First Plan, later amended in April 2007 and May 2009, respectively, to link the
personal interests of our board members, employees and consultants to those of
our shareholders by providing them with an incentive to generate superior
returns for our shareholders, as well as to provide us with the flexibility to
motivate, attract and retain the services of these individuals upon whose
judgment, interest and special effort the successful conduct of our operations
is dependent. The First Plan provides for the grant of options, referred to as
“awards,” and we have reserved 2,500,000 shares for issuance under the First
Plan. We adopted a second share incentive plan, or the Second Plan, after
obtaining the approval by shareholders in February 2008. We have reserved
4,190,748 shares for issuance under the Second Plan. As of December 31, 2009,
our board of directors has granted certain of our officers, employees and
consultants an aggregate of 1,980,651 options and 2,996,896 restricted shares,
excluding options and restricted shares forfeited pursuant to the above
plans.




Administration. Our share
incentive plans are administered by our compensation committee or, in its
absence, by our board of directors. Our compensation committee will determine
the provisions, terms and conditions of our awards.




Awards. Awards granted are
evidenced by an award agreement that sets forth the terms, conditions and
limitations for each award. Our First Plan only provides for awards in the form
of options. Options provide for the right to purchase our ordinary shares at a
specified price, and usually will become exercisable in installments after the
grant date. The option exercise price may be paid in cash, by check, by our
ordinary shares which have been held by the option holder for such time as may
be required to avoid adverse accounting treatment, by other property with value
equal to the exercise price, through a broker assisted cash-less exercise or by
such other methods as our compensation committee or board of directors may
approve from time to time.




The
following paragraphs briefly describe the principal features of the various
awards that may be granted under the Second Plan.




•
            Options. Options
      provide for the right to purchase our ordinary shares at a price and
      period determined by our compensation committee in one or more
      installments after the grant date.




•
            Restricted Shares. A
      restricted share award is the grant of our ordinary shares determined by
      our compensation committee. A restricted share is nontransferable, unless
      otherwise determined by our compensation committee at the time of award,
      and may be repurchased by us upon termination of employment or service
      during a restricted period. Our compensation committee shall also
      determine in the award agreement whether the participant will be entitled
      to vote the restricted shares or receive dividends on such
      shares.




•
            Restricted Share Units.
      Restricted share units represent the right to receive our ordinary shares
      at a specified date in the future, subject to forfeiture of such right. If
      the restricted share unit has not been forfeited, then on the date
      specified in the award agreement, we shall deliver to the holder
      unrestricted ordinary shares which will be freely
      transferable.




Termination of Plan. Unless
terminated earlier, our First Plan and Second Plan will expire in 2016 and 2018,
respectively. Our board of directors has the authority to amend or terminate our
share incentive plans subject to shareholder approval to the extent necessary to
comply with applicable law. However, no such action may impair the rights of any
recipient of the awards unless agreed by the recipient and the share incentive
plan administrator.


67


The
following table summarizes, as of December 31, 2009, the outstanding options and
restricted shares granted under our plans to several of our directors and
executive officers and to other individuals. We have two types of vesting
schedules for options. A substantial portion of options vest over a four-year
period beginning in October 2006, April 2007, January 2008, February 2008, June
2008 or January 2009. Other options vest on the first anniversary of the grant
date. These restricted shares vest over a three year period beginning July
2007.




Name
                            
                            Ordinary Shares
                              Underlying Options
                              Granted
                            
                            
                            Restricted
                              Shares
                            
                            
                            Exercise Price
                            
                            
                            Grant Date
                            
                            Date of ExpirationRuennsheng
      Allen Wang
                            
                            
                            
                            
                            
                            799,101
                            1**
                            
                            
                            N/A
                            
                            
                            February
      2008
                            
                            February
      2018Richard
      Yumin Gu
                            
                            
                            *
                            
                            
                            
                            
                            
                            
                            $
                            1.283
                            
                            
                            January
      2008
                            
                            January
      2018Fang
      Yang
                            
                            
                            *
                            
                            
                            
                            
                            
                            
                            $
                            1.283
                            
                            
                            January
      2008
                            
                            January
      2018Xiaoqian
      Zhou
                            
                            
                            *
                            
                            
                            
                            
                            
                            
                            $
                            1.283
                            
                            
                            April
      2007
                            
                            April
      2017Director
      and executive officers as a group
                            
                            
                            257,040Other
      individuals as a group
                            
                            
                            1,171,389
                            
                            
                            
                            
                            
                            
                            $
                            1.283
                            
                            
                            October
      2006, April 2007, January 2008 or January 2009
                            
                            October
      2016, April 2017, January 2018 or January 2019180,642
                            
                            
                            
                            
                            
                            
                            $
                            0.70
                            
                            
                            January
      2009
                            
                            January
      2019 or January
2014







1
            Restricted
      shares purchased at $0.001 per
share.




*
            Less
      than 1% of our outstanding ordinary
shares.




**
            In
      addition to the above unvested restricted shares, 1,598,200 of
      restricted shares granted to Mr. Ruennsheng Allen Wang were vested in July
      2008 and July 2009, respectively. The 799,101 restricted shares not vested
      as of December 31, 2009 was vested on March 12, 2010 in connection with
      Mr. Ruennsheng Allen Wang’s resignation from the position of chief
      executive officer and director.




C.
            Board
      Practices




Board
of Directors




Our board
of directors currently has nine directors, all designated by the holders of our
ordinary shares. As of the date of this annual report, a majority of our
directors meet the “independence” definition under The Nasdaq Stock Market
Marketplace Rules, or the Nasdaq Rules.




Under our
amended and restated articles of association, which became effective in May
2007, our board of directors consists of at least two directors. Our directors
are elected by the holders of our ordinary shares.




A
director is not required to hold any shares in the company by way of
qualification. A director may vote with respect to any contract, proposed
contract or arrangement in which he is materially interested. A director may
exercise all the powers of the company to borrow money, mortgage its
undertakings, property and uncalled capital, and issue debentures or other
securities whenever money is borrowed or pledged as security for any obligation
of the company or of any third party. Upon the completion of our initial public
offering in May 2007, we established three committees under the board of
directors: the audit committee, the compensation committee and the nominating
committee. We have adopted a charter for each committee.




Committees
of the Board of Directors




We have
established three committees under the board of directors: the audit committee,
the compensation committee and the corporate governance and nominating
committee. We have adopted a charter for each of the three committees. Each
committee’s members and functions are described below.


68


Audit Committee. Our audit
committee consists of Ms. Merry Tang, Mr. Steve Morgan and Ms. Jian Li and is
chaired by Ms. Merry Tang. Ms. Tang, Mr. Morgan and Ms. Li satisfy the
independence requirements of Rule 10A-3 under the Exchange Act, as amended, and
Rule 5605 of the Nasdaq Rules. The audit committee oversees our accounting and
financial reporting processes and audits of the financial statements of our
company. The audit committee is responsible for, among other
things:




•
            selecting
      the independent auditors and pre-approving all auditing and non-auditing
      services permitted to be performed by the independent
      auditors;




•
            reviewing
      with the 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 the
      independent auditors;




•
            reviewing
      major issues as to the adequacy of our internal controls and any special
      audit steps adopted in light of material control deficiencies;
      and




•
            meeting
      separately and periodically with management and the independent
      auditors.




Compensation Committee. Our
compensation committee consists of Ms. Jian Li, Mr. Wenze Wang and Mr. Xiaoqian
Zhou. Ms. Li, Mr. Wang and Mr. Zhou satisfy the independence requirements of
Rule 5605 of the Nasdaq Rules. The compensation committee assists the board in
reviewing and approving the compensation structure, including all forms of
compensation, relating to our directors and executive officers. Our chief
executive officer may not be present at any committee meeting during which his
compensation is deliberated. The compensation committee is responsible for,
among other things:




•
            reviewing
      and approving the total compensation package for our senior executives;
      and




•
            reviewing
      periodically and approving 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. Our corporate governance and nominating committee consists of
Mr. Wenze Wang,  Ms. Jian Li and Mr. Xiaoqian Zhou. Mr. Wang, Ms. Li
and Mr. Zhou satisfy the independence requirements of Rule 5605 of the Nasdaq
Rules. The corporate governance and nominating committee assists the board of
directors in selecting individuals qualified to become our directors and in
determining the composition of the board and its committees. The corporate
governance and nominating committee is responsible for, among other
things:




•
            identifying
      and recommending qualified candidates to the board for selection of
      directors nominees for election or re- election to the board of directors
      and committees of the board of directors, or for appointment to fill any
      vacancy;




•
            reviewing
      annually with the board of directors the current composition of the board
      of directors with regards to characteristics such as independence, age,
      skills, experience and availability of service to us;
  and




•
            advising
      the board of directors periodically with regard 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 the board of directors on all matters of corporate
      governance and on any remedial actions to be
  taken.




Duties
of Directors




Under
Cayman Islands law, our directors have fiduciary duties to act honestly in good
faith with a view to our best interests. Our directors also have a duty to
exercise the skill they actually possess with the care and diligence that a
reasonably prudent person would exercise in comparable circumstances. In
fulfilling their duty of care to us, our directors must ensure compliance with
our amended and restate memorandum and articles of association. A shareholder
has the right to seek damages if a duty owed by our directors is
breached.


69


Terms
of Directors and Officers




Our
shareholders have designated our directors into three classes, namely Class A
directors, Class B directors and Class C directors, who shall retire from office
and be eligible for re-election at the first, second and third annual general
meeting after our initial public offering, respectively. Mr. Tingxiu Lu, Ms.
Jian Li and Mr. Stephen Zhifang Cai have been designated as Class A directors.
Mr. Jianhua Zhao, Mr. Steve Morgan and Ms. Merry Tang have been designated as
Class B directors. Mr. Xiaoqian Zhou, Mr. Wenze Wang and Mr. Shiliang Guo have
been designated as Class C directors. At each subsequent annual general meeting
after the third annual general meeting, the directors of the class who have been
longest in office shall retire and shall be eligible for re-election. A director
may only be removed by the shareholders. Officers are elected by and serve at
the discretion of the board of directors.




D.           Employees




We had
1,607 and 1,799 employees as of December 31, 2007 and 2008, respectively. As of
December 31, 2009, we had 1,848 full-time employees, consisting of 1,471 in
manufacturing, 85 in equipment maintenance, 131 in quality assurance, 20 in
purchasing, 45 in research and development, 40 in sales and marketing and 56 in
general and administrative. All of these employees are located in our facilities
in Nanjing, except for 13 employees located in our offices in Shanghai and
Germany. Our employees are not covered by any collective bargaining agreement.
We consider our relations with our employees to be good.




From time
to time, we also employ part-time employees and independent contractors to
support our manufacturing, research and development and sales and marketing
activities. We plan to hire additional employees as we expand.




E.           Share
Ownership




The
following table sets forth information, some of which has been obtained from
public filings, with respect to the beneficial ownership of our ordinary shares
as of March 31, 2010, by:




·
            each
      of our directors and executive officers who are also our shareholders;
      and




·
            each
      person known to us to own beneficially more than 5.0% of our ordinary
      shares.




Ordinary Shares
                    Beneficially OwnedNumber(1)
                  
                  
                  
                  %(2)Directors
      and Executive Officers:Tingxiu
      Lu (3)
                  
                  
                  39,184,200
                  
                  
                  
                  14.7Jianhua
      Zhao (4)
                  
                  
                  17,645,064
                  
                  
                  
                  6.6Aihua
      Wang (4)
                  
                  
                  17,645,064
                  
                  
                  
                  6.6Xiaoqian
      Zhou (5)
                  
                  
                  *
                  
                  
                  
                  *Richard
      Yumin Gu (6)
                  
                  
                  *
                  
                  
                  
                  *Fang
      Yang (7)
                  
                  
                  *
                  
                  
                  
                  *All
      Directors and Executive Officers as a Group
                  
                  
                  57,128,904
                  
                  
                  
                  21.4Principal
      Shareholders:Elite
      Shine Group Limited (8)
                  
                  
                  39,184,200
                  
                  
                  
                  14.7Credit
      Suisse AG (9)
                  
                  
                  37,550,976
                  
                  
                  
                  14.1Exuberance
      Investment Limited (10)
                  
                  
                  32,678,274
                  
                  
                  
                  12.2Smooth
      King Investments Limited (11)
                  
                  
                  21,295,800
                  
                  
                  
                  8.0Brightest
      Power Holdings Limited (12)
                  
                  
                  17,645,064
                  
                  
                  
                  6.6PraxCapital
      Fund II, L.P (13)
                  
                  
                  16,043,934
                  
                  
                  
                  6.0










70




(1)
            Beneficial
      ownership is determined in accordance with the rules of the Securities and
      Exchange Commission, or SEC, and includes voting or investment power with
      respect to the securities.




(2)
            For
      each person and group included in this table, percentage ownership is
      calculated by dividing the number of shares beneficially owned by such
      person or group by 267,287,253, being the number of ordinary shares
      outstanding as of March 31, 2010 plus the number of ordinary shares
      underlying share options held by such person or group that are exercisable
      within 60 days after March 31, 2010
..




(3)
            Includes
      39,184,200 ordinary shares ,beneficially owned by Elite Shine Group
      Limited, a British Virgin Islands company, which is 100% owned by Mr. Lu.
      The business address for Mr. Lu is No. 123 Focheng West Road, Nanjing
      Jiangning Economic & Technical Development Zone, Nanjing, Jiangsu
      Province 211100, People’s Republic of China. Of these ordinary shares, the
      ownership of 5,000,000 ADS representing 30,000,000 ordinary shares, or the
      Elite Shine Disputed Shares, became the subject of a dispute, which is
      described below. In addition, Elite Shine Group Limited has entered into
      certain share pledge agreement in September 2009 with a Chinese bank.
      Pursuant to the share pledge agreement, 9,184,200 of our ordinary shares
      beneficially owned by Elite Shine Group Limited, or the Pledged Shares,
      were pledged to such Chinese bank to secure a syndicated loan arranged by
      it to a company controlled by Mr. Lu. The share pledge agreement does not
      grant the Chinese bank the power to vote or to direct the vote of the
      Pledged Shares, or, prior to default, the power to dispose or to direct
      disposition of the Pledged Shares.





(4)
            Includes
      17,645,064 ordinary shares ,beneficially owned by Brightest Power Holdings
      Limited, a British Virgin Islands company, which is 100% owned by Dr. Zhao
      and Dr. Wang. Dr. Zhao and Dr. Wang are husband and wife, and their
      business address is No. 123 Focheng West Road, Nanjing Jiangning Economic
      & Technical Development Zone, Nanjing, Jiangsu Province 211100,
      People’s Republic of China. Of these ordinary shares, the ownership of
      1,600,000 ADS representing 9,600,000 ordinary shares, or the Brightest
      Power Disputed Shares, became the subject of a dispute, which is described
      below.




(5)
            Represents
      ordinary shares issued and issuable upon exercise of options held by Mr.
      Zhou. Mr. Zhou’s address is No. 123 Focheng West Road, Nanjing Jiangning
      Economic & Technical Development Zone, Nanjing, Jiangsu Province
      211100, People’s Republic of China.




(6)
            Represents
      ordinary shares underlying ADSs held by Ms. Jian Yue Xue, the wife of Mr.
      Gu and ordinary shares issuable upon exercise of options held by Mr. Gu.
      Mr. Gu’s address is No. 123 Focheng West Road, Nanjing Jiangning Economic
      & Technical Development Zone, Nanjing, Jiangsu Province 211100,
      People’s Republic of China.




(7)
            Represents
      ordinary shares issuable upon exercise of options held by Mr. Yang. Mr.
      Yang’s address is No. 123 Focheng West Road, Nanjing Jiangning Economic
      & Technical Development Zone, Nanjing, Jiangsu Province 211100,
      People’s Republic of China.




(8)
            Elite
      Shine Group Limited is 100% owned by Mr. Lu. The address of Elite Shine
      Group Limited is P.O. Box 957, Offshore Incorporation Centre, Road Town,
      Tortola, British Virgin Islands.




(9)
            Based
      on a Schedule 13G Amendment No. 2 filed by Credit Suisse AG on February
      25, 2010, this represents the shares that may be deemed to be beneficially
      owned by Credit Suisse AG and includes 32,678,274 shares that China
      Harvest Fund, L.P. beneficially owns because of Credit Suisse AG’s
      relationship to China Harvest Fund, L.P.. Credit Suisse AG disclaims
      beneficial ownership of these 32,678,274 shares. The ultimate parent
      company of Credit Suisse AG is Credit Suisse Group AG, a corporation
      formed under the laws of Switzerland. Credit Suisse Group AG disclaims
      beneficial ownership of shares beneficially owned by its direct or
      indirect subsidiaries, including Credit Suisse AG. Credit Suisse AG’s
      business address is Uetlibergstrasse 231, P.O. Box 900, CH 8070 Zurich,
      Switzerland. See footnote 10 for additional discussion of these
      shares.


71


(10)
            Based
      on a Schedule 13G filed by Exuberance Investment Limited on February 14,
      2008, this represents 32,678,274 ordinary shares held by Exuberance
      Investment Limited, a British Virgin Islands company, with the registered
      address at P.O. Box 173, Kingston Chambers, Road Town, Tortola, British
      Virgin Islands. Exuberance Investment Limited is 97.83% owned by China
      Harvest Fund, L.P., a Cayman Islands exempted limited partnership, and
      2.17% owned by China Harvest Parallel Fund I, L.P., a Cayman Islands
      exempted limited partnership, each with the registered address at the
      offices of M&C Corporate Services Limited, P.O. Box 309GT, Ugland
      House, South Church Street, George Town, Grand Cayman, Cayman Islands. The
      general partner of China Harvest Fund, L.P. and China Harvest Parallel
      Fund I, L.P. is China Renaissance Capital Investment, L.P., a Cayman
      Islands exempted limited partnership. Voting and investment power of
      shares beneficially held by China Harvest Fund, L.P. is exercised by the
      investment committee of China Renaissance Capital Investment, L.P. which
      consists of Mark Qiu, Hung Shih, Li Zhenzhi, Charles Pieper and Nicole
      Arnaboldi. The address for these committee members is c/o China
      Renaissance Capital Investment, L.P., M&C Corporate Services Limited,
      P.O. Box 309GT, Ugland House, South Church Street, George Town, Grand
      Cayman, Cayman Islands.




(11)
            Smooth
      King Investments Limited is 100% owned by Ms. Yingchun Huang. The address
      of Smooth King Investments Limited is P.O. Box 957, Offshore Incorporation
      Centre, Road Town, Tortola, British Virgin
  Islands.




(12)
            Brightest
      Power Holdings Limited is 100% owned by Dr. Zhao and Dr. Wang. The address
      of Brightest Power Holdings Limited is P.O. Box 957, Offshore
      Incorporation Centre, Road Town, Tortola, British Virgin
      Islands.




(13)
            Based
      on a Schedule 13G Amendment No. 1 filed by PraxCapital Fund II, L.P. on
      February 13, 2009, this represents 16,043,934 ordinary shares held by
      PraxCapital Fund II, L.P., a Cayman Islands limited partnership, with the
      registered address at P.O. Box 309GT, Ugland House, South Church St.,
      George Town, Grand Cayman. The general partner of PraxCapital Fund II,
      L.P. is Prax Capital GP II, a Cayman Islands company. Prax Capital GP II
      is controlled by its board of directors, consisting of Jose Luis Artiga,
      Fernando R. Vila, Jeff Jie-Ping Yao and Lei Xu. The address of Jose Luis
      Artiga is Chalet Augusta No. 2, 3963 Crains-Sur-Sierre, Switzerland. The
      address of Fernando R. Vila is 1001 Brickell Bay Drive, Suite 2402, Miami,
      Florida, 33131. The address of each of Jeff Jie-Ping Yao and Xu Lei is 333
      Huai Hai Middle Road, Suite 1701, Shanghai, People’s Republic of China,
      200021.




The Elite
Shine Disputed Shares and the Brightest Power Disputed Shares are the subject of
a turnover order, or the Order, entered by the District Court for the Southern
District of Ohio on September 30, 2009 in case number 08-cv-0667, Securities and
Exchange Commission v. One Equity Corporation, et al. The Elite Shine Disputed
Shares and the Brightest Power Disputed Shares had been pledged as collateral
for a loan that was to be provided by Marshal-Light Trading Partners, Inc. The
loans never funded and the Elite Shine Disputed Shares and the Brightest Power
Disputed Shares were returned to Mr. Lu, Dr. Zhao and Dr. Wang, respectively.
Marshal-Light Trading Partners, Inc. was subsequently placed into receivership
as part of an SEC enforcement action. Despite the return of the Elite Shine
Disputed Shares and the Brightest Power Disputed Shares, a Court-appointed
receiver, or the Receiver, in the One Equity case argues that the Elite Shine
Disputed Shares and the Brightest Power Disputed Shares should be deemed part of
the estate of Marshal-Light Trading Partners, Inc. Elite Shine Group Limited,
Mr. Lu, Brightest Power Holdings Limited, Dr. Zhao and Dr. Wang, together with
other similarly situated holders of our ordinary shares, or together the C-SUN
Parties, have vigorously opposed the Receiver’s action and are awaiting a final
order from the District Court for the Southern District of Ohio in order to
appeal the Order. The Elite Shine Disputed Shares and the Brightest Power
Disputed Shares remain in the custody of JPMorgan Chase Bank, N.A. and the
District Court for the Southern District of Ohio has noted that "the C-SUN
Parties should have the opportunity for meaningful appellate review of the
[Order] prior to liquidation and distribution by the Receiver." Elite Shine
Group Limited, Mr. Lu, Brightest Power Holdings Limited, Dr. Zhao and Dr. Wang
will appeal the District Court for the Southern District of Ohio’s order
transferring the Elite Shine Disputed Shares and the Brightest Power Disputed
Shares into the estate of Marshal-Light Trading Partners, Inc. if a distribution
order is entered.




None of
our shareholders has different voting rights from other shareholders. Except as
disclosed elsewhere in this annual report, we are not aware of any arrangement
that may, at a subsequent date, result in a change of control of our
company.




ITEM
      7.
            MAJOR
      SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS




A.           Major
Shareholders




See Item
6, “Directors, Senior Management and Employees 3⁄4 Share
Ownership.”


72


B.           Related Party
Transactions




Transactions
with Certain Directors, Shareholders and Affiliates




In August
2006, Sunergy Nanjing entered into an agreement to lease warehouse premises of
3,000 square meters from CEEG (Nanjing) Special Transformer Manufacturing Co.,
Ltd., an entity controlled by our chairman, for a term until September 2011. The
tenancy agreement provides for annual rental payments of RMB60,000
(approximately $8,790). The rental expense in the year ended December 31, 2009
was RMB60,000 (approximately $8,790). As of December 31, 2009, we had a rental
payable balance of approximately $26,000 to CEEG (Nanjing) Special Transformer
Manufacturing Co., Ltd.




As of
December 31, 2009, we had a payable balance of $0.1 million to CEEG Nanjing
International Trade Co., Ltd., which related to a payment we collected on behalf
of CEEG Nanjing International Trade Co., Ltd. from a third party.




In 2009,
we purchased raw materials from CEEG (Nanjing) Solar Research Institute, an
entity controlled by our chairman, in the amount of $475, and sold solar cells
to CEEG (Nanjing) Solar Research Institute in the amount of $0.7 million. In
December 2009, we entered into an agreement with CEEG (Nanjing) Solar Research
Institute, pursuant to which CEEG (Nanjing) Solar Research Institute will supply
certain equipment and provide technology services to us at a consideration of
RMB33 million (approximately $4.8 million) in connection with the building
integrated photovoltaic system to be installed in our Nanjing facilities. We
paid RMB10 million (approximately $1.5 million) to CEEG (Nanjing) Solar Research
Institute under this agreement in January 2010.




In 2009,
we purchased raw materials from CEEG (Nanjing) Semiconductor Co., Ltd., an
entity controlled by our chairman, in the amount of $6.5 million. As of December
31, 2009, we had a payable balance to CEEG (Nanjing) Semiconductor Co., Ltd. in
the amount of $2.1 million. In July 2008, we issued a bank accepted note in the
amount of RMB100 million (approximately $14.7 million) to CEEG (Nanjing)
Semiconductor Co., Ltd. in connection with a raw material purchase contract
entered into with this company in May 2008. As of December 31, 2008, we recorded
a receivable balance from CEEG (Nanjing) Semiconductor Co., Ltd. in the amount
of $11.5 million, which related to the prepayment we made (as evidenced by the
bank accepted note issued in July 2008) in respect of the raw materials to be
delivered by CEEG (Nanjing) Semiconductor Co., Ltd. In January 2009, we
terminated this raw material purchase contract with CEEG (Nanjing) Semiconductor
Co., Ltd. which subsequently returned our prepayment of $11.5 million. In 2009,
we sold solar cells under processing arrangements with CEEG (Nanjing)
Semiconductor Co., Ltd. and charged it a processing fee in the amount of
approximately $42,000.




In 2009,
we sold solar cells to CEEG (Shanghai) Solar Science and Technology Co., Ltd. in
the aggregate amount of $54.9 million. As of December 31, 2009, we had a
receivable balance from CEEG (Shanghai) Solar Science and Technology Co., Ltd.
in the amount of $7.1 million, which related to the amounts payable to us in
respect of sales of our solar power products. We also outsourced the production
of solar modules from our solar cells under processing arrangements with CEEG
(Shanghai) Solar Science and Technology Co., Ltd. and procured the solar modules
from it. Under certain circumstances, we also purchased solar modules directly
from it. In 2009, we paid processing fees to and purchased solar modules from
CEEG (Shanghai) Solar Science and Technology Co., Ltd. in the aggregate amount
of approximately $4.2 million.




In 2009,
we sold solar cells to CEEG (Nanjing) New Energy Co., Ltd. in the aggregate
amount of approximately $26.7 million. As of December 31, 2009, we had a
receivable balance from CEEG (Nanjing) New Energy Co., Ltd. in the amount of
approximately $2.7 million, which related to receivable in respect of sales of
solar cells. In 2009, we also purchased solar modules and wafers from CEEG
(Nanjing) New Energy Co., Ltd. in the aggregate amount of approximately $0.2
million.




In 2009,
we purchased raw materials from China Electric Equipment Group (Hong Kong)
Limited in the amount of approximately $0.3 million. We also sold solar cells to
China Electric Equipment Group (Hong Kong) Limited in the amount of
approximately $1,400 in 2009.




In 2009,
we entered into a purchase contract and its supplementary contracts with Jiangxi
Jingde Semiconductor New Material Co., Ltd., an entity controlled by our
chairman, under which Jiangxi Jingde Semiconductor New Material Co., Ltd. agreed
to supply an aggregate of 263 tons of polysilicon to us from November 2009 to
June 2010.  The contract provided a fixed price for the delivery in
November 2009, and for the subsequent monthly delivery, the prices shall be
negotiated between the parties before shipment and the prices shall be lower
than the market price within certain percentage. In connection with this
contract, we issued a bank accepted note in the amount of RMB100 million
(approximately $14.7 million) to Jiangxi Jingde Semiconductor New Material Co.,
Ltd in January 2009. In 2009 and the first quarter of 2010, we purchased
polysilicon in the amount of approximately $2.2 million and RMB35.3 million
(approximately $5.2 million), respectively, under this contract. As of March 31,
2010, we had a receivable balance of RMB 43.4 million (approximately $6.4
million) from Jiangxi Jingde Semiconductor New Material Co., Ltd., which related
to prepayment we made in respect of the polysilicon purchase.


73


CEEG has
guaranteed most of our bank borrowings. As of December 31, 2009, we had RMB340
million (approximately $49.8 million) in outstanding borrowing solely guaranteed
by CEEG. In addition, in November 2009, Jiangsu CEEG Equipment Co., Ltd. entered
into agreements to jointly guarantee with CEEG a total of RMB100 million
(approximately $14.6 million) of our bank borrowings, which will become due in
November 2010. In September 2009, Jiangsu CEEG Equipment Co., Ltd. entered into
an agreement to jointly guarantee with Mr. Tingxiu Lu RMB200 million
(approximately $29.3 million) of our bank borrowings, which will become due in
September 2010. As of December 31, 2009, approximately $8.8 million of the
short-term bank borrowings were jointly secured by the pledge of our raw
materials and the guarantee of Mr. Tingxiu Lu.




CEEG and
Sunergy Nanjing entered into an agreement on May 16, 2008 under which CEEG
agreed to guarantee free of charge bank borrowings by Sunergy Nanjing of up to
RMB1 billion (approximately $146.5 million). This agreement has an initial term
of two years from May 17, 2008 to May 16, 2010. We renewed this agreement in
April 2010 to extend the term to May 31, 2011.




In 2009,
we purchased from CEEG certain accessories in the amount of RMB0.4 million
(approximately $60,000). As of December 31, 2009, we had a payable balance to
CEEG in the amount of approximately $140,000, which related to amount payable in
respect of purchase of the above accessories and rent for our staff
dormitory.




In April
2008, we entered into an agreement to lease the land use right over a plot of
land of 360 square meters from CEEG (Nanjing) Special Transformer Co., Ltd. for
a term until March 2013 to construct a nitrogen station. The tenancy agreement
provides for annual rental payments of RMB22,000 (approximately
$3,200).




In March
2010, we entered into a share transfer agreement with CEEG and Sundex Holdings
Limited, pursuant to which we will acquire the 100% equity interests in CEEG
(Shanghai) Solar Science & Technology Co., Ltd. at a consideration of RMB200
million (approximately $29.3 million). The acquisition is expected to close
before June 30, 2010.




In March
2010, we also entered into a share transfer agreement with CEEG and Sundex
Holdings Limited, pursuant to which we will acquire the 100% equity interests in
CEEG (Nanjing) New Energy Co., Ltd. at a consideration of RMB120 million
(approximately $17.6 million). The acquisition is also expected to close before
June 30, 2010.




Employment
Agreements




See
“Item 6. Directors, Senior Management and Employees—Management—Employment
Agreements.”




Share Incentive
Plan




See
“Item 6. Directors, Senior Management and Employees—Management—Share
Incentive Plan.”




Related Party Transaction
Policy




We
adopted an audit committee charter and a related party transaction policy, which
require that the audit committee review all related party transactions on an
ongoing basis and all such transactions be approved or ratified by the
committee.




C.           Interests of Experts and
Counsel




Not
applicable.




ITEM
      8.
            FINANCIAL
      INFORMATION




A.           Consolidated Statements and
Other Financial Information




We have
appended consolidated financial statements filed as part of this annual
report.


74


Legal
Proceedings




We are a
named defendant in three purported class actions currently pending in the United
States District Court for the Southern District of New York—Brown v. China
Sunergy Co., Ltd. et al., Case No. 07-CV-07895 (DAB), Sheshtawy v. China Sunergy
Co., Ltd. et al., Case No. 07-CV-08656 (DAB), and Giombetti v. China Sunergy
Co., Ltd. et al., Case No. 07-CV-09689 (DAB). On September 29, 2008, the
District Court appointed a lead plaintiff and consolidated the three cases. The
lead plaintiff filed a consolidated amended complaint on December 8,
2008.




The
consolidated amended complaint purports to state class action claims against us
in connection with our initial public offering and seeks unspecified damages.
Specifically, the lead plaintiff alleges that we made false and misleading
statements in our initial public offering registration statement and prospectus
regarding, among other things, the procurement of polysilicon.




Several
of our directors and officers, along with the investment banks that underwrote
our initial public offering, are also named defendants in the cases. On January
26, 2009, the defendants filed a motion to dismiss the consolidated amended
complaint.  Briefing on the motion was completed on May 1, 2009.
Defendants’ motion remained outstanding when, on July 14, 2009, the parties
reached an agreement in principle to settle the dispute in its
entirety.




The
parties are currently working together to document the settlement, notify
potential class members, and obtain final approval from the
court.  The settlement process, as in any class action, will involve
(i) publication of the proposed settlement to class members, (ii) a period of
time during which class members may opt out of the settlement or object to it,
and (iii) a court hearing, only after which will the court approve the proposed
settlement.





On
October 16, 2009, the parties filed draft settlement documents for the court’s
approval. The court has not yet scheduled a date for preliminary approval of the
proposed settlement.  Once it approves the settlement documents, the
settlement process will take several months to complete.  We have
recorded an estimated amount of $1.1 million for the final settlement in our
consolidated financial statements as of and during the year ended December 31,
2009.




In
September 2009, we filed a petition with the Salten District Court seeking
injunction with regard to a $50 million bank guarantee, which is a security for
our payment obligation under a long term supply contract entered into between
REC SiTech AS, a Norwegian wafer supplier, and us in June 2008. The contract
stipulates that REC SiTech AS will supply us monocrystalline 156-millimeter
wafers for a seven year period between 2009 and 2015. Without obtaining our
written consent as the contract requires, REC SiTech AS merged into REC Wafer
Norway AS upon its dissolution on January 1, 2009. Subsequently, the bank
guarantee was not renewed. REC Wafer Norway AS claimed that the non-renewal of
the bank guarantee was a breach of contract which according to the supply
contract is the basis for the drawdown of the bank guarantee, and it sought to
draw on the bank guarantee.




The
Salten District Court initially granted us the injunction prohibiting REC Wafer
Norway AS from drawing on the bank guarantee but later rejected our request for
an extension of the injunction upon a hearing held in January 2010. We
subsequently appealed to the Court of Appeal in Norway, which denied our
injunction request on April 16, 2010, and we have now a further appeal to the
supreme court of Norway. The Court of Appeal further ordered on April 23, 2010
to the effect that its ruling on April 16, 2010 is to be suspended until the
appeal is determined by the Supreme Court, which may not provide its ruling
before mid-June 2010. We have also served a writ claiming that REC Wafer Norway
AS is not a party to the contract entered into between Sunergy Nanjing and the
currently dissolved REC SiTech AS and thus not in the position to benefit from
the bank guarantee. The hearing regarding the writ is to take place in early
June 2010 with a judgment expected to be granted by the end of the same
month.




We have
separately filed a lawsuit against REC Wafer Norway AS with the People’s High
Court of Jiangsu Province, China. The court in China has issued an injunction to
the related banks to forbid these banks from making payments related to the bank
guarantee. In April 2010, the People’s High Court of Jiangsu Province rejected
REC Wafer Norway AS’s dissent of jurisdiction after an oral
hearing.




Other
than as described above, we are currently not a party to any material legal or
administrative proceedings, and we are not aware of threatened material legal or
administrative proceedings against us.  We may from time to time
become a party to various legal or administrative proceedings arising in the
ordinary course of our business.


75




Dividend
Policy




We have
never declared or paid any dividends, nor do we have any present plan to pay any
cash dividends on our ordinary shares in the foreseeable future. We currently
intend to retain most, if not all, of our available funds and any future
earnings to operate and expand our business.




We are a
holding company incorporated in the Cayman Islands. We rely on dividends paid by
our direct and indirect subsidiaries, Sunergy BVI, Sunergy Hong Kong and Sunergy
Nanjing, for our cash needs, including the payment of dividends to the holders
of our ADSs and debt service on any debt we may incur through our Cayman holding
company. The payment of dividends by entities organized in China is subject to
limitations. Regulations in the PRC currently permit payment of dividends only
out of accumulated profits as determined in accordance with PRC accounting
standards and regulations. Sunergy Nanjing is also required to set aside at
least 10% of its after-tax profit based on PRC accounting standards each year to
its general reserves until the cumulative amount of such reserves reaches 50% of
its registered capital. These reserves are not distributable as cash dividends.
Sunergy Nanjing is also required to allocate a portion of its after-tax profits,
as determined by its board of directors, to its staff welfare and bonus funds,
which may not be distributed to equity owners. In addition, if Sunergy Nanjing
or Sunergy BVI incurs debt on its own behalf in the future, the instruments
governing the debt may restrict its ability to pay dividends or make other
distributions to us.




Our board
of directors has complete discretion on whether to pay dividends, subject to the
approval of our shareholders. Even if our board of directors decides to pay
dividends, the form, frequency and amount will depend upon our future operations
and earnings, capital requirements and surplus, general financial condition,
contractual restrictions and other factors that the board of directors may deem
relevant. Any dividend we declare will be paid to the holders of ADSs, subject
to the terms of the deposit agreement, to the same extent as holders of our
ordinary shares, subject to the terms of the deposit agreement, including the
fees and expenses payable under. Cash dividends on our ordinary shares, if any,
will be paid in U.S. dollars.




B.           Significant
Changes




Except as
disclosed elsewhere in this annual report, we have not experienced any
significant changes since the date of our audited consolidated financial
statements included in this annual report.




ITEM
      9.
            THE
      OFFER AND LISTING




A.           Offering and Listing
Details.




Our ADSs,
each representing six of our ordinary shares, have been listed on the Nasdaq
Global Market since May 17, 2007. Our ADSs trade under the symbol
“CSUN.”




For the
period from May 17, 2007 to May 27, 2010, the closing price of our ADSs on the
Nasdaq Global Market has ranged from $1.38 to $17.88 per ADS. For the year ended
December 31, 2009, the closing price ranged from $1.38 to $6.08 per
ADS.




The
following table provides the high and low closing prices for our ADSs on the
Nasdaq Global Market for the period indicated.




Trading PriceHigh
                
                
                Low$
                
                
                $Annual
      High and Low2007
      (from May 17, 2007)
                
                
                17.88
                
                
                
                5.052008
                
                
                17.71
                
                
                
                1.512009
                
                
                6.08
                
                
                
                1.38Quarterly
      High and LowFirst
      Quarter 2008
                
                
                17.71
                
                
                
                6.49Second
      Quarter 2008
                
                
                14.29
                
                
                
                7.49Third
      Quarter 2008
                
                
                12.03
                
                
                
                6.80Fourth
      Quarter 2008
                
                
                7.54
                
                
                
                1.51First
      Quarter 2009
                
                
                5.40
                
                
                
                1.38Second
      Quarter 2009
                
                
                6.08
                
                
                
                2.51Third
      Quarter 2009
                
                
                5.60
                
                
                
                3.37Fourth
      Quarter 2009
                
                
                5.04
                
                
                
                3.51First
      Quarter 2010
                
                
                5.52
                
                
                
                3.90Monthly
      Highs and LowsNovember
      2009
                
                
                4.45
                
                
                
                3.58December
      2009
                
                
                5.04
                
                
                
                3.95January
      2010
                
                
                5.52
                
                
                
                4.11February
      2010
                
                
                4.61
                
                
                
                4.03March
      2010
                
                
                4.31
                
                
                
                3.90April
      2010
                
                
                4.80
                
                
                
                4.08May
      2010 (through May 27, 2010)
                
                4.70
                
                
                3.65


76




B.           Plan of
Distribution


Not
applicable.




C.           Markets




Our ADSs,
each representing six of ordinary shares, have been listed on the Nasdaq Global
Market since May 17, 2007 and have been trading under the symbol
“CSUN.”




D.           Selling
Shareholders




Not
applicable.




E.           Dilution




Not
applicable.




F.           Expenses of the
Issue




Not
applicable.




ITEM
      10.
            ADDITIONAL
      INFORMATION




A.           Share
Capital




Not
applicable.




B.           Memorandum and Articles of
Association




We
incorporate by reference into this annual report the description of our amended
and restated memorandum of association contained in our F-1 registration
statement (File No. 333-142367) originally filed with the SEC on April 25, 2007,
as amended. Our shareholders adopted our amended and restated memorandum and
articles of association by a special resolution on April 24, 2007.




The
following are summaries of material provisions of our currently effective
amended and restated memorandum and articles of association, as well as the
Companies Law (2009 Revision), or Companies Law insofar as they relate to the
material terms of our ordinary shares.




Registered
Office and Objects




The
Registered Office of our company is at the offices ofthe offices of Codan Trust
Company (Cayman) Limited, Cricket Square, Hutchins Drive, PO Box 2681, Grand
Cayman, KY1-1111, Cayman Islands. The objects for which our company is
established are unrestricted and we have full power and authority to carry out
any object not prohibited by the Companies Law, as amended from time to time, or
any other law of the Cayman Islands.




Board of
Directors




See “Item
6.C. Board Practices — Board of Directors”


77




Ordinary
Shares




General.All of our
outstanding ordinary shares are fully paid and non-assessable.Certificates
representing the ordinary shares are issued in registered form. Our shareholders
who are non-residents of the Cayman Islands may freely hold and vote their
shares.




Dividends.The holders of our
ordinary shares are entitled to such dividends as may be declared by our
shareholders or board of directors subject to the Companies Law.




Voting Rights.Each ordinary
share is entitled to one vote on all matters upon which the ordinary shares are
entitled to vote. Voting at any meeting of shareholders is by show of hands
unless a poll is demanded or required by the rules of the designated stock
exchange as described in our amended and restate articles of association. A poll
may be demanded by (a) the chairman of the meeting, (b) at least three
shareholders present in person or, in the case of a shareholder being a
corporation, by its duly authorized representative or by proxy for the time
being entitled to vote at the meeting, (c) any shareholder or shareholders
present in person or, in the case of a shareholder being a corporation, by its
duly authorized representative or by proxy and representing not less than
one-tenth of the total voting rights of all the shareholders having the right to
vote at the meeting, (d) a shareholder or shareholders present in person or, in
the case of a shareholder being a corporation, by its duly authorized
representative or by proxy and holding not less than one-tenth of the issued
share capital of our voting shares or (e) if required by the rules of the
designated stock exchange, by any director or directors who, individually or
collectively, hold proxies in respect of shares representing 5% or more of the
total voting rights at such meeting.




A quorum
required for a meeting of shareholders consists of at least two shareholders
present in person or by proxy or, if a corporation or other non-natural person,
by its duly authorized representative representing not less than one-third of
the total issued voting shares. Shareholders’ meetings are held annually and may
be convened by our board of directors on its own initiative. Advance notice of
at least ten clear days is required for the convening of our annual general
meeting and other shareholders’ meetings.




An
ordinary resolution to be passed by the shareholders requires the affirmative
vote of a simple majority of the votes attaching to the ordinary shares cast in
a general meeting, while a special resolution requires the affirmative vote of
no less than two-thirds of the votes cast attaching to the ordinary shares. A
special resolution is required for important matters such as a change of name or
an amendment to our memorandum or articles of association. Holders of the
ordinary shares may effect certain changes by ordinary resolution, including
alter the amount of our authorized share capital, consolidate and divide all or
any of our share capital into shares of larger amount than our existing share
capital, and cancel any unissued shares.




Transfer of Shares.Subject
to the restrictions of our amended and restated articles of association, as
applicable, any of our shareholders may transfer all or any of his or her
ordinary shares by an instrument of transfer in the usual or common form or a
form prescribed by the designated stock exchange or any other form approved by
our board.




Our board
of directors may, in its absolute discretion, decline to register any transfer
of any ordinary share which is not fully paid up or on which we have a lien or
shares issued under any share incentive scheme for employees upon when a
restriction on transfer imposed thereby still subsists. Our directors may also
decline to register any transfer of any ordinary share unless (a) the instrument
of transfer is lodged with us, accompanied by the certificate for the ordinary
shares to which it relates and such other evidence as our board of directors may
reasonably require to show the right of the transferor to make the transfer; (b)
the instrument of transfer is in respect of only one class of ordinary shares;
(c) the instrument of transfer is properly stamped, if required; (d) in the case
of a transfer to joint holders, the number of joint holders to whom the ordinary
share is to be transferred does not exceed four; or (e) a fee of such maximum
sum as the Nasdaq Global Market may determine to be payable, or such lesser sum
as our board of directors may from time to time require, is paid to us in
respect thereof.




If our
directors refuse to register a transfer they shall, within two months after the
date on which the instrument of transfer was lodged, send to each of the
transferor and the transferee notice of such refusal. The registration of
transfers may, on prior notice being given by advertisement in one or more
newspapers or by electronic means, be suspended and the register closed at such
times and for such periods as our board of directors may from time to time
determine, provided, however, that the registration of transfers shall not be
suspended nor the register closed for more than 30 days in any
year.




Liquidation.On a return of
capital on winding up or otherwise (other than on conversion, redemption or
purchase of shares), assets available for distribution among the holders of
ordinary shares shall be distributed among the holders of the ordinary shares on
a pro rata basis. If our assets available for distribution are insufficient to
repay all of the paid-up capital, the assets will be distributed so that the
losses are borne by our shareholders proportionately.


78




Calls on Shares and Forfeiture of
Shares.Our board of directors may from time to time make calls upon
shareholders for any amounts unpaid on their shares in a notice served to such
shareholders at least 14 days prior to the specified time and place of payment.
The shares that have been called upon and remain unpaid are subject to
forfeiture.




Redemption of Shares.Subject
to the provisions of the Companies Law, the rules of the designated stock
exchange, our amended and restated memorandum and articles of association and to
any special rights conferred on the holders of any shares or class of shares, we
may issue shares on terms that they are subject to redemption at our option or
at the option of the holders, on such terms and in such manner as may be
determined by our board of directors.




Variations of Rights of Shares.All or any of the special rights attached to any class of shares may,
subject to the provisions of the Companies Law, be varied with the sanction of a
special resolution passed at a general meeting of the holders of the shares of
that class.




Inspection of Register of Members.Pursuant to our amended and restated articles of association, our
register of members and branch register of members shall be open for inspection
by shareholders for such times and on such days as our board of directors shall
determine, without charge, or by any other person upon a maximum payment of
$2.50 or such other sum specified by the board, at the registered office or such
other place at which the register is kept in accordance with the Companies Law
or, upon a maximum payment of $1.00 or such other sum specified by the board, at
our registration office, unless the register is closed in accordance with our
amended and restated articles of association.




Inspection of Books and
Records. No holders of our ordinary shares shall have any right of
inspecting any of our accounts, books or documents except as conferred by the
Companies Law or authorized by the directors or by us in general meeting.
However, we will make this annual report, which contains our audited financial
statements, available to shareholders and ADS holders. See “Item 10.H. Documents
on Display.”




C.           Material
Contracts




We have
not entered into any material contracts other than in the ordinary course of
business and other than those described in Item 4, “Information on the Company”
or elsewhere in this annual report on Form 20-F.




D.           Exchange
Controls




China’s
government imposes control over the convertibility of RMB into foreign
currencies. The conversion of RMB into foreign currencies, including U.S.
dollars, has been based on rates announced by the People’s Bank of China. On
July 21, 2005, the PRC government changed its decade-old policy of pegging the
value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is
permitted to fluctuate within a narrow and managed band against a basket of
certain foreign currencies. This change in policy has resulted in an
approximately 17.4 % appreciation of the RMB against the U.S. dollar between
July 21, 2005 and March 31, 2010. While the international reaction to the
RMB revaluation has generally been positive, there remains significant
international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in a further and more significant
appreciation of the RMB against the U.S. dollar.




Pursuant
to the Foreign Exchange Administration Regulations issued by the State Council
on January 29, 1996, and effective as of April 1, 1996 (and amended on January
14, 1997 and August 5, 2008, respectively) and the Administration Rules of the
Settlement, Sale and Payment of Foreign Exchange which came into effect on July
1, 1996, or the Rules, conversion of RMB into foreign exchange by foreign
investment enterprises for current account items, including the distribution of
dividends and profits to foreign investors of joint ventures, is permissible.
Foreign investment enterprises are permitted to remit foreign exchange from
their foreign exchange bank account in China on the basis of, inter alia, the
terms of the relevant joint venture contracts and the board resolutions
declaring the distribution of the dividend and payment of profits. The State
Council amended the Foreign Exchange Administration Rules on January 14, 1997
and August 5, 2008, respectively, providing that, among other things, an
important provision, as Article 5 provides that the State shall not impose
restrictions on recurring international current account payments and transfers.
Renminbi can be freely converted into foreign currencies for international
payment under capital accounts unless Chinese laws and regulations require
obtaining prior approval from SAFE. However, for the international income under
capital accounts, the conversion of foreign currencies into Renminbi is still
subject to the prior approval of SAFE.




Under the
Rules, foreign investment enterprises are required to open and maintain separate
foreign exchange accounts for capital account items (but not for other items).
In addition, foreign investment enterprises may only buy, sell and/or remit
foreign currencies at those banks authorized to conduct foreign exchange
business upon the production of valid commercial documents and, in the case of
certain capital account item transactions, document approval from
SAFE.


79


Currently,
foreign investment enterprises are required to apply to SAFE for “foreign
exchange registration certificates for foreign investment enterprises” (which
are granted to foreign investment enterprises, upon fulfilling specified
conditions and which are subject to review and renewal by SAFE on an annual
basis). With such foreign exchange registration certificates and required
underlying transaction documents,  or with approval documents from the
SAFE if the transactions are under capital account (which are obtained on a
transaction-by-transaction basis), foreign-invested enterprises may enter into
foreign exchange transactions at banks authorized to conduct foreign exchange
business to obtain foreign exchange for their needs.




E.
            Taxation




The
following summary of the material Cayman Islands, PRC and United States federal
income tax consequences of an investment in our ADSs or ordinary shares is based
upon laws and relevant interpretations thereof in effect as of the date of this
annual report on Form 20-F, all of which are subject to change. This summary
does not deal with all possible tax consequences relating to an investment in
our ADSs or ordinary shares, such as the tax consequences under state, local,
and other tax laws not addressed herein.




Cayman
Islands Taxation




The
Cayman Islands currently levies no taxes on individuals or corporations based
upon profits, income, gains or appreciation and there is no taxation in the
nature of inheritance tax or estate duty. There are no other taxes likely to be
material to us levied by the Government of the Cayman Islands except for stamp
duties which may be applicable on instruments executed in, or brought within the
jurisdiction of the Cayman Islands. The Cayman Islands is not party to any
double tax treaties. There are no exchange control regulations or currency
restrictions in the Cayman Islands.




We have
received an undertaking from the Governor in Cabinet of the Cayman Islands that,
in accordance with section 6 of the Tax Concessions Law (1999 Revision) of the
Cayman Islands, for a period of 20 years from August 22, 2006, no law which is
enacted thereafter in the Cayman Islands imposing any tax to be levied on
profits, income, gains or appreciations shall apply to us or our operations and,
in addition, that no tax to be levied on profits, income, gains or appreciations
or which is in the nature of estate duty or inheritance tax shall be payable (i)
on or in respect of the shares, debentures or other obligations of us or (ii) by
way of the withholding in whole or in part of a payment of dividend or other
distribution of income or capital by us to its members or a payment of principal
or interest or other sums due under a debenture or other obligation of
us.




People’s
Republic of China Taxation




Pursuant
to the New EIT Law and the New EIT Law Implementing Rules, both of which became
effective on January 1, 2008, dividends generated after January 1, 2008 and
payable by a foreign-invested enterprise to its foreign investors will be
subject to a 10% withholding tax if the foreign investors are considered as
non-PRC resident enterprises without any establishment or place of business
within China or if the dividends payable have no connection with the
establishment or place of business of the foreign investors within China, unless
any such foreign investor’s jurisdiction of incorporation has a tax treaty with
China that provides for a reduced withholding arrangement. The Cayman Islands,
where we are incorporated, does not have such a tax treaty with China. Sunergy
Hong Kong, our wholly owned subsidiary and the direct holder of 100% equity
interest in Sunergy Nanjing, is incorporated in Hong Kong. According to the
Mainland and Hong Kong Special Administrative Region Arrangement on Avoiding
Double Taxation or Evasion of Taxation on Income agreed between China and Hong
Kong, dividends paid by a foreign-invested enterprise in China to its direct
holding company in Hong Kong will be subject to withholding tax at a rate of no
more than 5% (if the foreign investor owns directly at least 25% of the shares
of the foreign-invested enterprise).  If Sunergy Hong Kong is regarded
as a non-PRC resident enterprise, and therefore would be subject to a 5%
withholding tax for any dividends payable to it from Sunergy Nanjing, the amount
of funds available to us to meet our cash requirements, including the payment of
dividends to our shareholders and debt service on any debt we may incur through
our Cayman holding company, could be materially reduced.


80


The New
EIT Law and the New EIT Law Implementation Rules provides that enterprises
established under the laws of foreign countries or regions whose "de facto
management bodies" are located within the PRC are considered PRC resident
enterprises and will be subject to the PRC Enterprise Income Tax at the rate of
25% on their worldwide income.  Under the Implementation Rules of the
New EIT Law, a "de facto management body" is defined as a body that has material
and overall management and control over manufacturing and business operations,
personnel, accounting, properties, etc. of an enterprise.  It is still
unclear whether we will be considered a PRC resident enterprise under the New
EIT Law.




Under the
New EIT Law and the New EIT Law Implementation Rules, if we and Sunergy Hong
Kong were regarded as PRC resident enterprises, the dividends payable to us from
Sunergy Nanjing would be exempt from the PRC enterprise income
tax.  If Sunergy Hong Kong is regarded as a non-PRC resident
enterprise, and therefore would be subject to a 5% withholding tax for any
dividends payable to it from Sunergy Nanjing, the amount of funds available to
us to meet our cash requirements, including the payment of dividends to our
shareholders and debt service on any debt we may incur through our Cayman
holding company, could be materially reduced.




In
addition, if we are regarded as a PRC resident enterprise under the New EIT Law,
any dividends to be distributed by us to our non-PRC shareholders or holders of
ADSs will be subject to a withholding tax. Unless there are further rules
announced by the Chinese tax authorities, we may be required under the New EIT
Law to withhold PRC income tax on our dividends payable to our non-PRC
shareholders or holders of ADSs, or any gain realized by our non-PRC
shareholders or holders of ADSs from transfer of the shares or
ADSs.




United
States Federal Income Taxation




The
following discussion describes the material U.S. federal income tax consequences
to U.S. Holders (as defined below) under current law of an investment in our
ADSs or ordinary shares. This discussion applies only to U.S. Holders that hold
the ADSs or ordinary shares as capital assets (generally, property held for
investment) and that have the U.S. dollar as their functional currency. This
discussion is based on the tax laws of the United States as in effect on the
date of this annual report and on U.S. Treasury regulations in effect or, in
some cases, proposed as of the date of this annual report, as well as judicial
and administrative interpretations thereof available on or before such date. All
of the foregoing authorities are subject to change, which change could apply
retroactively and could affect the tax consequences described
below.




The
following discussion does not deal with the tax consequences to any particular
investor or to persons in special tax situations such as:




·
            banks
      and other financial institutions;




·
            insurance
      companies;




·
            broker-dealers;




·
            traders
      that elect to use a mark-to-market method of
  accounting;




·
            tax-exempt
      entities;




·
            persons
      liable for alternative minimum tax;




·
            U.S.
      expatriates;




·
            regulated
      investment companies or real estate investment
  trusts;




·
            persons
      holding an ADS or ordinary share as part of a straddle, hedging,
      conversion or integrated
transaction;




·
            persons
      who acquired ADSs or ordinary shares pursuant to the exercise of any
      employee stock options or otherwise as
  compensation;




·
            persons
      that actually or constructively own 10% or more of the total combined
      voting power of all classes of our voting stock;
  or




·
            partnerships
      or other pass-through entities, or persons holding ADSs or ordinary shares
      through such entities.




81


INVESTORS
SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL
TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, FOREIGN
AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
OUR ADSs OR ORDINARY SHARES.




The
discussion below of the U.S. federal income tax consequences to “U.S. Holders”
will apply to you if you are a beneficial owner of our ADSs or ordinary shares
and you are, for U.S. federal income tax purposes:




·
            an
      individual who is a citizen or resident of the United
    States;




·
            a
      corporation (or other entity treated as a corporation for U.S. federal
      income tax purposes) organized under the laws of the United States, any
      state thereof or the District of
Columbia;




·
            an
      estate, the income of which 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 the control of one or more U.S. persons for all
      substantial decisions or (2) has a valid election in effect under
      applicable U.S. Treasury regulations to be treated as a U.S.
      person.




If you
are a partner in a partnership (or other entity treated as a partnership for
U.S. federal income tax purposes) that holds our ADSs or ordinary shares, your
tax treatment will generally depend on your status and the activities of the
partnership.




The
discussion below assumes that the representations contained in the deposit
agreement are true and that the obligations in the deposit agreement and any
related agreement have been and will be complied with in accordance with their
terms. If you hold our ADSs, you should be treated as the beneficial owner of
the underlying ordinary shares represented by those ADSs for U.S. federal income
tax purposes.




The U.S.
Treasury has expressed concerns that U.S. holders of ADSs may be claiming
foreign tax credits in situations where an intermediary in the chain of
ownership between the holder of an ADS and the issuer of the security underlying
the ADS has taken actions inconsistent with the ownership of the underlying
security by the person claiming the credit. Such actions (for example, a
pre-release of an ADS by a depositary) may also be inconsistent with the
claiming of the reduced rate of tax applicable to dividends received by certain
non-corporate U.S. holders of ADSs, including individual U.S. holders (discussed
below).  Accordingly, the availability of foreign tax credits or the
reduced tax rate for dividends received by certain non-corporate U.S. Holders,
including individual U.S. Holders, could be affected by actions taken by the
U.S. Treasury or the depositary.




Taxation
of Dividends and Other Distributions on the ADSs or Ordinary Shares




Subject
to the passive foreign investment company rules discussed below, the gross
amount of any distributions we make to you with respect to our ADSs or ordinary
shares (including the amount of any taxes withheld therefrom) will generally be
included in your gross income as dividend income on the date of actual or
constructive receipt by the depositary, in the case of ADSs, or by you, in the
case of ordinary shares, but only to the extent that the distribution is paid
out of our current or accumulated earnings and profits (as determined under U.S.
federal income tax principles). To the extent the amount of the distribution
exceeds our current and accumulated earnings and profits (as determined under
U.S. federal income tax principles), such excess amount will be treated first as
a tax-free return of your tax basis in your ADSs or ordinary shares, and then,
to the extent such excess amount exceeds your tax basis, as capital gain. We
currently do not, and we do not intend to, calculate our earnings and profits
under U.S. federal income tax principles. Therefore, a U.S. Holder should expect
that a distribution will generally be treated as a dividend even if that
distribution would otherwise be treated as a non-taxable return of capital or as
capital gain under the rules described above. Any dividends we pay will not be
eligible for the dividends-received deduction allowed to corporations in respect
of dividends received from other U.S. corporations.


82


With
respect to certain non-corporate U.S. Holders, including individual U.S.
Holders, for taxable years beginning before January 1, 2011, dividends will be
“qualified dividend income” that is taxed at the lower applicable capital gains
rate, provided that certain conditions are satisfied, including (1) our ADSs or
ordinary shares are readily tradable on an established securities market in the
United States, or we are eligible for the benefits of a qualifying income tax
treaty with the United States that includes an exchange of information program,
(2) we are neither a passive foreign investment company nor treated as such with
respect to you for our taxable year in which the dividend is paid and the
preceding taxable year, and (3) certain holding period requirements are met.
U.S. Treasury guidance indicates that common or ordinary shares, or ADSs
representing such shares, are considered for the purpose of clause (1) above to
be readily tradable on an established securities market in the United States if
they are listed on the Nasdaq Global Market, as are our ADSs (but not our
ordinary shares). There can be no assurance that the ADSs will be considered
readily tradable on an established securities market in later years. If we are
deemed to be a “resident enterprise” under PRC tax law (see Item 10, “Additional
Information—Taxation—People’s Republic of China Taxation”), we may be eligible
for the benefits of the income tax treaty between the United States and the PRC.
You should consult your tax advisors regarding the availability of the lower
capital gains rate applicable to qualified dividend income for any dividends
paid with respect to the ADSs or ordinary shares and any possible change in law
relating to the availability of such lower rate for dividends paid by
us.




Newly
enacted legislation requires certain U.S. Holders that are individuals, estates
or trusts to pay an additional 3.8% tax on, among other things, dividends on our
ADSs or ordinary shares for taxable years beginning after December 31,
2012.  You should consult your tax advisors regarding the effect, if
any, of this legislation on an investment in the ADSs or ordinary
shares.




Dividends
will constitute foreign source income for foreign tax credit limitation
purposes. If the dividends are qualified dividend income (discussed above), the
amount of the dividend taken into account for purposes of calculating the
foreign tax credit limitation will generally be limited to the gross amount of
the dividend, multiplied by the reduced tax rate applicable to qualified
dividend income and divided by the highest tax rate normally applicable to
dividends. The limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For this purpose, any
dividends distributed by us with respect to our ADSs or ordinary shares will be
“passive category income” or, in the case of certain U.S. Holders, “general
category income.” In addition, if PRC withholding taxes apply to dividends paid
to you with respect to the ADSs or ordinary shares (see Item 10, “Additional
Information—Taxation—People’s Republic of China Taxation”), subject to certain
conditions and limitations, such PRC withholding taxes may be treated as foreign
taxes eligible for credit against your U.S. federal income tax liability. The
rules relating to the determination of the foreign tax credit are complex, and
you should consult your tax advisors regarding the availability of a foreign tax
credit in your particular circumstances.




Taxation
of Disposition of the ADSs or Ordinary Shares




Subject
to the passive foreign investment company rules discussed below, you will
recognize taxable gain or loss on any sale, exchange or other taxable
disposition of an ADS or ordinary share equal to the difference between the
amount realized (in U.S. dollars) for the ADS or ordinary share and your tax
basis (in U.S. dollars) in the ADS or ordinary share. The gain or loss will be
capital gain or loss. If you are a non-corporate U.S. Holder, including an
individual U.S. Holder, who has held the ADS or ordinary share for more than one
year, you will be eligible for reduced tax rates. The deductibility of capital
losses is subject to limitations.




Newly
enacted legislation requires certain U.S. Holders that are individuals, estates
or trusts to pay an additional 3.8% tax on, among other things, capital gains
from the sale or other disposition of our ADSs or ordinary shares for taxable
years beginning after December 31, 2012.  You should consult your tax
advisors regarding the effect, if any, of this legislation on an investment in
the ADSs or ordinary shares.




Any gain
or loss that you recognize on a disposition of our ADSs or ordinary shares will
generally be treated as U.S. source income or loss for foreign tax credit
limitation purposes. However, if we are deemed to be a “resident enterprise”
under PRC tax law, we may be eligible for the benefits of the income tax treaty
between the United States and the PRC. In such event, if PRC tax were to be
imposed on any gain from the disposition of the ADSs or ordinary shares (see
Item 10, “Additional Information—Taxation—People’s Republic of China Taxation”),
a U.S. Holder that is eligible for the benefits of the treaty may elect to treat
such gain as PRC source income. You should consult your tax advisors regarding
the proper treatment of gain or loss in your particular
circumstances.




Passive
Foreign Investment Company




Based on
the market price of our ADSs, the value of our assets, and the composition of
our income and assets, although we do not believe that we were a “passive
foreign investment company,” or PFIC, for U.S. federal income tax purposes for
our taxable year ended December 31, 2009, we cannot assure you that we were not
a PFIC for such year.  A non-U.S. corporation will be a PFIC for any
taxable year if either:




·
            at
      least 75% of its gross income for such year is passive income;
      or




83


·
            at
      least 50% of the value of its assets (based on an average of the quarterly
      values of the assets) during such year is attributable to assets that
      produce passive income or are held for the production of passive income
      (the “asset test”).




For this
purpose, we will be treated as owning our proportionate share of the assets and
earning our proportionate share of the income of any other corporation in which
we own, directly or indirectly, at least 25% (by value) of the
stock.




We must
make a separate determination after the close of each taxable year as to whether
we were a PFIC for that year. The composition of our income and assets will be
affected by how, and how quickly, we use the cash we generate from our
operations and raise in any offering. Because the value of our assets for
purposes of the asset test will generally be determined by reference to the
market price of our ADSs or ordinary shares, fluctuations in the market price of
the ADSs or ordinary shares may cause us to become a PFIC. Although we do not
believe that we were a PFIC for our taxable year ended December 31, 2009,
because of the depressed market price of the ADSs and our retention of a
significant amount of cash during such year, there is a significant risk that we
could be treated as a PFIC for such year. Accordingly, we cannot assure you that
we were not a PFIC for such year.




If we are
a PFIC for any taxable year during which you hold ADSs or ordinary shares, we
will generally continue to be treated as a PFIC with respect to you for all
succeeding years during which you hold the ADSs or ordinary shares, unless we
cease to be a PFIC and you make a “deemed sale” election with respect to the
ADSs or ordinary shares, as applicable. If such election is made, you will be
deemed to have sold the ADSs or ordinary shares you hold at their fair market
value and any gain from such deemed sale would be subject to the rules described
in the following two paragraphs. After the deemed sale election, your ADSs or
ordinary shares with respect to which such election was made will not be treated
as shares in a PFIC unless we subsequently become a PFIC.




For each
taxable year that we are treated as a PFIC with respect to you, you will be
subject to special tax rules with respect to any “excess distribution” you
receive and any gain you recognize from a sale or other disposition (including a
pledge) of the ADSs or ordinary shares, unless you make a “mark-to-market”
election as discussed below. Distributions you receive in a taxable year that
are greater than 125% of the average annual distributions you received during
the shorter of the three preceding taxable years or your holding period for the
ADSs or ordinary shares will be treated as an excess distribution. Under these
special tax rules:




·
            the
      excess distribution or recognized 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 years in
      your holding period prior to the first taxable year in which we were 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 individuals or corporations, as applicable, for each
      such year, and the interest charge generally applicable to underpayments
      of tax will be imposed on the resulting tax attributable to each such
      year.




The tax
liability for amounts allocated to years prior to the year of disposition or
excess distribution cannot be offset by any net operating losses for such years,
and gains (but not losses) from a sale or other disposition of the ADSs or
ordinary shares cannot be treated as capital, even if you hold the ADSs or
ordinary shares as capital assets.




If we are
treated as a PFIC with respect to you for any taxable year, to the extent any of
our subsidiaries are also PFICs or we make direct or indirect equity investments
in other entities that are PFICs, you will be deemed to own shares in such
lower-tier PFICs that are directly or indirectly owned by us in that proportion
that the value of the ADSs or ordinary shares you own bears to the value of all
of our ADSs and ordinary shares, and you may be subject to the rules described
in the preceding two paragraphs with respect to the shares of such lower-tier
PFICs that you would be deemed to own. You should consult your tax advisors
regarding the application of the PFIC rules to any of our
subsidiaries.


84


A U.S.
Holder of “marketable stock” (as defined below) of a PFIC may make a
mark-to-market election for such stock to elect out of the PFIC rules described
above regarding excess distributions and recognized gains. If you make a
mark-to-market election for our ADSs or ordinary shares, you will include in
income for each year that we are a PFIC an amount equal to the excess, if any,
of the fair market value of the ADSs or ordinary shares you hold as of the close
of your taxable year over your adjusted basis in such ADSs or ordinary shares.
You will be allowed a deduction for the excess, if any, of the adjusted basis of
the ADSs or ordinary shares over their fair market value as of the close of the
taxable year. However, deductions will be allowable only to the extent of any
net mark-to-market gains on the ADSs or ordinary shares included in your income
for prior taxable years. Amounts included in your income under a mark-to-market
election, as well as any gain from the actual sale or other disposition of the
ADSs or ordinary shares, will be treated as ordinary income. Ordinary loss
treatment will apply to the deductible portion of any mark-to-market loss on the
ADSs or ordinary shares, as well as to any loss from the actual sale or other
disposition of the ADSs or ordinary shares, to the extent that the amount of
such loss does not exceed the net mark-to-market gains previously included for
such ADSs or ordinary shares. Your basis in the ADSs or ordinary shares will be
adjusted to reflect any such income or loss amounts. If you make a valid
mark-to-market election, the tax rules that apply to distributions by
corporations that are not PFICs would apply to distributions by us, except that
the lower capital gains rate applicable to qualified dividend income (discussed
above under “—Taxation of Dividends and Other Distributions on the ADSs or
Ordinary Shares”) would not apply.




The
mark-to-market election is available only for “marketable stock,” which is stock
that is traded in greater than de minimis quantities on at
least 15 days during each calendar quarter (“regularly traded”) on a qualified
exchange or other market, as defined in applicable U.S. Treasury regulations.
Our ADSs are listed on the Nasdaq Global Market, which is a qualified exchange
or other market for these purposes. Consequently, if the ADSs continue to be
listed on the Nasdaq Global Market and are regularly traded, and you are a
holder of ADSs, we expect that the mark-to-market election would be available to
you if we become a PFIC. Because a mark-to-market election cannot be made for
equity interests in any lower-tier PFICs that we own, a U.S. Holder may continue
to be subject to the PFIC rules described above regarding excess distributions
and recognized gains with respect to its indirect interest in any investments
held by us that are treated as an equity interest in a PFIC for U.S. federal
income tax purposes.




Alternatively,
a U.S. Holder of stock of a PFIC may make a “qualified electing fund” election
with respect to such corporation to elect out of the PFIC rules described above
regarding excess distributions and recognized gains.  A U.S. Holder
that makes a valid qualified electing fund election with respect to a PFIC will
generally include in income for a taxable year such holder’s pro rata share of the
corporation’s income for the taxable year.  However, the qualified
electing fund election is available only if the PFIC provides such U.S. Holder
with certain tax information as required under applicable U.S. Treasury
regulations.  We do not intend to prepare or provide the information
that would enable you to make a qualified electing fund election.




Under
newly enacted legislation, unless otherwise provided by the U.S. Treasury, each
U.S. shareholder of a PFIC is required to file an annual report containing such
information as the U.S. Treasury may require.  Prior to such
legislation, a U.S. shareholder of a PFIC was required to file Internal Revenue
Service Form 8621 only for each taxable year in which such shareholder received
distributions from the PFIC, recognized gain on a disposition of the PFIC stock,
or made a “reportable election.”  If we are or become a PFIC, you
should consult your tax advisors regarding any reporting requirements that may
apply to you.




You
should consult your tax advisors regarding the application of the PFIC rules to
your investment in our ADSs or ordinary shares.




Information
Reporting and Backup Withholding




Dividend
payments with respect to ADSs or ordinary shares and proceeds from the sale,
exchange or other disposition of ADSs or ordinary shares may be subject to
information reporting to the Internal Revenue Service and possible U.S. backup
withholding at a current rate of 28%, unless the conditions of an applicable
exception are satisfied. Backup withholding will not apply to a U.S. Holder that
furnishes a correct taxpayer identification number and makes any other required
certification or that is otherwise exempt from backup withholding. U.S. Holders
that are required to establish their exempt status generally must provide such
certification on Internal Revenue Service Form W-9. Under newly enacted
legislation, for taxable years beginning after March 18, 2010, certain
individuals holding the ADSs or ordinary shares other than in an account at a
financial institution may be subject to additional information reporting
requirements. U.S. Holders should consult their tax advisors regarding the
application of the U.S. information reporting and backup withholding
rules.




Backup
withholding is not an additional tax. Amounts withheld as backup withholding may
be credited against your U.S. federal income tax liability, and you may obtain a
refund of any excess amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the Internal Revenue Service and
furnishing any required information in a timely manner.


85


F.
            Dividends and Paying
      Agents




Not
Applicable.




G.
            Statement by
      Experts




Not
Applicable.




H.
            Documents on
      Display




We
previously filed with the SEC our registration statement on Form F-1
(Registration No. 333-144282, as amended) and the prospectus under the
Securities Act of 1933, with respect to our ordinary shares. We have also filed
with the SEC a related registration statement on F-6 (Registration No.
333-142574) to register the ADSs. We also filed with the SEC a registration
statement on Form S-8 (File Number 333 -148125, as amended) with respect to our
securities to be issued under our First Plan.




We are
currently subject to periodic reporting and other informational requirements of
the Exchange Act as applicable to foreign private issuers. Accordingly, we will
be required to file reports and other information with the SEC. Specifically, we
are required to file annually a Form 20-F no later than: (1) within six months
after the end of each fiscal year, which is December 31, for fiscal years ending
before December 15, 2011; and (2) within four months after the end of each
fiscal year for fiscal years ending on or after December 15, 2011. As a foreign
private issuer, we are exempt from the rules of the Exchange Act prescribing the
furnishing and content of proxy statements to shareholders. All information
filed with the SEC can be inspected and copied at the public reference
facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549.
You can request copies of these documents, upon payment of a duplicating fee, by
writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. You may also obtain
additional information over the Internet at the SEC’s website at www.sec.gov.




Our
financial statements have been prepared in accordance with U.S.
GAAP.




We will
furnish our shareholders with annual reports, which will include a review of
operations and annual audited consolidated financial statements prepared in
conformity with U.S. GAAP.




In
accordance with Nasdaq Stock Market Marketplace Rules 4350(b), we will post
this annual report on Form 20-F on our website at
http://www.chinasunergy.com.




I.
            Subsidiary
      Information




For a
listing of our subsidiaries, see Item 4, “Information on the
Company—Organizational Structure.”




ITEM
      11.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Inflation




Since our
inception, inflation in China has not materially impacted our results of
operations. According to the National Bureau of Statistics of China, the
consumer price index in China increased by 3.9%, 1.8%, 1.5%, 4.8% and 5.9% in
2004, 2005, 2006, 2007 and 2008, respectively, and decreased slightly by 0.7% in
2009.




Foreign
Exchange Risk




A major
portion of our sales are denominated in Renminbi and Euros, with the remainder
in U.S. dollars, while a substantial portion of our costs and expenses is
denominated in U.S. dollars and Renminbi, with the remainder in Euros.
Therefore, fluctuations in currency exchange rates could have a significant
impact on our financial stability due to a mismatch among various foreign
currency-denominated sales and costs. Fluctuations in exchange rates,
particularly among the U.S. dollar, Renminbi and Euro, affect our gross and net
profit margins and could result in foreign exchange and operating
losses.




Our exposure to foreign exchange risk
primarily relates to currency gains or losses resulting from timing differences
between signing of sales contracts and settling of these contracts. As of
December 31, 2009, we had a Renminbi denominated cash balance of RMB563.7
million and a U.S. dollar denominated cash balance of $29.2 million. Assuming we
had converted the Renminbi denominated cash balance of RMB563.7 million as of
December 31, 2009 into U.S. dollar at the exchange rate of RMB6.8259 for $1.00
as of December 31, 2009, this cash balance would have been $82.6 million.
Assuming a further 1% appreciation of the U.S. dollar against the Renminbi, this
cash balance would have decreased to $81.8 million as of December 31, 2009.
Therefore, if we decide to convert our Renminbi into U.S. dollars for the
purpose of making payments for dividends on our ordinary shares or ADSs or for
other business purposes, any appreciation of the U.S. dollar against the
Renminbi would have a negative effect on the U.S. dollar amount available to
us.




86




We are
also subject to foreign currency translation risk.  Our financial
statements are expressed in U.S. dollars but the functional currency of our
operating subsidiary is Renminbi. We translate monetary assets and liabilities
denominated in other currencies into Renminbi at the rates of exchange in effect
at each balance sheet date. Depending on movements in foreign exchange rates,
the foreign currency translation may have an adverse impact on our consolidated
financial statements. We recorded these exchange gains and losses in the
statements of operations. We recorded net foreign currency losses of $1.2
million, $6.9 million and $0.5 million in 2007, 2008 and 2009,
respectively.




In 2009,
our exposure to foreign currency risk was also impacted by an embedded foreign
currency forward contract.  One of our supply contracts provided that
the purchase price of the silicon raw materials to be acquired was denominated
in U.S. dollars, which is not the functional currency of either of the
contracting parties.  Accordingly, the contract contains an embedded
foreign currency forward contract, which is required to be bifurcated and
accounted for at fair value. Fluctuations in forward foreign exchange rates have
impacted our assessment in determining the fair value of our embedded
derivative. However, this supply contract was terminated in September 2009. As a
result, in 2009, we recorded a gain on the change in fair value of the embedded
derivative of $7.6 million which was included in the line item “Change in fair
value of derivative” in the consolidated statements of operations.




In 2009,
we entered into a series of foreign currency forward contracts with certain
banks to hedge our exposure to foreign currency exchange risk. As of December
31, 2009, we had foreign currency forward contracts with a total contract value
of approximately EUR6.0 million. As with all hedging instruments, there are
risks associated with the use of foreign currency forward
contracts.  As at December 31, 2009, we recorded a gain on change in
fair value of derivatives related to the forward foreign currency exchange
contracts of $0.4 million, which was included in the line item “Change in fair
value of derivative” in the consolidated statements of operations. While the use
of such foreign currency forward contracts provides us with protection from
certain fluctuations in foreign currency exchange, we potentially forgo the
benefits that might result from favorable fluctuations in foreign currency
exchange. In addition, any default by the counterparties to these transactions
could adversely affect our financial condition and results of
operations.




Counterparty
Risk




Outstanding financial derivative
instruments expose us to credit loss in the event of non-performance by the
counterparties to the agreements. On a periodic basis, we review the credit
ratings of our counterparties and adjust our exposure as deemed appropriate. The
counterparty risk has been considered in the fair value measurement of
derivative instruments.





Interest
Rate Risk




Our exposure to interest rate risk
primarily relates to interest expenses incurred by our short-term borrowings, as
well as interest income generated by excess cash invested in demand deposits
with original maturities of three months or less. Such interest-earning
instruments carry a degree of interest rate risk. We have not used any
derivative financial instruments to manage our interest rate risk exposure. We
have not been exposed nor do we anticipate being exposed to material risks due
to changes in interest rates, because most of our borrowings bear fixed interest
rates.As
of December 31, 2009, we had total short-term bank borrowings amounting to
$102.5 million, all of which was utilized, and the average interest rate on the
amounts outstanding was 5.25%. Based on our short-term bank borrowings as of
December 31, 2009, a 1% increase in average interest rate would result in
approximately a $50,000 increase in our interest expense on an annual basis. Our
future interest expense may increase due to changes in market interest
rates.




ITEM
      12.
            DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY
SECURITIES




A.
            Debt
      Securities





Not
applicable.


87


B.
            Warrants and
      Rights




Not
applicable.




C.
            Other
      Securities





Not
applicable.




D.
            American Depositary
      Shares




Fees
and Charges Payable by ADS Holders




According
to the deposit agreement between us and the depositary, JPMorgan Chase Bank
N.A., our ADR holders may have to pay the following fees and charges to JPMorgan
Chase Bank N.A. in connection with ownership of the ADR:




Category
              
              Depositary
      actions
              
              Associated
      fee(a)
      Depositing or substituting the underlying shares
              
              Each
      person to whom ADSs are issued against deposits of shares, including
      deposits and issuances in respect of:
                ·Share distributions, stock dividend, stock split,
      merger
                ·Exchange of securities or any other transaction or event
      affecting the ADSs or the deposited securities
              
              US$5.00
      for each 100 ADSs (or portion thereof) evidenced by the ADRs
      issued(b)
      Receiving or distributing dividends
              
              Distribution
      of cash dividends
              
              US$0.02
      or less per ADS(c)
      Selling or exercising rights
              
              Distribution
      or sale of securities, the fee being in an amount equal to the fee for the
      execution and delivery of ADSs which would have been charged as a result
      of the deposit of such securities
              
              Up
      to US$5.00 for each 100 ADSs (or portion thereof)(d)
      Withdrawing an underlying security
              
              Acceptance
      of ADRs surrendered for withdrawal of deposited securities
              
              US$5.00
      for each 100 ADSs (or portion thereof) evidenced by the ADRs
      surrendered(e)
      Transferring, splitting or grouping receipts
              
              Transfers
      of depositary receipts
              
              US$1.50
      per ADS(f)
      General depositary services, particularly those charged on an annual
      basis
              
              Services
      performed by the depositary in administering the ADRs
              
              US$0.02
      per ADS (or portion thereof) not more than once each calendar year and
      payable at the sole discretion of the depositary by billing ADR Holders or
      by deducting such charge from one or more cash dividends or other cash
      distributions




88





(g)
      Expenses of the Depositary
                
                Expenses
      incurred on behalf of ADR Holders in connection with:
                  ·Compliance with foreign exchange control regulations or any law or
      regulation relating to foreign investment
                  ·The depositary's or its custodian’s compliance with applicable law,
      rule or regulation
                  ·Stock transfer or other taxes and other governmental
      charges
                  ·Cable, telex and facsimile transmission and delivery
      charges
                  ·fees for the transfer or registration of deposited securities in
      connection with the deposit or withdrawal of deposited
      securities
                  ·Expenses of the depositary in connection with the conversion of
      foreign currency into U.S. dollars (which are paid out of such foreign
      currency)
                  ·Any other charge payable by depositary or its agents in connection
      with the servicing of the shares or the deposited
    securities
                
                Expenses
      payable at the sole discretion of the depositary by billing ADR Holders or
      by deducting such charges from one or more cash dividends or other cash
      distributions




We will
pay all other charges and expenses of the depositary and any agent of the
depositary (except the custodian) pursuant to agreements from time to time
between us and the depositary. The fees described above may be amended from time
to time.




Fees
and Payments from the Depositary to Us




The
depositary has agreed to reimburse us for certain expenses we incur that are
related to establishment and maintenance of the ADR program, including investor
relations expenses and stock exchange application and listing
fees.  There are limits on the amount of expenses for which the
depositary will reimburse us, but the amount of reimbursement available to us is
not related to the amounts of fees the depositary collects from
investors.  In 2009, we did not receive any payments from the
depository or any reimbursement relating to the ADS facility.





II.
            PART
      II




ITEM
      13.
            DEFAULTS,
      DIVIDEND ARREARAGES AND
DELINQUENCIES




None.




ITEM
      14.
            MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS




The
following “Use of Proceeds” information relates to:




·
            the
      registration statement on Form F-1 (File number: 333-142367), or the IPO
      Registration Statement for our initial public offering of 9,775,000
      American depositary shares, which IPO Registration Statement was declared
      effective by the SEC on May 16, 2007;
and




·
            the registration statement on
      Form F-3 (File number: 333-151518), or the Shelf Registration Statement
      for our registration of convertible senior notes, which Shelf Registration
      Statement was declared effective by the SEC on June 19,
      2008.




We
received net proceeds after expenses of approximately $95.9 million from our
initial public offering and net proceeds of approximately $50.2 million
from the sale of our convertible senior notes.


89


The net
proceeds from our public offering on NASDAQ were allocated as
follows:




·
            approximately
      $60 million for purchasing raw materials and other working capital
      requirements; and




·
            approximately
      $20 million for modifying our existing solar cell manufacturing lines and
      expanding our solar cell manufacturing
  facilities.




Among the
remaining amount of the net proceeds, approximately $11 million is currently
restricted cash deposited at a bank to secure certain bank guarantee related to
our purchase of raw materials.




Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Cowen and Company, LLC and
Jefferies & Company, Inc. served as the underwriters for our initial public
offering.




We used
the net proceeds from the sale of our convertible senior notes as
follows:




·
            approximately
      $30 million for expansion of production
  capacity;




·
            approximately
      $10 million for enhancement of research and development;
    and




·
            the
      reminder for development, and general corporate
  purposes




Credit
Suisse Securities (USA) LLC served as the initial purchaser for the sale of
our convertible senior notes.




As of
December 31, 2009, our cash resources amount to $123.9 million, comprised of
cash on hand and demand deposits.




See “Item 10. Additional Information”
for a description of the rights of securities holders, which remain
unchanged.




ITEM
      15.
            CONTROLS
      AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




Our
management, with the participation of our chief executive officer and chief
financial officer, has performed an evaluation of the effectiveness of our
disclosure controls and procedures within the meaning of Rules 13a-15(e) and
15d-15(e) of the Exchange Act as of the end of the period covered by this
report. Based on such evaluation, our management has concluded that, as of the
end of the period covered by this annual report, our disclosure controls and
procedures were effective.




Management’s
Annual Report on Internal Control Over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) under the
Exchange Act. Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements in accordance with
generally accepted accounting principles and includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of a company’s assets, (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of consolidated
financial statements in accordance with generally accepted accounting
principles, and that a company’s receipts and expenditures are being made only
in accordance with authorizations of a company’s management and directors, and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of a company’s assets that
could have a material effect on the consolidated financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. In addition, projections of any evaluation of
effectiveness of our internal control over financial reporting to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies and procedures
may deteriorate.




As
required by Section 404 of the Sarbanes-Oxley Act and related rules as
promulgated by the SEC, management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2009 using criteria
established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.


90


Based on
this assessment, management concluded that our internal control over financial
reporting was effective as of December 31, 2009 based on the criteria
established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.




Our independent registered public
accounting firm, Deloitte Touche Tohmatsu CPA Ltd., has audited our internal
control over financial reporting included in this annual report on Form
20-F.




Attestation
Report of the Independent Registered Public Accounting Firm




To the
Board of Directors and Shareholders of China Sunergy Co. Ltd.





We have
audited the internal control over financial reporting of China Sunergy Co., Ltd.
(the "Company")  and subsidiaries (collectively referred to as the
"Group") as of December 31, 2009, based on the criteria established in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Group's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management's Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Group's internal control over
financial reporting based on our audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audit provides a reasonable basis for our opinion.




A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.  A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.




Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis.  Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.




In our
opinion, the Group maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on the criteria
established in Internal
Control -Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and the
related financial statement schedule as of and for the year ended December
31, 2009 of the Group and our report dated May 28, 2010 expressed an unqualified
opinion on those financial statements and financial statement
schedule.


91


/s/
DELOITTE  TOUCHE TOHMATSU CPA LTD.




Shanghai,
China




May 28,
2010




Changes
in Internal Control over Financial Reporting




No change
in our internal control over financial reporting occurred during the year ended
December 31, 2009 that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




ITEM
      16A.
            AUDIT
      COMMITTEE FINANCIAL EXPERT




Our board
of directors has determined that Merry Tang, an independent director and member
of our audit committee, is an audit committee financial expert.




ITEM
      16B.
            CODE
      OF ETHICS




Our board
of directors has adopted a code of ethics that applies to our directors,
officers, employees and agents, including certain provisions that specifically
apply to our chief executive officer, chief financial officer, senior finance
officer, controller, vice presidents and any other persons who perform similar
functions for us. We hereby undertake to provide to any person without charge, a
copy of our code of business conduct and ethics within ten working days after we
receive such person’s written request.




ITEM
      16C.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES




The
following table sets forth the aggregate fees by categories specified below in
connection with certain professional services rendered by Deloitte Touche
Tohmatsu CPA Ltd., our principal external auditors, for the periods indicated.
We did not pay any tax related or other fees to our auditors in 2008 and we did
not pay our auditors any fees other than audit fees in 2009.




2008
                    
                    
                    2009Audit
      fees(1)
                    
                    $
                    1,140,516
                    
                    
                    $
                    1,097,871Audit-related
      fees(2)
                    
                    $
                    393,384
                    
                    
                    
                    —Tax
      fees
                    
                    
                    —
                    
                    
                    
                    —All
      other fees
                    
                    
                    —
                    
                    
                    
                    —


(1)
            “Audit
      fees” means the aggregate fees billed in each of the fiscal years listed
      for professional services rendered by our principal auditors for the audit
      of our annual financial statements.




(2)
            “Audit-related
      fees” means the aggregate fees billed in each of the fiscal years listed
      for assurance and related services by our principal auditors that are
      reasonably related to the performance of the audit or review of our
      financial statements and are not reported under “Audit fees.” Services
      comprising the fees disclosed under the category of “Audit-related fees”
      involve principally the issue of comfort letter, rendering of listing
      advice, and other audit-related services for the years ended December 31,
      2008 and December 31, 2009.




We
engaged Deloitte Touche Tohmatsu CPA Ltd. in 2006. Total service fees billed
related to these professional services in 2008 and 2009 amounted to $1,533,900
and $1,097,871, respectively.




The
policy of our audit committee is to pre-approve all audit and non-audit services
provided by Deloitte Touche Tohmatsu CPA Ltd., including audit services,
audit-related services, tax services and other services as described above,
other than those for de minimus services which are approved by the Audit
Committee prior to the completion of the audit.




ITEM
      16D.
            EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES




We are in
compliance with the Nasdaq corporate governance rules with respect to the audit
committee.


92


ITEM
      16E.
            PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS.




During
the fourth quarter of 2008, we conducted open market repurchases of the
convertible senior notes, and through December 31, 2008, we repurchased $6.5
million aggregate principal amount of the convertible senior notes for a total
cash consideration of $2.0 million.
 
 In June
2009, we conducted open market repurchases of $4.0 million aggregate principal
amount of the convertible senior notes for a total cash consideration of $1.8
million.





ITEM
16F.
            CHANGE IN REGISTRANT’S CERTIFYING
      ACCOUNTANT




Not applicable.




ITEM
      16G.
            CORPORATE
      GOVERNANCE




Rule 5635(c) of the Nasdaq Rules
requires a Nasdaq listed company to obtain its shareholders’ approval of stock
option plans or other equity compensation arrangements, and any material
amendments to such plans or arrangements. Rule 5615 of the Nasdaq Rules permits
a foreign private issuer like our company to follow home country practice in
certain corporate governance matters. Upon board approval in May 2009, we
effected amendments to our First Plan. We believe that some of the amendments
are material changes to the then existing plan.  Our Cayman Islands
counsel has provided a letter to Nasdaq dated May 14, 2009, confirming that
under the existing Cayman Islands law, we are not required to obtain
shareholders’ approval for amendments to our existing equity incentive plan.
Nasdaq has acknowledged the receipt of such letter and our home country practice
with respect to approval for amendments to our equity incentive
plan.




Other than the home country practice
described above, we are not aware of any significant ways in which our corporate
governance practices differ from those followed by U.S. domestic companies under
the Nasdaq Rules.




III.
            PART
      III




ITEM
      17.
            FINANCIAL
      STATEMENTS




We have
elected to provide financial statements pursuant to Item 18.




ITEM
      18.
            FINANCIAL
      STATEMENTS




The
consolidated financial statements of China Sunergy and its subsidiaries are
included at the end of this annual report.




ITEM
      19.
            EXHIBITS




Exhibit
                    Number
                  
                  Description of Document1.1
                  
                  Amended
      and Restated Memorandum and Articles of Association of the Registrant
      (incorporated by reference to Exhibit 3.2 from our Registration Statement
      on Form F-1 (file no. 333-142367) filed with the Securities and Exchange
      Commission on April 25, 2007).2.1
                  
                  Registrant’s
      Specimen American Depositary Receipt (included in Exhibit
      2.3).2.2
                  
                  Registrant’s
      Specimen Certificate for Ordinary shares (incorporated by reference to
      Exhibit 4.2 from our Registration Statement on Form F-1 (file no.
      333-142367) filed with the Securities and Exchange Commission on April 25,
      2007).2.3
                  
                  Form
      of Deposit Agreement among the Registrant, JPMorgan Chase Bank, N.A. as
      depositary, and holders of the American Depositary Receipts (incorporated
      by reference to Exhibit 4.3 from our Registration Statement on Form F-1
      Amendment No. 2 (file no. 333-142367) filed with the Securities and
      Exchange Commission on April 25, 2007).2.4
                  
                  Indenture
      dated as of July 1, 2008 between Wilmington Trust Company and the
      Registrant (incorporated by reference to Exhibit 4.8 of the Report of
      Foreign Private Issuer on Form 6-K filed by China Sunergy Co., Ltd. on
      July 2, 2008).




93





Exhibit
                    Number
                  
                  Description of Document4.1
                  
                  Subscription
      Agreement among the Registrant and other parties therein dated as of
      September 17, 2006 (incorporated by reference to Exhibit 4.4 from our
      Registration Statement on Form F-1 (file no. 333-142367) filed with the
      Securities and Exchange Commission on April 25, 2007).4.2
                  
                  Shareholders
      Agreement among the Registrant and other parties therein dated as of
      September 26, 2006, amended as of October 24, 2006, March 22, 2007 and
      April 24, 2007 (incorporated by reference to Exhibit 4.5 from our
      Registration Statement on Form F-1 (file no. 333-142367) filed with the
      Securities and Exchange Commission on April 25, 2007).4.3
                  
                  Registration
      Rights Agreement among the Registrant and other parties therein dated as
      of September 26, 2006 (incorporated by reference to Exhibit 4.6 from
      our Registration Statement on Form F-1 (file no. 333-142367) filed with
      the Securities and Exchange Commission on April 25,
  2007).4.4
                  
                  Sale
      and Purchase Agreement among the Registrant, Sunergy BVI and other parties
      therein dated as of August 29, 2006 (incorporated by reference to Exhibit
      4.7 from our Registration Statement on Form F-1 (file no. 333-142367)
      filed with the Securities and Exchange Commission on April 25,
      2007).4.5
                  
                  Agreement
      for the Transfer and Assumption of Obligations among the Registrant,
      Sunergy BVI and other parties therein dated as of August 29,
      2006(incorporated by reference to Exhibit 4.8 from our Registration
      Statement on Form F-1 (file no. 333-142367) filed with the Securities and
      Exchange Commission on April 25, 2007).4.6
                  
                  Subscription
      Agreement among the Sunergy BVI, Sunergy Nanjing and other parties therein
      dated as of April 4, 2006(incorporated by reference to Exhibit 4.9 from
      our Registration Statement on Form F-1 (file no. 333-142367) filed with
      the Securities and Exchange Commission on April 25,
  2007)4.7
                  
                  Warrant
      Purchase Agreement among the Sunergy BVI, Sunergy Nanjing and other
      parties therein dated as of March 8, 2006(incorporated by reference to
      Exhibit 4.10 from our Registration Statement on Form F-1 (file no.
      333-142367) filed with the Securities and Exchange Commission on April 25,
      2007).4.8
                  
                  Amended
      and Restated Share Incentive Plan (incorporated by reference to Exhibit
      4.1 from our Post-Effective Amendment No. 1 to Registration Statement on
      Form S-8 (File No. 333-148125), as amended, filed with the Commission on
      June 22, 2009).4.9
                  
                  Second
      Share Incentive Plan, including form of Restricted Share Award Agreement
      (incorporated by reference to Exhibit 4.9 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.10
                  
                  Form
      of Indemnification Agreement between the Registrant and its directors
      (incorporated by reference to Exhibit 10.2 from our Registration Statement
      on Form F-1 (file no. 333-142367) filed with the Securities and Exchange
      Commission on April 25, 2007).4.11*
                  
                  Form
      of Employment Agreement between the Registrant and Senior Executive
      Officers of the Registrant.4.12
                  
                  Form
      of Director Agreement between the Registrant and certain independent
      directors (incorporated by reference to Exhibit 4.12 from our Annual
      Report on Form 20-F filed with the Securities and Exchange Commission on
      June 9, 2008).4.13
                  
                  English
      Translation of Authorization License for Usage of Trademark between China
      Electric Equipment Group Co., Ltd. and Sunergy Nanjing dated as of June 7,
      2006(incorporated by reference to Exhibit 10.4 from our Registration
      Statement on Form F-1 (file no. 333-142367) filed with the Securities and
      Exchange Commission on April 25, 2007).4.14
                  
                  English
      Translation of Trademark License Agreement between China Electric
      Equipment Group Co., Ltd. and Sunergy Nanjing dated as of March 15,
      2006(incorporated by reference to Exhibit 10.5 from our Registration
      Statement on Form F-1 (file no. 333-142367) filed with the Securities and
      Exchange Commission on April 25, 2007).4.15
                  
                  English
      Translation of License Authorization for Usage of Trademark between China
      Electric Equipment Group Co., Ltd. and Sunergy Nanjing dated as of
      February 9, 2006(incorporated by reference to Exhibit 10.6 from our
      Registration Statement on Form F-1 (file no. 333-142367) filed with the
      Securities and Exchange Commission on April 25, 2007).4.16
                  
                  English
      Translation of Purchase Contract between Jiangsu Zhongneng and Sunergy
      Nanjing  dated as of March 1, 2007 (incorporated by reference to
      Exhibit 10.24 from our Registration Statement on Form F-1 (file no.
      333-142367) filed with the Securities and Exchange Commission on April 25,
      2007).




94





Exhibit
                    Number
                  
                  Description of Document4.17
                  
                  English
      Translation of Guarantee Contract between China Electric Equipment Group
      Co., Ltd. and Bank of Communications dated as of November 30, 2006
      (incorporated by reference to Exhibit 10.31 from our Registration
      Statement on Form F-1 (file no. 333-142367) filed with the Securities and
      Exchange Commission on April 25, 2007).4.18
                  
                  English
      Translation of Property Lease Contract between CEEG (Nanjing) Special
      Transformers Co., Ltd. and Sunergy Nanjing dated as of August 29, 2006
      (incorporated by reference to Exhibit 10.37 from our Registration
      Statement on Form F-1 (file no. 333-142367) filed with the Securities and
      Exchange Commission on April 25, 2007).4.19
                  
                  Series
      A and Series B Preferred Shares Sale and Purchase Agreement dated as of
      March 22, 2007 (incorporated by reference to Exhibit 10.39 from our
      Registration Statement on Form F-1 (file no. 333-142367) filed with the
      Securities and Exchange Commission on April 25, 2007).4.20
                  
                  English
      Translation of Joint Venture Contract between Sunergy BVI and CEEG in 2007
      (incorporated by reference to Exhibit 4.50 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.21
                  
                  English
      Translation of Land Use Right Transfer Agreement between China Electric
      Equipment Group Co., Ltd. and Sunergy Nanjing  dated as of July
      23, 2007 (incorporated by reference to Exhibit 4.51 from our Annual Report
      on Form 20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.22
                  
                  English
      Translation of Form of Equipment Purchase Contract between China Electric
      Equipment Group Co., Ltd and Sunergy Nanjing (incorporated by reference to
      Exhibit 4.52 from our Annual Report on Form 20-F filed with the Securities
      and Exchange Commission on June 9, 2008).4.23
                  
                  English
      Translation of Form of Guarantee Contract between China Electric Equipment
      Group Co., Ltd. and Bank of Communications (incorporated by reference to
      Exhibit 4.53 from our Annual Report on Form 20-F filed with the Securities
      and Exchange Commission on June 9, 2008).4.24
                  
                  English
      Translation of Comprehensive Credit Granting Contract between Sunergy
      Nanjing and China Citic Bank dated as of January 9, 2008 (incorporated by
      reference to Exhibit 4.54 from our Annual Report on Form 20-F filed with
      the Securities and Exchange Commission on June 9,
2008).4.25
                  
                  English
      Translation of Maximum Guarantee Contract between China Electric Equipment
      Group Co., Ltd. and China Citic Bank dated as of January 9, 2008
      (incorporated by reference to Exhibit 4.55 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.26
                  
                  English
      Translation of Maximun Guarantee Contract between China Electric Equipment
      Group Co., Ltd. and Huaxia Bank dated as of May 31, 2007(incorporated by
      reference to Exhibit 4.56 from our Annual Report on Form 20-F filed with
      the Securities and Exchange Commission on June 9,
2008).4.27
                  
                  English
      Translation of Form of Guarantee Contract between China Electric Equipment
      Group Co., Ltd. and Industrial and Commercial Bank of China (incorporated
      by reference to Exhibit 4.57 from our Annual Report on Form 20-F filed
      with the Securities and Exchange Commission on June 9,
    2008).4.28
                  
                  English
      Translation of Maximum Guarantee Contract between China Electric Equipment
      Group Co., Ltd. and Evergrowing Bank dated as of November 1, 2007
      (incorporated by reference to Exhibit 4.58 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.29
                  
                  English
      Translation of Guarantee Contract among China Electric Equipment Group,
      Tingxiu Lu and  Agriculture Bank of China dated as of December
      27, 2007 (incorporated by reference to Exhibit 4.59 from our Annual Report
      on Form 20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.30
                  
                  English
      Translation of Guarantee Contract between China Electric Equipment Group
      Co., Ltd. and  Nanjing Jiangning Rural Credit Cooperative dated
      as of January 24, 2008 (incorporated by reference to Exhibit 4.60 from our
      Annual Report on Form 20-F filed with the Securities and Exchange
      Commission on June 9,
2008).




95





Exhibit
                    Number
                  
                  Description of Document4.31
                  
                  English
      Translation of Guarantee Contract between China Construction Bank and
      China Electric Equipment Group Co., Ltd. dated as of November 15,2007
      (incorporated by reference to Exhibit 4.61 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008)4.32
                  
                  English
      Translation of Guarantee Contract between Tingxiu Lu and  Bank
      of Shanghai dated as of February 2, 2008 (incorporated by reference to
      Exhibit 4.62 from our Annual Report on Form 20-F filed with the Securities
      and Exchange Commission on June 9, 2008).4.33
                  
                  English
      Translation of Guarantee Contract between China Electric Equipment Group
      Co., Ltd. and Bank of Shanghai dated as of February 2, 2008 (incorporated
      by reference to Exhibit 4.63 from our Annual Report on Form 20-F filed
      with the Securities and Exchange Commission on June 9,
    2008).4.34
                  
                  English
      Translation of Credit Granting Contract between Sunergy Nanjing and China
      Merchant Bank dated as of January 18, 2008 (incorporated by reference to
      Exhibit 4.64 from our Annual Report on Form 20-F (file no .001-33433)
      filed with the Securities and Exchange Commission on June 9,
      2008).4.35
                  
                  English
      Translation of Agreement on Co-Construction Transformer Substation between
      China Electric Equipment Group Co., Ltd. dated as of November 2, 2007
      (incorporated by reference to Exhibit 4.65 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.36†
                  
                  Sales
      Contract between Aleo Solar AG and Sunergy Nanjing dated as of October 4,
      2007 as well as Supplementary Contract dated as of January 21, 2008
      (incorporated by reference to Exhibit 4.66 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.37
                  
                  English
      Translation of Sales Contract between CEEG Nanjing International Trade
      Co., Ltd. and Sunergy Nanjing dated as of October 15, 2007. (incorporated
      by reference to Exhibit 4.67 from our Annual Report on Form 20-F filed
      with the Securities and Exchange Commission on June 9,
    2008).4.38
                  
                  English
      Translation of Purchase Contract between CEEG (Nanjing) Semiconductor
      Material Co., Ltd. and Sunergy Nanjing dated as of December 11, 2007.
      (incorporated by reference to Exhibit 4.68 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.39
                  
                  English
      Translation of Form of Purchase Contract between CEEG (Nanjing)
      Semiconductor Material Co., Ltd. and Sunergy Nanjing. (incorporated by
      reference to Exhibit 4.69 from our Annual Report on Form 20-F filed with
      the Securities and Exchange Commission on June 9,
2008).4.40
                  
                  English
      Translation of Purchase Contract between CEEG (Nanjing) Semiconductor
      Material Co., Ltd. and Sunergy Nanjing dated as of December 29, 2007.
      (incorporated by reference to Exhibit 4.70 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.41
                  
                  English
      Translation of Sales Contract between CEEG (Nanjing) Semiconductor
      Material Co., Ltd. and Sunergy Nanjing dated as of November 20, 2007.
      (incorporated by reference to Exhibit 4.71 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.42
                  
                  English
      Translation of Purchase Contract between CEEG (Nanjing) Solar Research
      Institute and Sunergy Nanjing dated as of November 28, 2007. (incorporated
      by reference to Exhibit 4.72 from our Annual Report on Form 20-F filed
      with the Securities and Exchange Commission on June 9,
    2008).4.43
                  
                  English
      Translation of Form of Sales Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing (incorporated by
      reference to Exhibit 4.73 from our Annual Report on Form 20-F filed with
      the Securities and Exchange Commission on June 9,
  2008).




96





Exhibit
                    Number
                  
                  Description of Document4.44
                  
                  English
      Translation of Long-term Sales Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing dated as of January
      10, 2008 (incorporated by reference to Exhibit 4.74 from our Annual Report
      on Form 20-F filed with the Securities and Exchange Commission on June 9,
      2008)4.45
                  
                  English
      Translation of Purchase Contract between CEEG (Shanghai) Solar Science and
      Technology Co., Ltd. and Sunergy Nanjing dated as of November 28, 2007
      (incorporated by reference to Exhibit 4.75 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.46
                  
                  English
      Translation of Module Processing Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing dated as of December
      19, 2007 (incorporated by reference to Exhibit 4.76 from our Annual Report
      on Form 20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.47
                  
                  English
      Translation of Security Agreement between China Electric Equipment Group
      Co., Ltd. and Sunergy Nanjing (incorporated by reference to Exhibit 4.47
      from our Annual Report on Form 20-F filed with the Securities and Exchange
      Commission on June 9, 2008).4.48
                  
                  English
      Translation of Purchase Contract between CEEG (Nanjing) Semiconductor
      Material Co., Ltd. and Sunergy Nanjing dated as of June 16, 2008 and its
      supplemental agreement dated as of July 29, 2008 (incorporated by
      reference to Exhibit 4.48 from our Annual Report on Form 20-F filed with
      the Securities and Exchange Commission on June 26,
  2009).4.49
                  
                  English
      Translation of Sales Contract between China Electric Equipment Group (Hong
      Kong) Limited and Sunergy Nanjing dated as of June 3, 2008 (incorporated
      by reference to Exhibit 4.49 from our Annual Report on Form 20-F filed
      with the Securities and Exchange Commission on June 26,
    2009).4.50
                  
                  English
      Translation of Purchase Contract between Jiangxi Jingde Semiconductor New
      Material Co., Ltd. and Sunergy Nanjing dated as of January 19, 2009
      (incorporated by reference to Exhibit 4.50 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 26,
      2009).4.51
                  
                  English
      Translation of Sales Contract between CEEG (Shanghai) Solar Science and
      Technology Co., Ltd. and Sunergy Nanjing dated as of April 7, 2008
      (incorporated by reference to Exhibit 4.51 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 26,
      2009).4.52
                  
                  English
      Translation of Form ofSales
      Contract between CEEG (Shanghai) Solar Science and Technology Co., Ltd.
      and Sunergy Nanjing (incorporated by reference to Exhibit 4.52 from our
      Annual Report on Form 20-F filed with the Securities and Exchange
      Commission on June 26, 2009).4.53
                  
                  English
      Translation of  Long-term Sales Contract between CEEG (Shanghai)
      Solar Science and Technology Co., Ltd. and Sunergy Nanjing dated as of
      January 10, 2008 (incorporated by reference to Exhibit 4.53 from our
      Annual Report on Form 20-F filed with the Securities and Exchange
      Commission on June 26, 2009).4.54
                  
                  English
      Translation of  Sales Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing dated as of July 2,
      2008 (incorporated by reference to Exhibit 4.54 from our Annual Report on
      Form 20-F filed with the Securities and Exchange Commission on June 26,
      2009).4.55
                  
                  English
      Translation of  Sales Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing dated as of August
      20, 2008 (incorporated by reference to Exhibit 4.55 from our Annual Report
      on Form 20-F filed with the Securities and Exchange Commission on June 26,
      2009).4.56
                  
                  English
      Translation of  Sales Contract between CEEG (Nanjing) New Energy
      Co., Ltd. and Sunergy Nanjing dated as of September 8, 2008 (incorporated
      by reference to Exhibit 4.56 from our Annual Report on Form 20-F filed
      with the Securities and Exchange Commission on June 26,
    2009).4.57
                  
                  English
      Translation of  Form of Sales Contract between CEEG (Shanghai)
      Solar Science and Technology Co., Ltd. and Sunergy Nanjing and its
      supplementary contract (incorporated by reference to Exhibit 4.57 from our
      Annual Report on Form 20-F filed with the Securities and Exchange
      Commission on June 26,
2009).




97





Exhibit
                    Number
                  
                  Description of Document4.58
                  
                  English
      Translation of  Creditor’s Rights Transfer Contract between CEEG
      (Nanjing) International Trading Co., Ltd. and Sunergy Nanjing dated as of
      October 14, 2008 (incorporated by reference to Exhibit 4.58 from our
      Annual Report on Form 20-F filed with the Securities and Exchange
      Commission on June 26, 2009).4.59
                  
                  English
      Translation of Agreement among CEEG, CEEG (Nanjing) New Energy Co., Ltd.
      and Sunergy Nanjing dated as of December 30, 2008 (incorporated by
      reference to Exhibit 4.59 from our Annual Report on Form 20-F filed with
      the Securities and Exchange Commission on June 26,
  2009).4.60
                  
                  English
      Translation of Agreement among CEEG, CEEG (Nanjing) International Trade
      Co., Ltd. and Sunergy Nanjing dated as of December 31, 2008 (incorporated
      by reference to Exhibit 4.60 from our Annual Report on Form 20-F filed
      with the Securities and Exchange Commission on June 26,
    2009).4.61
                  
                  English
      Translation of Equity Interest Transfer Agreement regarding the transfer
      of equity interest in China Sunergy (Shanghai) Co., Ltd. between China
      Electric Equipment Group Co., Ltd. and China Sunergy (Hong Kong) Co., Ltd.
      dated as of September 1, 2008 (incorporated by reference to Exhibit 4.61
      from our Annual Report on Form 20-F filed with the Securities and Exchange
      Commission on June 26, 2009)4.62
                  
                  ADS
      Lending Agreement, dated June 25, 2008, among Credit Suisse Securities
      (Europe) Limited, Credit Suisse, London Branch, and the Registrant
      (incorporated by reference to Exhibit 99.1 of the Report of Foreign
      Private Issuer on Form 6-K filed by China Sunergy Co., Ltd. on July 2,
      2008).4.63*
                  
                  English
      Translation of Purchase Contract between CEEG (Nanjing) Semiconductor
      Material Co., Ltd. and Sunergy Nanjing dated as of July 23, 2009 and its
      supplementary contract dated as of November 9, 20094.64*
                  
                  English
      Translation of Sales Contract between CEEG (Nanjing) Semiconductor
      Material Co., Ltd. and Sunergy Nanjing dated as of July 23, 2009 and its
      supplementary contract dated as of November 20, 20094.65*
                  
                  English
      Translation of Sales Contract between CEEG (Nanjing) New Energy Co., Ltd.
      and Sunergy Nanjing dated as of April 24, 20094.66*
                  
                  English
      Translation of Sales Contract between CEEG (Nanjing) New Energy Co., Ltd.
      and Sunergy Nanjing dated as of September 3, 2009 and its supplementary
      contracts dated as of September 16, 2009 and September 17,
      20094.67*
                  
                  English
      Translation of Sales Contract between CEEG (Nanjing) New Energy Co., Ltd.
      and Sunergy Nanjing dated as of September 30, 2009 and its supplementary
      contracts dated as of October 13, 2009 and undated4.68*
                  
                  English
      Translation of Form of Sales Contract between CEEG (Nanjing) New Energy
      Co., Ltd. and Sunergy Nanjing4.69*
                  
                  English
      Translation of Form of Sales Contract between CEEG (Nanjing) New Energy
      Co., Ltd. and Sunergy Nanjing4.70*
                  
                  English
      Translation of EPC Contract for Multiple BIPV Photovoltaic Grid-Connected
      System Demonstration Project of CEEG Nanjing Science and Technology Park
      between CEEG (Nanjing) Solar Research Institute Co., Ltd. and Sunergy
      Nanjing dated as of December 29, 20094.71*
                  
                  English
      Translation of Supplementary Agreements between Jiangxi Jingde
      Semiconductor New Material Co., Ltd. and Sunergy Nanjing dated as of May
      25, 2009 and November 20, 20094.72*
                  
                  English
      Translation of Long-term Sales Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing dated as of November
      19, 20084.73*
                  
                  English
      Translation of Sales Contract between CEEG (Shanghai) Solar Science and
      Technology Co., Ltd. and Sunergy Nanjing dated as of February 26, 2009 and
      its supplementary contract dated March 17, 20094.74*
                  
                  English
      Translation of Module Processing Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing dated as of June 12,
      2009




98





Exhibit
                            Number
                          
                          Description of Document4.75*
                          
                          English
      Translation of Sales Contract between CEEG (Shanghai) Solar Science and
      Technology Co., Ltd. and Sunergy Nanjing dated as of June 29,
      20094.76*
                          
                          English
      Translation of Form of Sales Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing4.77*
                          
                          English
      Translation of Form of Sales Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing4.78*
                          
                          English
      Translation of Form of Sales Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing4.79*
                          
                          English
      Translation of Security Agreement between China Electric Equipment Group
      Co., Ltd. and Sunergy Nanjing dated as of April 26,
20104.80*
                          
                          English
      Translation of Agreement between CEEG (Nanjing) New Energy Co., Ltd. and
      Sunergy Nanjing dated as of February 24, 2009 and its supplementary
      contract dated as of July 20, 20094.81*
                          
                          English
      Translation of Agreement between CEEG (Shanghai) Solar Science and
      Technology Co., Ltd. and Sunergy Nanjing4.82*
                          
                          English
      Translation of Supplementary Agreement between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd and Sunergy Nanjing4.83*
                          
                          Supplementary
      Agreement among SunPower Philippines Manufacturing Ltd., CEEG (Shanghai)
      Solar Science and Technology Co., Ltd and Sunergy Nanjing dated as of
      November 26, 20094.84*
                          
                          English
      Translation of Share Transfer Agreement of CEEG (Nanjing) New Energy Co.,
      Ltd. among China Electric Equipment Group Co., Ltd., Sundex Holdings
      Limited and Sunergy Nanjing dated as of March 15, 20104.85*
                          
                          English
      Translation of Share Transfer Agreement of CEEG (Shanghai) Solar Science
      & Technology Co., Ltd. among China Electric Equipment Group Co., Ltd.,
      Sundex Holdings Limited and Sunergy Nanjing dated as of March 15,
      20108.1
                          
                          Subsidiaries
      of the Registrant (incorporated by reference to Exhibit 8.1 our Annual
      Report on Form 20-F filed with the Securities and Exchange Commission on
      June 9, 2008).11.1
                          
                          Code
      of Business Conduct and Ethics of the Registrant (incorporated by
      reference to Exhibit 99.1 from Registration Statement on Form F-1 (file
      no. 333-142367) filed with the Securities and Exchange Commission on April
      25, 2007).12.1*
                          
                          CEO
      Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.12.2*
                          
                          CFO
      Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.13.1*
                          
                          CEO
      Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.13.2*
                          
                          CFO
      Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.15.1*
                          
                          Consent
      of Conyers Dill & Pearman.15.2*
                          
                          Consent
      of Jun He Law Offices.15.3*
                          
                          Consent
      of Deloitte Touche Tohmatsu, Independent Registered Public Accounting
      Firm.







*   Filed
with this Annual Report on Form 20-F.





†   Confidential
treatment has been granted with respect to portions of this exhibit and such
confidential treatment portions have been deleted and replaced with “****” and
filed separately with the Securities and Exchange Commission pursuant to Rule
406 under the Securities Act of 1933.


99




SIGNATURES




The
registrant hereby certifies that it meets all of the requirements for filing its
annual report on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.




CHINA
      SUNERGY CO., LTD.By:
                                    /s/   Stephen Zhifang
      CaiName:Stephen
      Zhifang CaiTitle:Chief
      Executive Officer





Date: May
28, 2010


100




CHINA
SUNERGY CO., LTD.





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





Report
      of Independent Registered Public Accounting Firm
                  
                  
                  F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2009
                  
                  
                  F-3Consolidated
      Statements of Operations for the Years Ended December 31, 2007, 2008 and
      2009
                  
                  
                  F-5Consolidated
      Statements of Changes in Equity and Comprehensive Income (loss) for the
      Years Ended December 31, 2007, 2008 and 2009
                  
                  
                  F-6Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007, 2008 and
      2009
                  
                  
                  F-7Notes
      to the Consolidated Financial Statements
                  
                  
                  F-9Additional
      Information - Financial Statements Schedule I
                  
                  
                  F-44


F-1


REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders of China Sunergy Co. Ltd.





We have
audited the accompanying consolidated balance sheets of China Sunergy Co.,
Ltd.(the "Company") and subsidiaries (collectively referred to as the "Group")
as of December 31, 2008 and 2009, and the related consolidated statements of
operations, changes in equity and comprehensive income (loss), and cash flows
for each of the three years in the period ended December 31, 2009 and the
related financial statement schedule included in Schedule I. These financial
statements and financial statement schedule are the responsibility of the
Group's management.  Our responsibility is to express an opinion on
the financial statements and financial statement schedule based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of China Sunergy Co., Ltd. and subsidiaries as
of December 31, 2008 and 2009, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America.  Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Group's internal control over financial
reporting as of December 31, 2009, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated May 28, 2010 expressed an unqualified
opinion on the Company's internal control over financial reporting.





/s/
DELOITTE  TOUCHE TOHMATSU CPA LTD.





Shanghai,
China


May 28,
2010


F-2


CHINA
SUNERGY CO., LTD.





CONSOLIDATED
BALANCE SHEETS


(In
U.S. dollars)





December 31,2008
                
                
                2009$
                
                
                $ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                
                94,799,699
                
                
                
                123,854,702Restricted
      cash
                
                
                62,399,835
                
                
                
                55,677,748Accounts
      receivable, net of allowance for doubtful accounts of $349 and $7,386,030
      in 2008 and 2009, respectively
                
                
                8,905,979
                
                
                
                15,292,156Advanced
      to suppliers, net of allowance for doubtful accounts of $1,105,384 and
      $nil in 2008 and 2009, respectively
                
                
                7,319,946
                
                
                
                184,195Amounts
      due from related parties
                
                
                18,583,319
                
                
                
                22,102,667Inventories
                
                
                59,124,619
                
                
                
                22,645,081Deferred
      tax assets
                
                
                1,992,759
                
                
                
                2,838,806Prepaid
      expense and other current assets
                
                
                11,531,250
                
                
                
                4,088,974Total
      current assets
                
                
                264,657,406
                
                
                
                246,684,329Property,
      plant and equipment, net
                
                
                102,608,619
                
                
                
                93,790,156Prepaid
      land use rights
                
                
                6,441,567
                
                
                
                6,426,801Deferred
      tax assets
                
                
                1,511,797
                
                
                
                1,568,459Restricted
      cash-collateral account
                
                
                17,502,450
                
                
                
                20,471,220Convertible
      senior notes issuance cost
                
                
                3,450,859
                
                
                
                2,480,588Other
      long-term assets
                
                
                1,551,867
                
                
                
                1,237,198TOTAL
      ASSETS
                
                
                397,724,565
                
                
                
                372,658,751


F-3


CHINA
SUNERGY CO., LTD.





CONSOLIDATED
BALANCE SHEETS


(In
U.S. dollars)





December 31,2008
                
                
                2009$
                
                
                $LIABILITIES
      AND EQUITYCurrent
      liabilities:Short-term
      bank borrowings
                
                
                97,299,027
                
                
                
                102,516,036Accounts
      payable
                
                
                29,099,148
                
                
                
                27,410,912Notes
      payable
                
                
                14,631,434
                
                
                
                1,293,600Accrued
      expenses and other current liabilities
                
                
                5,345,703
                
                
                
                5,474,115Amounts
      due to related parties
                
                
                246,465
                
                
                
                2,368,537Total
      current liabilities
                
                
                146,621,777
                
                
                
                139,063,200Collateral
      account payable
                
                
                17,502,450
                
                
                
                20,471,220Derivative
      liabilities
                
                
                9,058,340
                
                
                
                -Convertible
      senior notes
                
                
                48,098,364
                
                
                
                44,000,000Other
      liabilities
                
                
                1,187,233
                
                
                
                2,536,231Total
      liabilities
                
                
                222,468,164
                
                
                
                206,070,651Commitments
      and contingencies (Note 17)Equity:Ordinary
      share (par value $0.0001; 463,247,600 shares authorized, 267,766,443 and
      267,287,253 shares issued and outstanding as of December 31, 2008 and
      2009, respectively)
                
                
                26,777
                
                
                
                26,729Additional
      paid-in capital
                
                
                182,070,348
                
                
                
                183,396,950Subscription
      receivable
                
                
                (405,313
                )
                
                
                (405,313
                )Accumulated
      deficit
                
                
                (27,792,246
                )
                
                
                (37,638,616
                )Accumulated
      other comprehensive income
                
                
                21,057,815
                
                
                
                21,208,350Total
      equity attributable to China Sunergy Co., Ltd
                
                
                174,957,381
                
                
                
                166,588,100Noncontrolling
      interest
                
                
                299,020
                
                
                
                -Total
      equity
                
                
                175,256,401
                
                
                
                166,588,100TOTAL
      LIABILITIES AND EQUITY
                
                
                397,724,565
                
                
                
                372,658,751





The
accompanying notes are an integral part of these consolidated financial
statements.


F-4


CHINA
SUNERGY CO., LTD.





CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
U.S. dollars, except share data)





Years ended December 31,2007
                
                
                2008
                
                
                2009$
                
                
                $
                
                
                $Sales
      to third parties
                
                
                224,315,485
                
                
                
                295,919,243
                
                
                
                202,520,261Sales
      to related parties
                
                
                10,592,416
                
                
                
                55,000,718
                
                
                
                82,345,108Total
      revenues
                
                
                234,907,901
                
                
                
                350,919,961
                
                
                
                284,865,369Cost
      of sales to third parties
                
                
                (206,032,155
                )
                
                
                (284,311,888
                )
                
                
                (190,124,637
                )Cost
      of sales to related parties
                
                
                (10,848,766
                )
                
                
                (51,142,106
                )
                
                
                (78,127,432
                )Cost
      of revenues
                
                
                (216,880,921
                )
                
                
                (335,453,994
                )
                
                
                (268,252,069
                )Gross
      profit
                
                
                18,026,980
                
                
                
                15,465,967
                
                
                
                16,613,300Selling
      expenses
                
                
                (1,644,234
                )
                
                
                (3,866,300
                )
                
                
                (2,920,337
                )General
      and administrative expenses
                
                
                (13,664,204
                )
                
                
                (16,778,970
                )
                
                
                (24,517,431
                )Research
      and development expenses
                
                
                (2,555,073
                )
                
                
                (1,870,882
                )
                
                
                (4,381,060
                )Total
      operating expenses
                
                
                (17,863,511
                )
                
                
                (22,516,152
                )
                
                
                (31,818,828
                )Income
      (loss) from operations
                
                
                163,469
                
                
                
                (7,050,185
                )
                
                
                (15,205,528
                )Interest
      expense
                
                
                (7,394,229
                )
                
                
                (8,069,073
                )
                
                
                (7,296,324
                )Interest
      income
                
                
                1,577,194
                
                
                
                1,664,683
                
                
                
                1,632,550Changes
      in fair value of derivatives
                
                
                -
                
                
                
                (9,864,075
                )
                
                
                8,019,632Other
      income (expenses), net
                
                
                93,412
                
                
                
                (2,267,567
                )
                
                
                2,100,591Loss
      before income taxes
                
                
                (5,560,154
                )
                
                
                (25,586,217
                )
                
                
                (10,749,079
                )Tax
      benefit
                
                
                705,504
                
                
                
                2,648,621
                
                
                
                902,709Net
      loss
                
                
                (4,854,650
                )
                
                
                (22,937,596
                )
                
                
                (9,846,370
                )Net
      loss attributable to China Sunergy Co., Ltd
                
                
                (4,854,650
                )
                
                
                (22,937,596
                )
                
                
                (9,846,370
                )Dividend
      on Series A redeemable convertible preferred shares
                
                
                (154,723
                )
                
                
                -
                
                
                
                -Dividend
      on Series B redeemable convertible preferred shares
                
                
                (330,229
                )
                
                
                -
                
                
                
                -Dividend
      on Series C redeemable convertible preferred shares
                
                
                (233,125
                )
                
                
                -
                
                
                
                -Net
      loss attributable to the Company ordinary shareholders
                
                
                (5,572,727
                )
                
                
                (22,937,596
                )
                
                
                (9,846,370
                )Net
      loss per share:Basic
                
                $
                (0.04
                )
                
                $
                (0.10
                )
                
                $
                (0.04
                )Diluted
                
                $
                (0.04
                )
                
                $
                (0.10
                )
                
                $
                (0.04
                )Shares
      used in computation:Basic
                
                
                185,165,757
                
                
                
                238,079,890
                
                
                
                239,366,840Diluted
                
                
                185,165,757
                
                
                
                238,079,890
                
                
                
                239,366,840





The
accompany notes are an integral part of these consolidated financial
statements.


F-5


CHINA
SUNERGY CO., LTD.





CONSOLIDATED STATEMENTS OF
CHANGES IN EQUITY


AND COMPREHENSIVE INCOME
(LOSS)


(In U.S. dollars, except
share data)





AccumulatedAdditional
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      other
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      Comprehensivepaid-in
                                                                                      
                                                                                      Subscription
                                                                                      
                                                                                      Accumulated
                                                                                      
                                                                                      comprehensive
                                                                                      
                                                                                      Noncontrolling
                                                                                      
                                                                                      
                                                                                      
                                                                                      incomeOrdinary
      shares
                                                                                      
                                                                                      capital
                                                                                      
                                                                                      receivable
                                                                                      
                                                                                      deficit
                                                                                      
                                                                                      income
                                                                                      
                                                                                      interest
                                                                                      
                                                                                      Total
                                                                                      
                                                                                      (loss)
      incomeNumber
                                                                                      
                                                                                      $
                                                                                      
                                                                                      $
                                                                                      
                                                                                      $
                                                                                      
                                                                                      $
                                                                                      
                                                                                      $
                                                                                      
                                                                                      $
                                                                                      
                                                                                      $
                                                                                      
                                                                                      $Balance
      at January 1, 2007
                                                                                      
                                                                                      
                                                                                      104,544,000
                                                                                      
                                                                                      
                                                                                      10,454
                                                                                      
                                                                                      
                                                                                      20,144,945
                                                                                      
                                                                                      -
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      2,124,551
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      22,279,950Issuance
      of ordinary shares upon initial public offering net of issuance cost of
      $11,616,804
                                                                                      
                                                                                      
                                                                                      58,650,000
                                                                                      
                                                                                      
                                                                                      5,865
                                                                                      
                                                                                      
                                                                                      95,902,331
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      95,908,196Dividend
      on Series A redeemable convertible preferred shares
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      (154,723
                                                                                      )
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      (154,723
                                                                                      )Dividend
      on Series B redeemable convertible preferred shares
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      (330,229
                                                                                      )
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      (330,229
                                                                                      )Dividend
      on Series C redeemable convertible preferred shares
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      (233,125
                                                                                      )
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      (233,125
                                                                                      )Conversion
      of Series A, B and C redeemable convertible preferred shares into ordinary
      shares
                                                                                      
                                                                                      
                                                                                      74,138,777
                                                                                      
                                                                                      
                                                                                      7,414
                                                                                      
                                                                                      
                                                                                      62,496,406
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      62,503,820Share-based
      compensation
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      535,856
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      535,856Net
      loss
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      (4,854,650
                                                                                      )
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      (4,854,650
                                                                                      )
                                                                                      
                                                                                      (4,854,650
                                                                                      )Foreign
      currency translation adjustments
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      8,192,998
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      8,192,998
                                                                                      
                                                                                      
                                                                                      8,192,998Noncontrolling
      interest
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      299,020
                                                                                      
                                                                                      
                                                                                      299,020Balance
      at December 31, 2007
                                                                                      
                                                                                      
                                                                                      237,332,777
                                                                                      
                                                                                      
                                                                                      23,733
                                                                                      
                                                                                      
                                                                                      178,361,461
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      (4,854,650
                                                                                      )
                                                                                      
                                                                                      10,317,549
                                                                                      
                                                                                      
                                                                                      299,020
                                                                                      
                                                                                      
                                                                                      184,147,113
                                                                                      
                                                                                      
                                                                                      3,338,348Issuance
      of restricted shares
                                                                                      
                                                                                      
                                                                                      3,476,086
                                                                                      
                                                                                      
                                                                                      348
                                                                                      
                                                                                      
                                                                                      3,128
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      3,476Exercise
      of share options
                                                                                      
                                                                                      
                                                                                      371,580
                                                                                      
                                                                                      
                                                                                      37
                                                                                      
                                                                                      
                                                                                      476,824
                                                                                      
                                                                                      
                                                                                      (405,313
                                                                                      )
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      71,548Issuance
      of ordinary shares  under share lending facility
                                                                                      
                                                                                      
                                                                                      26,586,000
                                                                                      
                                                                                      
                                                                                      2,659
                                                                                      
                                                                                      
                                                                                      (2,659
                                                                                      )
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -Share-based
      compensation
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      3,231,594
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      3,231,594Net
      loss
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      (22,937,596
                                                                                      )
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      (22,937,596
                                                                                      )
                                                                                      (22,937,596
                                                                                      )Foreign
      currency translation adjustments
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      10,740,266
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      10,740,266
                                                                                      
                                                                                      
                                                                                      10,740,266Balance
      at December 31, 2008
                                                                                      
                                                                                      
                                                                                      267,766,443
                                                                                      
                                                                                      
                                                                                      26,777
                                                                                      
                                                                                      
                                                                                      182,070,348
                                                                                      
                                                                                      
                                                                                      (405,313
                                                                                      )
                                                                                      
                                                                                      (27,792,246
                                                                                      )
                                                                                      
                                                                                      21,057,815
                                                                                      
                                                                                      
                                                                                      299,020
                                                                                      
                                                                                      
                                                                                      175,256,401
                                                                                      
                                                                                      
                                                                                      (12,197,330
                                                                                      )Cancellation
      of restricted shares
                                                                                      
                                                                                      
                                                                                      (479,190
                                                                                      )
                                                                                      
                                                                                      (48
                                                                                      )
                                                                                      
                                                                                      (431
                                                                                      )
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      (479
                                                                                      )
                                                                                      
                                                                                      -Share-based
      compensation
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      1,327,033
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      1,327,033
                                                                                      
                                                                                      
                                                                                      -Net
      loss
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      (9,846,370
                                                                                      )
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      (9,846,370
                                                                                      )
                                                                                      
                                                                                      (9,846,370
                                                                                      )Foreign
      currencyTranslation
      adjustments
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      150,535
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      150,535
                                                                                      
                                                                                      
                                                                                      150,535Acquisition
      of noncontrolling interest
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      (299,020
                                                                                      )
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      -Balance
      at December 31, 2009
                                                                                      
                                                                                      
                                                                                      267,287,253
                                                                                      
                                                                                      
                                                                                      26,729
                                                                                      
                                                                                      
                                                                                      183,396,950
                                                                                      
                                                                                      
                                                                                      (405,313
                                                                                      )
                                                                                      
                                                                                      (37,638,616
                                                                                      )
                                                                                      
                                                                                      21,208,350
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      166,588,100
                                                                                      
                                                                                      
                                                                                      (9,695,835
                                                                                      )





The
accompanying notes are an integral part of these consolidated financial
statements.


F-6


CHINA
SUNERGY CO., LTD.





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
U.S. dollars)





Years ended December 31,2007
                
                
                2008
                
                
                2009$
                
                
                $
                
                
                $Operating
      activities:Net
      loss attributable to China Sunergy Co,.Ltd
                
                
                (4,854,650
                )
                
                
                (22,937,596
                )
                
                
                (9,846,370
                )Adjustments
      to reconcile net loss to net cash (used in) provided by operating provided
      by operating activities:Depreciation
      and amortization
                
                
                4,315,613
                
                
                
                5,814,348
                
                
                
                10,275,173Bad
      debt provision (recoveries)
                
                
                1,134,926
                
                
                
                (76,384
                )
                
                
                7,332,039Share-based
      compensation
                
                
                535,856
                
                
                
                3,231,594
                
                
                
                1,327,033Loss
      from disposal of property, plant and equipment
                
                
                54,397
                
                
                
                78,563
                
                
                
                553,478Impairment
      loss
                
                
                -
                
                
                
                -
                
                
                
                824,676Loss/gain
      on changes of derivatives
                
                
                -
                
                
                
                9,864,075
                
                
                
                (8,019,632
                )Gain
      on repurchase of convertible senior notes
                
                
                -
                
                
                
                (4,525,625
                )
                
                
                (2,155,000
                )Amortization
      of convertible senior notes issuance cost
                
                
                -
                
                
                
                886,715
                
                
                
                970,271Others
                
                
                -
                
                
                
                (173,658
                )
                
                
                (25,613
                )Changes
      in operating assets and liabilities:Inventories
                
                
                (11,760,753
                )
                
                
                (2,882,559
                )
                
                
                36,479,538Accounts
      receivable
                
                
                16,230,796
                
                
                
                17,911,376
                
                
                
                (13,770,289
                )Advanced
      to suppliers
                
                
                (54,740,526
                )
                
                
                72,359,945
                
                
                
                7,187,824Prepaid
      expenses and other current assets
                
                
                (15,259,352
                )
                
                
                5,602,661
                
                
                
                7,693,484Amounts
      due from related parties
                
                
                (135,480
                )
                
                
                (1,805,017
                )
                
                
                (3,519,348
                )Accounts
      payable
                
                
                (3,402,165
                )
                
                
                13,827,681
                
                
                
                7,122,380Accrued
      expenses and other liabilities
                
                
                1,056,313
                
                
                
                2,370,254
                
                
                
                (625,061
                )Advances
      from customers
                
                
                3,942,535
                
                
                
                (4,186,395
                )
                
                
                (491,938
                )Amount
      due to related parties
                
                
                4,472
                
                
                
                238,251
                
                
                
                (12,509,362
                )Deferred
      other income
                
                
                815,382
                
                
                
                254,854
                
                
                
                1,199,203Income
      tax payable
                
                
                -
                
                
                
                (1,250,477
                )
                
                
                -Deferred
      tax assets
                
                
                (705,504
                )
                
                
                (2,648,621
                )
                
                
                (902,709
                )Prepaid
      for land use rights
                
                
                -
                
                
                
                -
                
                
                
                (134,759
                )Net
      cash (used in) provided by operating activities
                
                
                (62,768,140
                )
                
                
                91,953,985
                
                
                
                28,965,018Investing
      activities:Purchases
      of property, plant and equipment
                
                
                (15,568,450
                )
                
                
                (44,074,853
                )
                
                
                (9,887,686
                )Purchase
      of land use rights
                
                
                (1,182,432
                )
                
                
                (4,330,930
                )
                
                
                -Purchase
      of long-term assets
                
                
                -
                
                
                
                (936,817
                )
                
                
                -Subsidy
      received from local government to purchase plant and
    equipment
                
                
                -
                
                
                
                24,566
                
                
                
                25,613Change
      in restricted cash
                
                
                (18,520,927
                )
                
                
                (38,926,435
                )
                
                
                6,722,087Net
      cash used in investing activities
                
                
                (35,271,809
                )
                
                
                (88,244,469
                )
                
                
                (3,139,986
                )


F-7


CHINA
SUNERGY CO., LTD.





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
U.S. dollars)





Years ended December 31,2007
                
                
                2008
                
                
                2009$
                
                
                $
                
                
                $Financing
      activities:Proceeds
      from issuance of ordinary shares
                
                
                107,525,000
                
                
                
                -
                
                
                
                -Issuance
      cost of ordinary shares
                
                
                (11,616,804
                )
                
                
                -
                
                
                
                -Proceeds
      from issuance of convertible senior notes
                
                
                -
                
                
                
                54,500,000
                
                
                
                -Issuance
      cost of convertible senior notes
                
                
                -
                
                
                
                (4,337,573
                )
                
                
                -Payment
      of convertible senior notes repurchase
                
                
                -
                
                
                
                (1,974,375
                )
                
                
                (1,845,000
                )Proceeds
      received from exercise of options
                
                
                -
                
                
                
                71,548
                
                
                
                -Cash
      contributions received from minority shareholder
                
                
                -
                
                
                
                299,020
                
                
                
                -Acquisition
      of noncontrolling interest
                
                
                -
                
                
                
                -
                
                
                
                (299,020
                )Cancellation
      of restricted shares
                
                
                -
                
                
                
                -
                
                
                
                (479
                )Proceeds
      from short-term bank borrowings
                
                
                168,006,462
                
                
                
                142,450,312
                
                
                
                130,986,537Repayment
      of short-term bank borrowings
                
                
                (128,882,001
                )
                
                
                (175,109,760
                )
                
                
                (125,864,004
                )Net
      cash provided by financing activities
                
                
                135,032,657
                
                
                
                15,899,172
                
                
                
                2,978,034Effect
      of exchange rate changes on cash and cash equivalents
                
                
                8,715,383
                
                
                
                14,733,345
                
                
                
                251,937Net
      increase in cash and cash equivalents
                
                
                45,708,091
                
                
                
                34,342,033
                
                
                
                29,055,003Cash
      and cash equivalents at the beginning of the year
                
                
                14,749,575
                
                
                
                60,457,666
                
                
                
                94,799,699Cash
      and cash equivalents at the end of the year
                
                
                60,457,666
                
                
                
                94,799,699
                
                
                
                123,854,702Supplemental
      disclosure of cash flow information:Interest
      paid
                
                
                7,210,061
                
                
                
                7,083,994
                
                
                
                6,334,495Income
      taxes paid
                
                
                -
                
                
                
                1,250,477
                
                
                
                -Supplemental
      disclosure of non-cash investing activities:Restricted
      cash collateral received in connection with share-lending
      arrangement
                
                
                -
                
                
                
                17,502,450
                
                
                
                2,968,770Purchase
      of property, plant and equipment included in accounts
    payable
                
                
                1,286,218
                
                
                
                8,114,354
                
                
                
                289,414




The
accompanying notes are an integral part of the consolidated financial
statements.


F-8


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





1.
            ORGANIZATION
      AND PRINCIPAL ACTIVITIES





China
Sunergy Co., Ltd. (the “Company”) was incorporated under the laws of the Cayman
Islands on August 4, 2006.





As of
December 31, 2009, the Company’s subsidiaries include the following
entities:





Date
      of
                          
                          Percentage
      ofSubsidiaries'
      Name
                          
                          Principal
      Activities
                          
                          Incorporation
                          
                          Ownership
                          
                          Place
      of IncorporationChina
      Sunergy Co., Ltd.
                          
                          Investment
      Holding
                          
                          January
      27, 2006
                          
                          
                          100
                          %
                          British
      Virgin IslandsChina
      Sunergy (Hong Kong) Co.,Limited
                          
                          Investment
      Holding
                          
                          December
      7, 2007
                          
                          
                          100
                          %
                          Hong
      KongChina
      Sunergy Europe Gmbh
                          
                          Marketing
      Service
                          
                          November
      27, 2007
                          
                          
                          100
                          %
                          GermanyChina
      Sunergy (Nanjing) Co., Ltd.
                          
                          Solar
      cells manufacturing
                          
                          August
      2, 2004
                          
                          
                          100
                          %
                          PRCChina
      Sunergy (Shanghai) Co., Ltd.
                          
                          Solar
      cells manufacturing
                          
                          November
      1, 2007
                          
                          
                          100
                          %
                          PRC





On
November 1, 2007, China Sunergy (Shanghai) Co., Ltd. ("Sunergy Shanghai") was
incorporated in Shanghai, with 95% of its equity interests under China Sunergy
BVI and 5% under China Electric Equipment Group Co., Ltd. (CEEG). In April 2009,
the Group acquired 5% noncontrolling interest from CEEG and became Sunergy
Shanghai’s one and only direct holding company. The net income/loss attributable
to noncontrolling interest for the year ended December 31, 2007, 2008 and 2009
was immaterial.





The
Company and its subsidiaries (collectively referred to as the "Group”) are
principally engaged in the design, development, manufacturing and marketing of
solar cells in the People’s Republic of China (the “PRC”) and overseas markets.
During the periods covered by the consolidated financial statements,
substantially all of the Group's business was conducted through Sunergy
Nanjing.





2.
            SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES





(a)
            Basis
      of presentation





The
consolidated financial statements of the Group have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“US GAAP”).





(b)
            Basis
      of consolidation





The
consolidated financial statements include the assets, liabilities, revenues and
expenses of the Group.  All significant intercompany transactions and
balances have been eliminated on consolidation.


F-9


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





2.           SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES - continued





(c)
            Use
      of estimates





The
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, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues and
expenses during the reporting period.  Actual results could differ
from those estimates.  The Group bases its estimates on historical
experience and various other factors believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources.  Significant accounting estimates reflected in the
consolidated financial statements include provision for uncertain tax positions
and tax valuation allowances, contingent liability relates to outstanding legal
proceedings, inventory valuation, purchase commitment, allowance on accounts
receivable and supplier advances, provision of warranty costs, assumptions used
in embedded derivative evaluation of long-term purchase contract and foreign
exchange forward contracts, forfeiture rate of options, capitalized interest and
the useful lives of and impairment for property, plant and equipment, intangible
assets and long-term deferred assets.





(d)
            Cash
      and cash equivalents and restricted
cash





Cash and
cash equivalents consist of cash on hand and demand deposits, which are
unrestricted as to withdrawal and use, and which have original maturities of
three months or less.





Restricted
cash represents bank deposits for securing letter of credit, bank promissory
note and bank guarantee that are not available for use in
operations.





(e)
            Fair
      value of financial instruments





Assets
and liabilities that are recorded at fair value on a recurring basis reflect
fair value as the price that would be received from the sale of an asset or paid
to transfer a liability (an exit price) on the measurement date in an orderly
transaction between market participants in the principal or most advantageous
market for the asset or liability. The Company applies a hierarchy of valuation
techniques, which is based on whether the inputs into the valuation technique
are observable or unobservable. The hierarchy is as follows:





•   Level
1 — Valuation techniques in which all significant inputs are unadjusted quoted
prices from active markets for assets or liabilities that are identical to the
assets or liabilities being measured.


F-10


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





2.
            SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued





(f)
            Fair
      value of financial instruments-
continued





•   Level
2 — Valuation techniques in which significant inputs include quoted prices from
active markets for assets or liabilities that are similar to the assets or
liabilities being measured and/or quoted prices for assets or liabilities that
are identical or similar to the assets or liabilities being measured from
markets that are not active. Also, model-derived valuations in which all
significant inputs and significant value drivers are observable in active
markets are Level 2 valuation techniques.





•   Level
3 — Valuation techniques in which one or more significant inputs or significant
value drivers are unobservable. Unobservable inputs are valuation technique
inputs that reflect the Group's own assumptions about the assumptions that
market participants would use in pricing an asset or liability.





When
available, the Group uses quoted market prices to determine the fair value of an
asset or liability. If quoted market prices are not available, the Group
measures fair value using valuation techniques that use, when possible, current
market-based or independently-sourced market parameters, such as interest rates
and currency rates.





(g)
            Inventories





Inventories
are stated at the lower of cost or market value. Cost is determined using the
weighted-average method.





The Group
estimates excess and slow moving inventory based upon assumptions of future
demands and market conditions. If actual market conditions are less favorable
than projected by management, additional inventory write-downs may be
required.





(h)
            Property,
      plant and equipment





Property,
plant and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
basis over the following estimated useful lives:





Buildings
              20
      yearsMachinery
              10
      yearsFurniture,
      fixtures and equipment
              5 yearsMotor
      vehicles
              5 years





Costs
incurred in constructing new facilities, including progress payments and other
costs related to construction, are capitalizedand transferred to
property, plant and equipment on completion, at which time depreciation
commences. Interest cost incurred and capitalized in respect of construction of
new facilities amounted to $nil, $2,492,328 and $1,074,430 for the years ended
December 31, 2007, 2008 and 2009, respectively.


F-11


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





2.
            SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued





(i)
            Prepaid
      land use rights





Prepaid
land use rights are recorded at cost and are charged to income statement ratably
over 50 years, according to the term of the land use right
agreement.





(j)
            Impairment
      of long-lived assets





The Group
evaluates its long-lived assets and finite lived intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. When these events occur, the Group measures
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 flows is
less than the carrying amount of the assets, the Group would recognize an
impairment loss equal to the excess of the carrying amount over the fair value
of the assets.





The Group
identified certain long-lived assets that were no longer actively used due to
obsolete technology or poor physical conditions as of December 31, 2009. Such
assets were impaired in accordance with ASC 360 which resulted a loss of
$824,676.





(k)
            Derivative
      financial instruments





The Group
enters into certain long-term supply contracts that may contain embedded
derivatives that need to be bifurcated if the terms of the contracts are neither
denominated in the functional/local currency of either contracted parties nor in
the currency such goods are routinely denominated in international commerce. The
Group accounts for such embedded derivatives at fair value and records the
change in the statement of operations.





The Group
entered into certain foreign exchange forward contracts to protect against
volatility of future cash flows caused by the changes in foreign exchange rates
associated with sales contracts denominated in Euro or U.S. dollar. The
Group recognizes all derivative instruments as either assets or liabilities at
fair value in the consolidated balance sheets. The derivatives do not qualify
for hedge accounting and, as a result, the changes in fair value of the
derivatives are recognized in the statement of operations.





(l)
            Income
      taxes





Deferred
income taxes are recognized for temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements,
net operating loss carryforwards and credits by applying enacted tax rates
applicable to future years. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Current
income taxes are provided for in accordance with the laws of the relevant taxing
authorities. The components of the deferred tax assets and liabilities are
individually classified as current and non-current based on the characteristics
of the underlying assets and liabilities, or the expected timing of their use
when they do not relate to a specific asset or liability.


F-12


CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise stated)
 
 2.
              SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued
 
 (m)
              Revenue
      recognition
 
 Sales of
solar cells and modules are recorded when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and
collectability is reasonably assured.  Customers do not have any
general rights of return but may be allowed to exchange for goods that are not
defective but may not meet certain minor specifications such as color or sizes
of the products for a 30 to 45 day period.  The Group has recorded the
estimated replacement costs, which have been immaterial for all periods, in
result of the product exchanges in cost of revenue upon the recognition of
revenue. A portion of the Group's sales to domestic customers require the
customers to prepay before delivery has occurred.  Such prepayments
are recorded as advances from customers in the consolidated balance sheets until
delivery has occurred.  A majority of the Group’s contracts with
overseas customers are written such that the customer takes title and assumes
the risks and rewards of ownership of the products upon
shipment.  Accordingly, the Group recognizes revenue upon documentary
evidence of shipment, assuming all other criteria have been met.
 
 (n)
              Buy-and-sell
      arrangements
 
 In 2007
and 2008, the Group has buy-and-sell arrangement with certain raw material
vendors wherein the Group sells finished goods, comprised of solar cells, and
acquires raw materials in the form of silicon wafers.  These
arrangements are with counterparties in the same line of business as the Group
and are executed as a means of securing a consistent supply of silicon wafer raw
materials. In 2009, the Group enters into arrangements wherein the Group
purchases raw material silicon wafers and sells polysilicon to the same
counterparties. These arrangements are for making profits from trading of
polysilicon. The Group records such transactions at fair value.
 
 During
the years ended December 31, 2007 and 2008, the Group purchased $15,173,393 and
$1,504,018 of raw materials and sold $10,517,112 and $1,529,131of finished
goods, respectively, under these buy-and-sell arrangements. During the years
ended December 31, 2009, the Group purchased $69,823,276 of silicon wafers and
sold $17,253,185 of polysilicon under the buy- and-sell
arrangements.
 
 (o)
              Cost
      of revenue
 
 Cost of
revenue includes production and indirect costs, as well as shipping and handling
costs for products sold and warranty costs.
 
 (p)
              Research
      and development
 
 Research
and development costs are expensed when incurred.
 
 (q)
              Advertising
      expenses
 
 Advertising
costs are expensed as incurred. The Group incurred advertising costs amounting
to $363,237, $495,162 and $425,750 for the years ended December 31, 2007, 2008
and 2009, respectively.
  F-13
  CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise stated)
 
 2.
              SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued
 
 (r)
              Warranty
      cost
 
 For solar
cells, the Group warrants its products against specified declines in the initial
minimum power generation capacity for up to 20 years after sales have taken
place.  The Group has the right to repair or replace the solar cells
based on the specific nature of the defect claims under the terms of the
warranty policy.  The Group maintains warranty reserves to cover
potential liabilities that could arise under these warranties.  Due to
limited warranty claims to date, the Group accrues the estimated costs of
warranties at 0.5% of solar cell sales. Since the beginning of 2007, however,
the Group has aborted such warranty terms in solar cell sales contracts signed
in 2007.
 
 Beginning
in 2007, the Group began selling modules. Solar modules are typically sold with
a 20 to 25 year warranty against specified declines in the initial minimum power
generation capacity at the time of sale. In addition, the Group provided
warranty for solar modules against defects in materials and workmanship for a
period of five years from the date of sale. The Group estimates and accrues the
costs of warranties at 1% of module sales.
 
 Due to
very limited claims occurred to date, the warranty provisions for cells and
modules are mainly based on an assessment competitors’ accrual history and
industry practice.  Actual warranty costs are accumulated and charged
against the accrued warranty liability.  To the extent that accrual
warranty costs differ from the estimates, the Group will prospectively revise
its accrual rate.
 
 (s)
              Government
      grants
 
 Government
grants are recognized when received and all the conditions for their receipt
have been met. Government grants are recognized as income in the period in which
the related expenditures are recorded. Capital grants for the acquisition of
equipment are recorded as a liability until earned and then offset against the
related capital assets.
 
 (t)
              Foreign
      currency translation
 
 The
functional and reporting currency of the Company is the United States dollar
(“US dollar”).  Monetary assets and liabilities denominated in other
currencies other than the US dollar are translated into US dollar at the rates
of exchange in effect at the balance sheet dates.  Transactions
dominated in currencies other than the US dollar during the year are converted
into US dollar at the applicable rates of exchange prevailing when the
transactions occur.  Transaction gains and losses are recorded in the
statements of operations.
 
 The
financial records of the Group’s subsidiaries are maintained in their local
currencies.  Assets and liabilities are translated at the exchange
rates at the balance sheet date, equity accounts are translated at historical
exchange rates and revenue, expenses, gains and losses are translated at the
average rate for the period.  Translation adjustments are reported as
cumulative translation adjustments and are shown as a separate component of
other comprehensive income in the statements of equity.
  F-14
  CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise stated)
 
 2.
              SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued
 
 (u)
              Comprehensive
      income (loss)
 
 Comprehensive
income (loss) includes all changes in equity except those resulting from
investments by owners and distributions to owners and is comprised of net income
(loss) and foreign currency translation adjustments.
 
 (v)
              Foreign
      currency risk
 
 The
functional currency of the Group’s subsidiaries which operate in the PRC is
Renminbi (“RMB”). The RMB is not a freely convertible currency. The PRC State
Administration for Foreign Exchange, under the authority of the People’s Bank of
China, controls the conversion of RMB into foreign currencies. 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 China
foreign exchange trading system market. The Group's aggregate amount of cash and
cash equivalents and restricted cash denominated in RMB amounted to USD
equivalent of $113,448,504 and $125,748,915 at December 31, 2008 and 2009,
respectively.
 
 (w)
              Concentration
      of credit risk
 
 Financial
instruments that potentially expose the Group to significant concentrations of
credit risk consist principally of cash and cash equivalents, accounts
receivable and advance to suppliers.  The Group places its cash and
cash equivalents with financial institutions with high-credit ratings and
quality.
 
 The Group
performs ongoing credit evaluations of customers and suppliers and generally
does not require collateral or other security from its customers.  The
Group establishes an allowance for doubtful accounts primarily based upon the
age of the receivables and advances and factors surrounding the credit risk of
specific customers and suppliers.
 
 The Group
recognized bad debt provision $1,134,926 for the year ended December 31,
2007,  and reversed $76,384 for the year ended December 31, 2008
related to a provision against an advance to a supplier which was recovered. The
Group recognized bad debt provision of $7,332,039 for the year ended December
31, 2009 mainly related to outstanding accounts receivable that are unlikely to
be collected due to the deteriorating financial conditions of certain
customer.
 
 Bad debt provision movements for accounts receivable and
advanced to suppliers are as follows:
 
 Years ended December 31,2007
                          
                          
                          2008
                          
                          
                          2009$
                          
                          
                          $
                          
                          
                          $Openning
      Balance
                          
                          
                          -
                          
                          
                          
                          (1,109,602
                          )
                          
                          
                          (1,105,733
                          )Addition/Reverse
                          
                          
                          (1,134,926
                          )
                          
                          
                          76,384
                          
                          
                          
                          (7,332,039
                          )Write
      off
                          
                          
                          -
                          
                          
                          
                          3,865
                          
                          
                          
                          1,081,363Effect
      of change in foreign currency
                          
                          
                          25,324
                          
                          
                          
                          (76,380
                          )
                          
                          
                          (29,621
                          )Ending
      Balance
                          
                          
                          (1,109,602
                          )
                          
                          
                          (1,105,733
                          )
                          
                          
                          (7,386,030
                          )
  F-15
  CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise stated)
 
 2.
              SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued
 
 (x)
              Net
      loss per share
 
 Basic
loss per share is computed by dividing loss attributable to holders of ordinary
shares by the weighted-average number of ordinary shares outstanding during the
year.  Diluted loss 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.  Generally, ordinary
share equivalents are excluded from the computation in loss periods as their
effects would be anti-dilutive.
 
 Dilutive
EPS for the year ended December 31, 2007, 2008 and 2009 excludes 1,586,900,
1,280,126 and 1,609,071 shares issuable upon exercise of share options,
respectively, excludes nil, 2,317,391 and 799,101 non-vested restricted shares,
respectively, and excludes nil, 23,414,630 and 21,463,411 shares issuable upon
conversion of the senior notes as their effects would have been
anti-dilutive.
 
 The terms
of the series A, series B and series C preferred share subscription agreements
allow for the preferred shareholders to participate equally with the common
shareholders with regards to any dividends declared and payable, after the
payment of preferred shares dividends.  The subscription agreements do
not require the preferred shareholders to participate in losses of the
Company.  Accordingly, the Company presents earnings per share using
the two-class method when the operations of the company result in earnings, and
not losses, for any given period.
 
 Upon the
consummation of the Group's initial public offering on May 22, 2007, the series
A, series B and series C redeemable convertible preference shares were
automatically converted into ordinary shares. The two class method of computing
earnings per share ceased to apply on the conversion date.
 
 The call
option on the Loaned Shares (see Note 9) has been excluded in the computation of
basic EPS as the Company has concluded that the Loaned Shares are not regarded
as issued for accounting purposes as existing shareholders are not expected to
be impacted by the issuance due to (a) the existence of the collateral
arrangement and (b) the requirement that the holders of the Loaned Shares return
any dividends received. The call option on the Loaned Shares would be considered
in the computation of diluted EPS using the treasury stock method with the fair
value of the collateral representing the assumed proceeds for the issuance of
the underlying shares.  For the year ended December 31, 2009, there
were no incremental shares included in the diluted EPS computation as the effect
would be anti-dilutive.
  F-16
  CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise stated)
 
 2.
              SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued
 
 (x)
              Net
      loss per share - continued
 
 The
following table sets forth the computation of basic and diluted income per share
for the periods indicated:
 
 Years ended December 31,2007
                                    
                                    
                                    2008
                                    
                                    
                                    2009$
                                    
                                    
                                    $
                                    
                                    
                                    $Net
      loss attributable to ordinary shareholders-basic and
    diluted
                                    
                                    $
                                    (5,572,727
                                    )
                                    
                                    $
                                    (22,937,596
                                    )
                                    
                                    $
                                    (9,846,370
                                    )Allocation
      of undistributed earnings to preferred shares for participating rights
      to dividends *
                                    
                                    $
                                    950,009
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Net
      loss attributable to ordinary shareholders
                                    
                                    $
                                    (6,522,736
                                    )
                                    
                                    $
                                    (22,937,596
                                    )
                                    
                                    $
                                    (9,846,370
                                    )Weighted–average
      ordinary shares outstanding-basic
                                    
                                    
                                    185,165,757
                                    
                                    
                                    
                                    238,079,890
                                    
                                    
                                    
                                    239,366,840Weighted-average
      ordinary shares outstanding-diluted
                                    
                                    
                                    185,165,757
                                    
                                    
                                    
                                    238,079,890
                                    
                                    
                                    
                                    239,366,840Net
      loss per share:Basic
                                    
                                    $
                                    (0.04
                                    )
                                    
                                    $
                                    (0.10
                                    )
                                    
                                    $
                                    (0.04
                                    )Diluted
                                    
                                    $
                                    (0.04
                                    )
                                    
                                    $
                                    (0.10
                                    )
                                    
                                    $
                                    (0.04
                                    )
 
 *
              Reflects
      the allocation of net income of $1,826,535 for the period from January 1,
      2007 to May 22, 2007, the date on which the preference shares were
      converted into ordinary shares.
 
 (y)
              Share-based
      compensation
 
 The Group
recognizes the services received in exchange for awards of equity instruments
based on the grant-date fair value of the award as determined by the Binomial
option pricing model, net of estimated forfeitures. The estimated compensation
cost is recognized using straight line method over the period the granter is
required to provide services per the conditions of the award. See Note 15,
“Share Based Compensation”, for further details.
  F-17
  CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise stated)
 
 2.
              SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued
 
 (z)
              Recently
      issued accounting pronouncements
 
 On
January 1, 2009, the Group adopted the new accounting standard relating to
noncontrolling interests (previously referred to as minority interests) that
changed the accounting and reporting for noncontrolling interests in the
consolidated financial statements. The Group does not believe the adoption of
ASC 810 would have any significant impact on its consolidated financial
statements due to the insignificance of the noncontrolling
interests.
 
 In June
2009, the FASB issued ASC 810-10, “Consolidation —Overall” (previously SFAS 167,
“Amendments
to FASB Interpretation No. 46(R)”). This accounting standard eliminates
exceptions of the previously issued pronouncement to consolidating qualifying
special purpose entities, contains new criteria for determining the primary
beneficiary, and increases the frequency of required reassessments to determine
whether a company is the primary beneficiary of a variable interest entity. This
accounting standard also contains a new requirement that any term, transaction,
or arrangement that does not have a substantive effect on an entity’s status as
a variable interest entity, a company’s power over a variable interest entity,
or a company’s obligation to absorb losses or its right to receive benefits
of an entity must be disregarded in applying the provisions of the previously
issued pronouncement. This accounting standard will be effective for the Group’s
fiscal year beginning January 1, 2010. The Group does not believe the adoption
of ASC 810-10 would have any significant impact on its consolidated financial
statements.
 
 In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, “Fair Value
Measurements and Disclosures (Topic 820) —Measuring Liabilities at Fair Value”.
ASU 2009-05 amends ASC 820-10, “Fair Value Measurements and Disclosures—
Overall”, for the fair value measurement of liabilities. It provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure the fair value using (1) a valuation technique that uses the quoted
price of the identical liability when traded as an asset or quoted prices for
similar liabilities or similar liabilities when traded as assets or (2) another
valuation technique that is consistent with the principles of Topic 820. It also
clarifies that when estimating the fair value of a liability, a reporting entity
is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability and that both a quoted price in an active market for the identical
liability at measurement date and that the quoted price for the identical
liability when traded as an asset in an active market when no adjustments to the
quoted price of the asset are required are Level 1 fair value
measurements.
 
 The
provisions of ASU 2009-05 are effective for the Group’s fiscal year beginning
January 1, 2010. Early application is permitted. The Group does not believe
the adoption of ASU 2009-05 would have any significant impact on its
consolidated financial statements starting from January 1,
2010.
  F-18
  CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise stated)
 
 2.
              SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued
 
 (z)
              Recently
      issued accounting pronouncements -
continued
 
 In
October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605)—
Multiple- Deliverable Revenue Arrangements” (previously EITF 08-1, "Revenue
Arrangements with Multiple Deliverables"). This ASU addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services (deliverables) separately rather than as a combined unit. Specifically,
this guidance amends the criteria for separating consideration in
multiple-deliverable arrangements. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence; (b) third-party evidence; or (c)
estimates. This guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method. In
addition, this guidance significantly expands required disclosures related to a
vendor’s multiple-deliverable revenue arrangements. This accounting standard
will be effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. Early
adoption is permitted. The Group does not believe the adoption of ASC
2009-13 would have any significant impact on its consolidated financial
statements.
 
 In
October 2009, the FASB issued ASU 2009-15, “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing,"
which clarifies that share lending arrangements that are executed in connection
with convertible debt offerings or other financings should be measured at fair
value and recognized as a debt issuance cost and be amortized using the
effective interest method over the life of the financing arrangement as interest
cost. In addition, ASU 2009-15 states that the loaned shares should be excluded
from basic and diluted earnings per share unless default of the share-lending
arrangement occurs, at which time the loaned shares would be included in the
common and diluted earnings per share calculation. ASU 2009-15 is effective for
all arrangements outstanding as of the fiscal year beginning on or after
December 15, 2009, (effective January 1, 2010 for the Group) and retrospective
application is required for all periods presented. In addition, ASU 2009-15 is
effective for arrangements entered into on or after the beginning of the first
reporting period that begins on or after June 15, 2009. The Group has evaluated
the provisions of ASU 2009-15 and determined that it will record additional debt
issuance costs at issuance of $1.9 million related to its Loaned Shares (see
Note 9).  Such costs will be amortized over the life of the
convertible notes and will result in an adjustment of $809,349 to beginning
retained earnings on January 1, 2010.
  F-19
  CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise stated)
 
 2.
              SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued
 
 (z)
              Recently
      issued accounting pronouncements -
continued
 
 In
December 2009, the FASB issued ASU 2009-17, “Consolidations
(Topic 810)—Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities,” which amends the
ASC for the issuance of FASB Statement No. 167, “Amendments to FASB
Interpretation No. 46(R),” issued by the
FASB in June 2009. The amendments in ASU 2009-17 replace the
quantitative-based risks and rewards calculation for determining which
reporting entity, if any, has a controlling financial interest in a variable
interest entity with an approach primarily focused on identifying which
reporting entity has the power to direct the activities of a variable
interest entity that most significantly impact the entity’s economic
performance and (1) the obligation to absorb the losses of the entity or
(2) the right to receive the benefits from the entity. ASU 2009-17 also
requires additional disclosure about a reporting entity’s involvement in
variable interest entities, as well as any significant changes in risk
exposure due to that involvement. ASU 2009-17 is effective for annual and
interim periods beginning after November 15, 2009. Early application is not
permitted. The Group does not believe the adoption of this ASU would have any
significant impact on its consolidated financial statements starting from
January 1, 2010.
 
 In
January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and
Disclosures (Topic 820) —Improving Disclosures about Fair Value Measurements”.
ASU 2010-06 amends ASC 820 (formerly SFAS 157) to add new requirements for
disclosures about (1) the different classes of assets and liabilities measured
at fair value, (2) the valuation techniques and inputs used, (3) the activity in
Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and
3. The guidance in ASU 2010-06 is effective for the first reporting period
beginning after December 15, 2009, except for the requirement to provide the
Level 3 activity of purchases, sales, issuances, and settlements on a gross
basis, which will be effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years. In the period of
initial adoption, entities will not be required to provide the amended
disclosures for any previous periods presented for comparative purposes.
However, those disclosures are required for periods ending after initial
adoption. Early adoption is permitted. The Group does not believe this ASU
has an impact on its consolidated financial statements.
 
 3.
              INVENTORIES
 
 Inventories
consist of the following:
 At December 31,2008
                              
                              
                              2009$
                              
                              
                              $Raw
      materials
                              
                              
                              36,475,120
                              
                              
                              
                              16,641,431Work-in-process
                              
                              
                              3,829
                              
                              
                              
                              -Finished
      goods
                              
                              
                              22,645,670
                              
                              
                              
                              6,003,650Inventories
                              
                              
                              59,124,619
                              
                              
                              
                              22,645,081
 
 The lower
of cost or market write-down for inventories is $13,777,913 and $1,817,159 as of
December 31, 2008 and 2009, respectively.
  F-20
  CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise stated)
 
 4.
              PROPERTY,
      PLANT AND EQUIPMENT, NET
 
 Property,
plant and equipment, net consist of the following:
 
 At December 31,2008
                            
                            
                            2009$
                            
                            
                            $Buildings
                            
                            
                            12,458,528
                            
                            
                            
                            12,493,824Plant
      and machinery
                            
                            
                            62,532,676
                            
                            
                            
                            97,736,557Furniture,
      fixtures and equipment
                            
                            
                            2,988,805
                            
                            
                            
                            4,591,312Motor
      vehicles
                            
                            
                            421,070
                            
                            
                            
                            451,73178,401,079
                            
                            
                            
                            115,273,424Less:
      Accumulated depreciation
                            
                            
                            (12,817,495
                            )
                            
                            
                            (22,642,296
                            )65,583,584
                            
                            
                            
                            92,631,128Construction
      in process
                            
                            
                            37,025,035
                            
                            
                            
                            1,159,028Property,
      plant and equipment, net
                            
                            
                            102,608,619
                            
                            
                            
                            93,790,156
 
 Depreciation
expense was $4,286,220, $5,695,363 and $9,984,187 for the years ended December
31, 2007, 2008 and 2009, respectively.
 
 5.
              PREPAID
      LAND USE RIGHTS, NET
 
 At December 31,2008
                        
                        
                        2009$
                        
                        
                        $Prepaid
      land use rights, cost
                        
                        
                        6,587,430
                        
                        
                        
                        6,722,188Less:
      Accumulated amortization
                        
                        
                        145,863
                        
                        
                        
                        295,387Prepaid
      land use rights, net
                        
                        
                        6,441,567
                        
                        
                        
                        6,426,801
 
 Amortization
expense was $29,393, $68,824 and $149,525 for the year ended December 31, 2007,
2008 and 2009.
 
 For 2010,
2011, 2012, 2013 and 2014, the Group will record annual amortization expense of
approximately $150,048.
  F-21
  CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise stated)
 
 6.
              BANK
      BORROWINGS
 
 At December 31,2008
                        
                        
                        2009$
                        
                        
                        $Short-term
      bank borrowings
                        
                        
                        97,299,027
                        
                        
                        
                        102,516,036Total
                        
                        
                        97,299,027
                        
                        
                        
                        102,516,036
 
 The
Group's short-term bank borrowings bore annual average interest rates of 7.42%
and 5.62% in year 2008 and 2009, respectively. These loans represent borrowings
of Sunergy Nanjing from various financial institutions and represent the maximum
amount available under each facility.  Each of these borrowings has a
term of one year, and expires at various times throughout the year.
 
 The short-term bank borrowings were
guaranteed by:
 
 YearsendedDecember 31,2008
                                
                                
                                2009$
                                
                                
                                $CEEG.Jiangsu
      CEEG Electrical Equipment Manufacturing Co., Ltd.and
      Group chairman Mr. Tingxiu Lu (Related parties)
                                
                                
                                72.4
      million
                                
                                
                                
                                93.7
      millionRaw
      materials and personal guarantee by Group chairman Mr. Tingxiu
      Lu
                                
                                
                                16.1
      million
                                
                                
                                
                                8.8
      million
  The Group
also has maximum short term credit facility vehicles of $89.3 million to
facilitate its purchase of raw materials from various banks, of which $1.3
million were withdrawn with $88.0 available to use as of December 31, 2009.
Those short-term credit facilities are renewable annually by mutual agreement
between the parties.
 
 7.
              DERIVATIVES
      FINANCIAL INSTRUMENTS
 
 During
2008, the Group entered into a long-term silicon supply contract that the
purchase price of the silicon to be acquired was denominated in U.S. dollars,
which is not the functional currency of either of the contracting parties.
Accordingly, the contract contains an embedded foreign exchange forward
contract, which is required to be bifurcated and accounted for at fair value.
Subsequent changes in fair value are recorded in the consolidated statements of
operations.
 
 As of
December 31, 2008, the fair value of embedded foreign currency derivatives
related to the purchase contract amounted to $7,603,956 and are recorded as
derivative liability. The loss arising from the embedded foreign currency
derivative instruments amounted to $7,611,513 for the year ended
December 31, 2008 has been recorded as “Change in fair value of
derivatives” in the consolidated statements of operations.
  F-22
  CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise stated)
 
 7.
              DERIVATIVES
      FINANCIAL INSTRUMENTS - continued
 
 As of
December 31, 2009, the derivative liability related to this long-term
supply contract was extinguished due to the termination of such term supply
contract on September 9, 2009. The gain arising from termination of the embedded
foreign currency derivative instruments amounted to $7,611,132 for the year
ended December 31, 2009 has been recorded as “Change in fair value of
derivatives” in the consolidated statements of operations.
 
 The Group
recorded a loss of $2.3 million and a $0.4 million gain relating to foreign
exchange forward contracts that did not qualify for hedge accounting for the
years ended December 31, 2008 and 2009. As of December 31, 2008 and 2009,
the Group had outstanding foreign exchange forward contracts with notional
amount of $ 46.6 million and $8.6 million, respectively, with estimated fair
value of $1.5 million and $0.3 million, respectively.
 
 8.
              FAIR
      VALUE MEASUREMENT
 
 As of
December 31, 2008 and 2009, information about inputs into the fair value
measurements of the Group's assets and liabilities that are measured at fair
value on a recurring basis in periods subsequent to their initial recognition is
as follows:
 Fair Value Measurements at December 31, 2008Date UsingTotal Fair
                              
                              Quoted PricesValue and
                              
                              in Active
                              
                              SignificantCarrying
                              
                              Markets for
                              
                              Other
                              
                              
                              SignificantValue on the
                              
                              Identical
                              
                              Observable
                              
                              
                              UnobservableBalanceSheet
                              
                              Assets
                              
                              Inputs
                              
                              
                              Inputs(Level1)
                              
                              (Level2)
                              
                              
                              (Level3)Liabilities:Foreign
      exchange forward contract
                              
                              $
                              1,454,383
                              
                              
                              
                              $
                              1,454,383Embedded
      derivatives for long-term purchase contract
                              
                              $
                              7,603,956
                              
                              
                              
                              
                              
                              
                              
                              $
                              7,603,956Total
      liabilities
                              
                              $
                              9,058,340
                              
                              
                              
                              $
                              1,454,383
                              
                              
                              $
                              7,603,956
  F-23
  CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise stated)
 
 8.
              FAIR
      VALUE MEASUREMENT - continued
 
 Fair Value Measurements at December 31, 2009Date UsingTotal Fair
                              
                              Quoted PricesValue and
                              
                              in Active
                              
                              SignificantCarrying
                              
                              Markets for
                              
                              Other
                              
                              SignificantValue on the
                              
                              Identical
                              
                              Observable
                              
                              UnobservableBalanceSheet
                              
                              Assets
                              
                              Inputs
                              
                              Inputs(Level
1)
                              
                              (Level
2)
                              
                              (Level
  3)Assets:Foreign
      exchange forward contractEmbedded
      derivatives for long-term purchase contract
                              
                              $
                              251,208
                              
                              
                              
                              $
                              251,208Total
      assets
                              
                              $
                              251,208
                              
                              
                              
                              $
                              251,208
 
 The Level
3 embedded derivative for long-term purchase contract was reversed in 2009 due
to the termination of REC long-term supply contract announced by REC on
September 9, 2009. Therefore, the derivative liability related to this long-term
supply contract was reversed to income statement as a gain through the change in
fair value of derivatives, resulting from the contract termination. A summary of
changes in Level 3 embedded derivative for long-term purchase contract for the
year ended December 31, 2008 and 2009 is as follows:
 
 Fair Value Measurements Using Significant
                                Unobservable Inputs
                                (Level 3)Embedded
      Derivative for Long-term Purchase
                                ContractBeginning
      balance as of January 1, 2008
                              
                              
                              -Total
      gains and losses (realized/unrealized)Included
      in earnings (or change in net assets)
                              
                              $
                              7,603,956Included
      in other comprehensive income
                              
                              
                              -Purchases,
      issuances, and settlements
                              
                              
                              -Ending
      balance as of December 31, 2008
                              
                              $
                              7,603,956Total
      gains and losses (realized/unrealized)Included
      in earnings (or change in net assets)
                              
                              $
                              (7,603,956
                              )Included
      in other comprehensive income
                              
                              
                              -Purchases,
      issuances, and settlements
                              
                              
                              -Ending
      balance as of December 31, 2009
                              
                              
                              -
  F-24




CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





8.
            FAIR
      VALUE MEASUREMENT - continued





The
following is a description of the fair value techniques used for instruments
measured at fair value as well as the general classification of such instruments
pursuant to the valuation hierarchy described above.





Foreign
exchange forward contract: Quoted prices in active markets for identical assets
are not available. The term of the forward contracts held by the Group is less
than one year. Main inputs for these short-term forward contracts include
foreign exchange rates, which are observable and can be obtained from third
party professional pricing sources.  These fair value measurements are
classified as level 2.





Embedded
Derivatives for long-term purchase contract: The fair value measurement is
performed using a discounted cash flow model, using observable USD/RMB forward
rates and unobservable inputs mainly including Group’s estimation about silicon
wafers to be purchased under the contract, expected future cash flows based on
monthly delivery of silicon wafer, degree of liquidity in the current credit
markets, and discount rate. This fair value measurement is classified as level
3.





As of
December 31, 2009, the carrying amounts of accounts receivable, advances to
suppliers, accounts payable, notes payable, advance from customers and
short-term borrowings approximate their fair values due to their short-term
nature.





The
carrying amount of the Group's outstanding convertible notes was US$48 million
and US$44 million and the estimated fair value of this debt was US$ 19 million
and US$20 million as of December 31, 2008 and 2009, respectively. The fair value
was estimated using market quotes as of December 31, 2008 and 2009.





The fair
value estimates presented above are based on pertinent information available to
management as of December 31, 2008 and 2009, respectively. Although
management is not aware of any factors that would significantly affect these
fair value estimates, such amounts have not been comprehensively revalued for
purposes of these financial statements since those dates, and current estimates
of fair value may differ significantly from the amounts
presented.


F-25


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





9.
            CONVERTIBLE
      SENIOR NOTES





On July
1, 2008, the Company issued US$54.5 million aggregate principal amount
(includes USD 4.5 million from exercise of over-allotment option in full) of
Convertible Senior Notes (“Convertible Notes” or “Notes”) due June 15, 2013,
with an interest rate of 4.75% per annum, payable in arrears semi-annually on
June 15 and December 15, beginning December 15, 2008.





Conversion





Each
$1,000 principal amount of the Notes will initially be convertible into 81.30
American Depository Shares, or ADSs, par value $.0001 per share at a conversion
price of $12.3, subject to adjustment. The Notes are convertible into a number
of ADSs equal to the conversion rate, at any time prior to the close of business
on the third business day immediately preceding the maturity date. Securities
may be converted only in denominations of USD 1,000 principal amount and
integral multiples thereof.





If Notes
are converted in connection with a fundamental change, then the conversion rate
of the Notes being converted shall be increased by an additional number of ADSs.
The conversion rate, including any additional ADSs added to the conversion rate
in connection with a fundamental change, will not exceed 97.56 ADSs (equal to a
conversion price of USD10.25 per ADS). Such maximum conversion rate will be
appropriately adjusted for anti-dilution conversion rate
adjustments.





Redemption





In the event of a fundamental change,
holders have the option to require the Company to repurchase the entire
principal amount of this Notes, or the portion thereof (which is $1,000 or an
integral multiple thereof), at the fundamental change Repurchase Price, together
with accrued interest to, but excluding the repurchase date.





In the
Event of Default, the Trustee by notice to the Company or the Holders of at
least 25% in principal amount of the Notes then outstanding by notice to the
Company and the Trustee, may declare the Notes to be due and payable. Upon such
declaration, the principal of, and accrued and unpaid interest (including any
additional amounts) on all Notes shall be due and payable
immediately.





Offering
expenses incurred for issuing of Convertible Notes amounted to
$4.3 million, and are being amortized through interest expense over the
beneficiary period from July 2008 to June 2013,
using the effective interest rate method. These capitalized costs are reported
as deferred assets in Convertible bond issuance cost, and $0.9 million and
$1.0 million was amortized for the year ended December 31, 2008 and 2009,
respectively.


F-26


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





9.
            CONVERTIBLE
      SENIOR NOTES - continued





Share
Lending Agreement





Concurrent
with this offering, 4,431,000 ADSs were borrowed by an affiliate of the initial
purchaser of the notes pursuant to an ADS lending agreement, and offered in a
transaction registered under the Securities Act. This is designed to facilitate
short sales and/or privately negotiated derivative transactions by which
investors may elect to hedge their investments in the Convertible
Notes.





The
Loaned Shares must be returned to the Group by the earliest of (a) the maturity
date of the Notes, June 15, 2013, (b) upon the Group's election to terminate the
Share Lending Agreement at any time after the later of (x) the date on which the
entire principal amount of the Notes ceases to be outstanding, and (y) the date
on which the entire principal amount of any additional convertible securities
that the Group has in writing consented to permit the ADS Borrower to hedge
under the Share Lending Agreement ceases to be outstanding, in each case,
whether as a result of conversion, redemption, repurchase, cancellation or
otherwise; and (c) the termination of the Share Lending Agreement.  The
Group is not required to make any payment to the underwriter of the Notes
("Underwriter") or the ultimate holder of the Notes ("the ADS Borrower") upon
the return of the Loaned Shares.





The
Underwriter has agreed to post collateral in cash, having a market value equal
to at least 100% of the market value of the Loaned Shares during the term of the
Share Lending Agreement. Otherwise, the Group can demand that the Underwriter
transfer to the collateral agent, a deposit equal to 100% of the market value of
the Loaned Shares to the Collateral Account, no later than the second following
business day. The collateral agent will promptly give the Group a statement
setting forth the Market Value of all Collateral upon the Group’s reasonable
request and the Group has the right to audit the Market Value of all
Collateral.





The
collateral agent is required to deliver to the Group any interest, distributions
or dividends on the date of such interest, distribution or dividends are
received.  The Underwriter has agreed not to vote the Loaned Shares to the
extent it is the shareholder of record.  An ADS Borrower has the ability to
vote without restriction.





A nominal
lending fee of US$0.0006 per ADS was received from the ADS borrower for the use
of the borrowed ADSs. The ADS Borrower will be required to return the borrowed
ADSs pursuant to the ADS lending agreement by the scheduled maturity date of the
notes in June 2013. The loaned ADS were accounted for as being reflected at
their par value in the common stock line item of the Group’s balance sheet, with
an offsetting reduction of additional paid in capital.





The Group
used the proceeds from the issuance of the Convertible Notes for expansion of
production capacity, for enhancement of research and development, and for
general corporate purposes.


F-27


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





9.
            CONVERTIBLE
      SENIOR NOTES - continued





The Group
has accounted for the Share Lending Agreement as the issuance of a written call
option to the ADS Borrower for the fair value of the associated ADSs.  The
Group has recorded the call option at fair value, given the Group has no
economic benefit associated with the issuance of the call option. The fair value
of the call option upon issuance and subsequently is immaterial.





Although
legally issued, the Group has not considered the Loaned Shares issued for
accounting purposes.  As a result, any cash collateral, to the extent
posted by the ADS Borrower, is not considered attributable to the issuance of
shares.  To the extent cash collateral is posted, the Group recorded the
cash as an asset on its balance sheet with an offsetting liability recorded to
reflect the collateral receipt as the proceeds of a borrowing.  The cash
collateral posted as of December 31, 2008 and 2009 is $17,502,450 and
$20,471,220 which is recorded as a long-term asset under restricted cash
collateral account with an offsetting long term liability recorded in collateral
accounts payable as of December 31, 2008 and 2009.





During
the 2008 and 2009, the Group conducted open market repurchase of its Convertible
Notes, and repurchased US$6.5 million and US$4.0 million aggregate principal
amount of the Convertible Notes for a total cash consideration of US$2.0 million
and US$1.8 million, respectively. As a result, the Group realized a net gain of
US$4.5 million and US$2.2 million and recorded as other income.





10.
            REDEEMABLE
      CONVERTIBLE PREFERRED SHARES





In April
2006, China Sunergy BVI issued 12,847,300 Series A redeemable convertible
preferred shares, par value $0.0001 per share (the "Series A Shares''). 
China Sunergy BVI incurred issuance costs of $149,590 which it has deducted from
the carrying value of the loans and, correspondingly, the Series A shares. 
In May 2006, China Sunergy BVI issued 23,905,100 Series B redeemable convertible
preferred shares, par value $0.0001 per share (the "Series B Shares''), China
Sunergy BVI incurred issuance costs of $50,000 which it has deducted from the
carrying value of the Series B shares.





In
September 2006, the Company issued 6,901,000 Series C redeemable convertible
preferred shares, par value $0.0001 per share (the "Series C
Shares'') (collectively with the Series A and Series B Shares, the
“Preferred Shares”), and incurred issuance costs of $100,000 which it has
deducted from the carrying value of the Series C shares.





Dividends





The
Preferred Shares are entitled to dividends at an annual rate of 3% of the
original issue price, compounded quarterly, whether or not declared by the Board
of Directors of the Company. After payment of the Preferred Shares dividend,
holders of Preferred Shares are entitled to participate in dividends paid to
holders of ordinary shares on an as-converted basis.


F-28


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





10.
            REDEEMABLE
      CONVERTIBLE PREFERRED SHARES -
continued





Conversion





The
preferred shares, plus all accrued but unpaid dividends thereon were originally
convertible into ordinary shares at pre-set conversion prices, at the option of
the holder at any time after the date of issuance of such shares.  The
preferred shares are automatically converted upon the consummation of an initial
public offering (“IPO”) or by obtaining the necessary written consent from the
holders of the Preferred Shares. An IPO refers to an initial public offering
duly approved by the Company’s board of directors.  The conversion price is
subject to adjustment for dilution, the issuance of additional equity securities
with a conversion price lower than that of the Preferred Shares, upon certain
distributions made by the Company and upon an earnings adjustment in the event
the Company’s 2006 (for series A and B); and 2007 (for series C) net earnings as
defined under the agreement, is less than a predefined amount.





In March
2007, the Company's shareholders adopted a third amended and restated memorandum
and articles of association to (a) modify the conversion prices of our
Series A, Series B and Series C preferred shares, which were revised
to $.39, $.44 and $1.76, respectively, subject to adjustments in the case
of certain dilution events, and (b) replace the definition of "qualified
IPO" or "QIPO" with the definition of "IPO." Such modifications did not have a
significant impact on expected cash flows and, as such, did not impact our
consolidated financial statements.





All the
outstanding Series A, Series B and Series C redeemable convertible preferred
shares of 12,847,300, 23,905,100 and 6,901,000 were automatically converted into
74,138,777 ordinary shares upon the consummation of the Group's initial public
offering on May 22, 2007.





Redemption





The
Preferred Shares may redeem at any time after the occurrence of a redemption
event, which includes (i) March 31, 2008 with respect to the Series A Shares,
May 6, 2009 with respect to the Series B Shares and September 26, 2009 with
respect to the Series C Shares (ii) a breach in the Preferred Share agreements
by the Company or its founders, (iii) a non-competition breach by the founders
or (iv) the commencement of a liquidation procedure or related action.  The
Company is only obligated to redeem 9,799,300 of the Series A Shares upon the
occurrence of events (iii) or (iv) above.  The Company has the ability to
request a one year extension of the redemption date upon the occurrence of
event (i) above, the extension of which requires the approval of the majority of
the holders of the Series A, Series B or Series C Shares, respectively. 
The redemption amount must be paid in cash and is that amount which would
provide the holder with an internal rate of return of 15% for Series A and
Series B Shares and 12% for Series C Shares.


F-29


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





10.
            REDEEMABLE
      CONVERTIBLE PREFERRED SHARES -
continued





Voting
rights





Each
Preferred Share has voting rights equivalent to the number of ordinary shares
into which it is convertible.





11.
            MAINLAND
      CHINA CONTRIBUTION PLAN





Full time
employees of the Group in the PRC participate in a government-mandated
multiemployer defined contribution plan pursuant to which certain pension
benefits, medical care, unemployment insurance, employee housing fund and other
welfare benefits are provided to employees.  PRC labor regulations require
the Group to accrue for these benefits based on certain percentages of the
employees’ salaries.  The total contribution for such employee benefits was
$636,913, $2,240,492 and $2,467,789 for the years ended December 31, 2007, 2008
and 2009, respectively.





12.
            PROFIT
      APPROPRIATION





Pursuant
to laws applicable to entities incorporated in the PRC, Sunergy Nanjing is
prohibited from distributing its statutory capital and must make appropriations
from PRC GAAP after-tax profit to other non-distributable reserve funds. These
reserve funds include one or more of the following: (i) a general reserve, (ii)
an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject
to certain cumulative limits, the general reserve fund requires annual
appropriation of 10% of after tax profit (as determined under accounting
principles generally accepted in the PRC at each year-end); the appropriation to
the other fund are at Sunergy Nanjing’s discretion. These reserve funds can only
be used for specific purposes of enterprise expansion and staff bonus and
welfare and are not distributable as cash dividends, loans or advances to the
Company due to a net loss in 2007, 2008 and 2009, Sunergy Nanjing made no
appropriation to other non-distributable reserve funds.





In 2007,
with a board resolution on December 20, 2007, Sunergy Nanjing declared a
dividend of $15,827,573 to the then shareholder, China Sunergy BVI, for the
profit made in 2006.





As a
result of these PRC laws and regulations, Sunergy Nanjing is restricted in its
ability to transfer the registered capital to the Company in the form of
dividends, loans or advances.  The restricted portion amounted to
$121,564,808, as of December 31, 2009.


F-30


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





13.
            OTHER
      INCOME (EXPENSE), NET





Years ended December 31,2007
                                
                                
                                2008
                                
                                
                                2009$
                                
                                
                                $
                                
                                
                                $Foreign
      currency exchange loss, net
                                
                                
                                (1,173,159
                                )
                                
                                
                                (6,858,856
                                )
                                
                                
                                (517,321
                                )Convertible
      bond repurchase gain
                                
                                
                                -
                                
                                
                                
                                4,525,625
                                
                                
                                
                                2,155,000Government
      grants
                                
                                
                                1,660,567
                                
                                
                                
                                98,732
                                
                                
                                
                                25,613Others
                                
                                
                                (393,996
                                )
                                
                                
                                (33,068
                                )
                                
                                
                                437,29993,412
                                
                                
                                
                                (2,267,567
                                )
                                
                                
                                2,100,591





14.
            INCOME
      TAX BENEFIT





Cayman
Islands





China
Sunergy Cayman is not subject to tax on income or capital gain according to the
current laws of the Cayman Islands.





British
Virgin Islands





China
Sunergy BVI is not subject to tax on income or capital gain according to the
current laws of the British Virgin Islands.





Hong
Kong





Sunergy
Hong Kong is subject to Hong Kong profit tax at a rate of 17.5% as of March 31,
2008 and 16.5% effective from April 1, 2008. No Hong Kong profit tax has been
provided as Sunergy Hong Kong has no assessable profit that was earned in or
derived from Hong Kong in 2009.





PRC





Sunergy
Shanghai was established in November 2007 and its applicable EIT rate is 25%.
Sunergy Shanghai did not have substantive operations and had incurred minimal
non-operating related losses.





Sunergy
Nanjing was governed by the Income Tax Law of PRC Concerning Foreign Investment
and Foreign Enterprise for the period before January 1, 2008, and the statutory
rate was 33% (30% of state income tax plus 3% local income tax) on PRC taxable
income.  Sunergy Nanjing, as a foreign-invested manufacturing enterprise
established in Nanjing (within a coastal economic zone), enjoyed a preferential
rate of 24%.  In addition, Sunergy Nanjing was granted a five-year tax
holiday (two years of exemption followed by three years of 50% deduction)
starting from its first profit making year which was 2006.  Thus Sunergy
Nanjing was tax exempted in 2006 and 2007.





On March
16, 2007, the PRC government promulgated the Law of the People’s Republic of
China on Enterprise Income Tax (“New EIT Law”), which was effective from January
1, 2008. Under the New EIT Law, domestically-owned enterprises and
foreign-invested enterprises are all subject to a uniform tax rate of 25%. 
Further, the New EIT Law stipulates that qualifying High and New Technology
Enterprises (“HNTEs”) is eligible for a preferential tax rate of
15%.


F-31


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





14.
            INCOME
      TAX BENEFIT - CONTINUED





On
December 26, 2007, the State Council issued a Notice of the State Council
Concerning Implementation of Transitional Rules for Enterprise Income Tax
Incentives (“Circular 39”). Based on Circular 39, enterprises that were
established and already enjoyed preferential tax treatments before March 16,
2007 will continue to enjoy them (i) in the case of preferential tax rates, for
a period of five years from January 1, 2008, and the enterprises that previously
enjoyed the tax rate of 24% shall be subject to the tax rate of 25% from 2008,
and (ii) in the case of preferential tax exemption or reduction for a specified
term, until the expiration of such term or 2012, whichever is earlier. However,
Circular 39 also prescribes that if the above transitional relief of EIT
overlaps with the preferential treatments provided by the New EIT Law, an
enterprise may choose the more favorable treatment, and shall not enjoy
both.  The treatment cannot be changed once it is chosen.





In 2008,
Sunergy Nanjing obtained the certificate of HNTE, with a valid period from 2008
to 2010, and thus is eligible for a 15% preferential tax rate during the above
period.  Based on Circular 39, the management chooses to enjoy the
transitional relief (i.e. 12.5% from 2008 to 2010). The management also believes
that it is more-likely-than-not to renew Sunergy Nanjing's HNTE status in 2011
and will be eligible for the 15% preferential rate for the following three years
from 2011 to 2013. Therefore, management applied the 15% income tax rate in deferred tax
calculations.If the renewal is not received for 2011 to 2013, then the
net deferred tax asset balance as of December 31, 2009 would change to
$5,470,748. The difference would be an increase of $1,063,483 to current net
earnings.





Effective
on January 1, 2007, the Group adopted the provisions of “Accounting for Uncertainty in Income
Taxes—an Interpretation of ASC No. 740” which clarifies the accounting
and disclosure for uncertainty in tax positions, as defined in that
statement.  ASC 740 prescribes a more-likely-than-not threshold for
financial statement recognition and measurement of tax position taken or
expected to taken in a tax return.  This interpretation also provides
guidance on de-recognition of income tax assets and liabilities, classification
of current and deferred income tax assets and liabilities, accounting for
interest and penalties associated with tax positions, accounting for income
taxes in interim periods and income tax disclosures.  The Group has made
its assessment for each tax position (including the potential application of
interest and penalties) based on the technical merits, and has measured the
unrecognized benefits associated with the tax positions.  The adoption of
ASC 740 did not have any material impact on the Group's total liabilities or
shareholders’ equity.  The Group has no uncertain tax positions as of
December 31, 2009 or unrecognized tax benefits which would favorably affect the
effective income tax rate.   The Group does not anticipate any
significant increases or decreases to its liabilities for unrecognized tax
benefits within the next 12 months.





According
to the PRC Tax Administration and Collection Law, the statute of limitations is
three years if the underpayment of income taxes is due to computational errors
made by the taxpayer. The statute of limitations will be extended to five years
under special circumstances, which are not clearly defined, but an underpayment
of income tax liability exceeding RMB100,000 is specifically listed as a special
circumstance. In the case of a transfer pricing related adjustment, the statute
of limitations is ten years. There is no statute of limitations in the case of
tax evasion. The statute of limitations in Hong Kong is 6
years.


F-32


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





14.
            INCOME
      TAX BENEFIT - continued





The tax
benefit comprises of:





Years ended December 31,2007
                          
                          
                          2008
                          
                          
                          2009$
                          
                          
                          $
                          
                          
                          $Current
      tax.
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Deferred
      tax benefit
                          
                          
                          705,504
                          
                          
                          
                          2,648,621
                          
                          
                          
                          902,709705,504
                          
                          
                          
                          2,648,621
                          
                          
                          
                          902,709





A
reconciliation between the effective income tax rate and the PRC statutory
income tax rate is as follows:





Years ended December 31,2007
                                
                                
                                2008
                                
                                
                                2009PRC
      statutory enterprise income tax rate
                                
                                
                                33.0
                                %
                                
                                
                                25.0
                                %
                                
                                
                                25.0
                                %50%
      additional deduction of R&D expense
                                
                                
                                6.7
                                %
                                
                                
                                0.4
                                %
                                
                                
                                1.6
                                %Other
      non-deductible expense for tax purposes
                                
                                
                                3.3
                                %
                                
                                
                                (0.7
                                )%
                                
                                
                                (0.9
                                )%Effect
      of tax rate change
                                
                                
                                (9.2
                                )%
                                
                                
                                (0.2
                                )%
                                
                                
                                (0.5
                                )%Different
      tax rates in other jurisdictions
                                
                                
                                (14.1
                                )%
                                
                                
                                (3.0
                                )%
                                
                                
                                (6.2
                                )%Valuation
      allowance
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (2.5
                                )%Effect
      of tax holiday
                                
                                
                                (7.0
                                )%
                                
                                
                                (11.1
                                )%
                                
                                
                                (8.1
                                )%12.7
                                %
                                
                                
                                10.4
                                %
                                
                                
                                8.4
                                %Gross
      tax exemption
                                
                                $
                                3,117,790
                                
                                
                                $
                                2,514,002
                                
                                
                                $
                                870,675Tax
      holiday per share-basic
                                
                                $
                                0.02
                                
                                
                                $
                                0.01
                                
                                
                                $
                                0.00Tax
      holiday per share-diluted
                                
                                $
                                0.02
                                
                                
                                $
                                0.01
                                
                                
                                $
                                0.00


F-33


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





14.
            INCOME
      TAX BENEFIT - continued





The
principal components of the deferred income tax assets are as
follows:





At December 31,2008
                                  
                                  
                                  2009$
                                  
                                  
                                  $Deferred
      tax assets:Pre-operating
      expense
                                  
                                  
                                  34,469
                                  
                                  
                                  
                                  6,828Depreciation
      of property, plant and equipment
                                  
                                  
                                  169,011
                                  
                                  
                                  
                                  310,340Warranty
      costs
                                  
                                  
                                  47,354
                                  
                                  
                                  
                                  69,761Inventory
      write-down
                                  
                                  
                                  1,648,271
                                  
                                  
                                  
                                  152,263Allowance
      for doubtful account
                                  
                                  
                                  127,952
                                  
                                  
                                  
                                  1,039,079Tax
      losses carried forward
                                  
                                  
                                  216,536
                                  
                                  
                                  
                                  3,085,288Derivative
      assets (liabilities)
                                  
                                  
                                  1,225,925
                                  
                                  
                                  
                                  (74,132
                                  )Fixed
      assets impairment
                                  
                                  
                                  -
                                  
                                  
                                  
                                  103,042Others
                                  
                                  
                                  35,038
                                  
                                  
                                  
                                  56,203Gross
      total deferred tax assets
                                  
                                  
                                  3,504,556
                                  
                                  
                                  
                                  4,748,672Valuation
      allowances
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (341,407
                                  )Net
      deferred tax assets
                                  
                                  
                                  3,504,556
                                  
                                  
                                  
                                  4,407,265Analysis
      as:Current
                                  
                                  
                                  1,992,759
                                  
                                  
                                  
                                  2,838,806Non-current
                                  
                                  
                                  1,511,797
                                  
                                  
                                  
                                  1,568,459Total
      deferred tax assets
                                  
                                  
                                  3,504,556
                                  
                                  
                                  
                                  4,407,265





The tax
losses carryforwards arising from year 2008 and 2009 are approximately $645,784
and $19,799,450 respectively, and will expire in 2013 and 2014
respectively.





The Group
considers positive and negative evidence to determine whether some portion or
all of the deferred tax assets will not be realized.  The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible for tax purposes. Based upon the projections for future taxable
income over the periods in which the deferred tax assets are realizable, the
Group believes it is more-likely-than-not that Sunergy Nanjing will realize the
benefits of those deductible differences, and as such, no valuation allowances
as of December 31, 2009 have been provided. The amount of the deferred tax
assets considered to be realizable, however, could be reduced in the near term
if estimates of future taxable income during the tax loss carry forward periods
are reduced.





Based on
the current profit, projected future profitability, and other available
evidence, the Group believes it is more-likely-than-not that Sunergy Hong Kong
and Sunergy Shanghai will not realize the deferred tax assets resulted from the
tax loss carried forward in the future periods.  Thus, a full valuation
allowances are provided for the deferred tax assets of Sunergy Hong Kong and
Sunergy Shanghai.





The Group
plans to indefinitely reinvest the undistributed earnings of the Company's PRC
subsidiaries.  However, as of December 31, 2009, the Company's PRC
subsidiaries have an accumulated deficit of $36.7 million. Upon distribution of
any future earnings in the form of dividends or otherwise, the Company would be
subject to the then applicable PRC tax laws and regulations.


F-34


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





15.
            SHARE
      BASED COMPENSATION





In
October 2006, the Company adopted the Share Incentive Plan (the “First Plan”)
which allows the Company to offer share incentive awards to employees, officers,
directors, individual consultants or advisors who rendered services to the
Group, pursuant to which 1,366,400 ordinary shares were authorized and granted.
Under the First Plan, options are granted with an exercise price equal to 70% of
the fair market value of the underlying shares, as determined by the Board of
Directors at the date of grant and expire after 10 years, with vesting occurring
25% upon each anniversary of the grant. The proceeds from the exercise of the
options by the grantee will be equity settled by cash or other method as
permitted and set forth in the plan.





On April
24, 2007, the Company amended and restated the above First Plan, which approved
the issuance of up 2,500,000 ordinary shares of the Company pursuant to awards
of options. Under the First plan, additional 684,500 ordinary shares were
granted at an exercise price equal to 70% of the IPO offering price per ordinary
share.





On
January 10, 2008, under the First Plan, the Company further granted options to
purchase 716,226 ordinary shares to certain employees at an exercise price of
US$1.283 per share. The options expire ten years from the date of grant, with
one–fourth of the options vesting on each of the following four grant date
anniversaries.





On
February 5, 2008, the shareholders granted approval for its Second Share
Incentive Plan (the “Second Plan”). The Second Plan is open to members of the
China Sunergy Board, as well as employees and consultants as determined by the
Compensation Committee of the Board. The maximum number of shares that may be
issued pursuant to the Second Plan is 4,190,748. The Company granted 2,397,301
and 1,078,785 restricted common shares to its then CEO and CFO on the same day,
which vest one third annually over the following three years.





On
January 9, 2009, the Group granted options to purchase 260,002 and 80,640
ordinary shares to certain employees at an exercise price of US$1.283 and US$0.7
per share, respectively. The options expire ten years from the date of grant,
with one-fourth of the options vesting on each of the following four grant date
anniversaries. At the same date, the Group also granted options to purchase
100,002 ordinary shares to a consultant at an exercise price of US$0.7 per
share. The shares subject to the option was vested on the December 31, 2009 and
is exercisable within 5 years from the date the option is vested.





The Group
recorded $535,856, $3,231,594 and $1,327,033 as compensation expense for the
years ended December 31, 2007, 2008 and 2009, respectively.


F-35


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





15.
              SHARE
      BASED COMPENSATION -
continued





The
derived fair value of the ordinary shares underlying the options granted on
April 24, 2007 was determined by the Company, with references to a retrospective
third-party valuation as of April 30, 2007, an independent appraiser, using
generally accepted valuation methodologies, including a weighted average equity
value derived by using a combination of the discounted cash flow method, a
method within the income approach whereby the present value of future expected
net cash flows is calculated using a discount rate and the guideline companies
method, which incorporates certain assumptions including the market performance
of comparable listed companies as well as the financial results and growth
trends of the Group, to derive the total equity value of the Group. The
valuation model allocated the equity value between the ordinary shares and the
preferred shares and determined the fair value of ordinary shares based on the
option-pricing method under the enterprise value allocation method. Under this
method, the ordinary shares have value only if the funds available for
distribution to shareholders exceed the value of the liquidation preference at
the time of a liquidity event (for example, merger or sale). The ordinary shares
are considered to be a call option with claim on the enterprise at an exercise
price equal to the remaining value immediately after the preferred shares are
liquidated.





The fair
value of each award is estimated on the date of grant using the binomial
option-pricing formula that uses the assumptions noted below. Expected
volatilities are based on the average volatility of comparable companies with
the time period commensurate with the expected time period. The Group uses
historical data to estimate option exercise and employee termination within the
pricing formula. The contractual life of the option is 6 to 10 years.  The
risk-free rate for periods within the contractual life of the option is based on
the yield of US Treasury Bond.





2007
                              
                              2008
                              
                              2009Average
      risk-free rate of return
                              
                              4.63%
                              
                              3.91%
                              
                              1.51%~2.40%Contractual
      life of the option
                              
                              10
      years
                              
                              10
      years
                              
                              6~10
      yearsVolatility
      rate
                              
                              61%
                              
                              60%
                              
                              84%Dividend
      yield
                              
                              0%
                              
                              0%
                              
                              0%





The
weighted average grant-date fair value of options granted during year 2007, 2008
and 2009 was $0.96, $1.20 and $0.22 per share, respectively. There were nil,
371,580 and nil options exercised during the year ended December 31, 2007, 2008
and 2009.  Total fair value of options vested during the year ended
December 31, 2007, 2008 and 2009 is $369,840, $341,934 and $523,078,
respectively.





In
November 2007, the Company modified the exercise price of all the options
granted in 2006 from $1.99 to $1.28 per ordinary share.  The total
incremental compensation expense resulting from the modification was $139,600,
which will be amortized over the remaining requisite service period of 2.95
years.





All the
amounts below reflect the modification of exercise prices of
options.


F-36


CHINA
SUNERGY CO., LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
U.S. dollars, except share data and unless otherwise stated)





15.
            SHARE
      BASED COMPENSATION - continued





A summary
of the option activities is follows:





Number of
                          Options
                        
                        
                        Weighted average
                          exercise price
                        
                        
                        Weighted
                          average
                          remaining
                          contract term
                        
                        
                        Aggregate
                          intrinsic valueOutstanding
      at January 1, 2009
                        
                        
                        1,280,126
                        
                        
                        $
                        1.283Granted
                        
                        
                        440,644
                        
                        
                        $
                        1.044Forfeited
                        
                        
                        (111,699
                        )
                        
                        $
                        1.283Outstanding  at
      December 31, 2009
                        
                        
                        1,609,071
                        
                        
                        $
                        1.218
                        
                        
                        
                        7.41
                        
                        
                        $
                        12,645Options
      vested or expected to vest at December 31, 2009
                        
                        
                        1,147,923
                        
                        
                        $
                        1.191
                        
                        
                        
                        7.46
                        
                        
                        $
                        7,000Options
      exercisable at December 31, 2009
                        
                        
                        550,004
                        
                        
                        $
                        1.177
                        
                        
                        
                        6.93
                        
                        
                        $
                        7,000




As of
December 31, 2009, there was $653,694 of unrecognized compensation expense
related to unvested share-based compensation, which is expected to be recognized
over a weighted-average period of 1.3 years.




The
following table summarizes the activity of restricted shares during the year
ended December 31, 2009:





weightedNumber of
                        
                        
                        average grant-Restricted Shares
                        
                        
                        date fair valueNon-vested
      as of January 1, 2009
                        
                        
                        2,317,391
                        
                        
                        
                        1.13Forfeited
                        
                        
                        (479,190
                        )
                        
                        
                        1.13Vested
                        
                        
                        (1,039,100
                        )
                        
                        
                        1.13Non-vested
      as of December 31, 2009
                        
                        
                        799,101
                        
                        
                        
                        1.13




The group
did not grant any restricted shares prior to 2008. The weighted average
grant-date fair value of restricted shares granted during year 2008 was $1.13
per share. Total fair value of restricted shares vested during the year ended
December 31, 2009 is $1,595,019.


F-37


CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise
stated)




15.
            SHARE
      BASED COMPENSATION - continued




As of
December 31, 2009, there was $761,349 of total unrecognized compensation expense
related to restricted shares granted under the plan, which is expected to be
recognized over a weighted-average period of 0.5 years.





16.
            RELATED
      PARTY TRANSACTIONS AND BALANCES





Related
party balances





Amounts
due from related parties:


YearsendedDecember 31,2008
                    
                    
                    2009$
                    
                    
                    
                    $Balances
      with directors
                    
                    
                    410,778
                    
                    
                    
                    -Trade
      related balances.
                    
                    
                    18,172,541
                    
                    
                    
                    22,102,667Amounts
      due from related parties
                    
                    
                    18,583,319
                    
                    
                    
                    22,102,667





Balances
with directors in 2008 pertain to withheld individual income tax paid for
directors.





Trade
related balances pertain to receivables and prepayments in respect of sales and
inventory purchases to/from related parties with common ultimate
investors.  Details of trade related balances with such parties are as
follows:





At December 31,Name of related party
                    
                    2008
                    
                    
                    2009$
                    
                    
                    
                    $Jiangxi
      Jingde Semiconductor New Material Co., Ltd
                    
                    
                    -
                    
                    
                    
                    12,270,385CEEG
      (Nanjing) Semiconductor Co., Ltd.
                    
                    
                    11,479,561
                    
                    
                    
                    -CEEG
      (Shanghai) Solar Science and Technology Co., Ltd.
                    
                    
                    6,692,980
                    
                    
                    
                    7,103,684CEEG
      (Nanjing) New Energy Co., Ltd.
                    
                    
                    -
                    
                    
                    
                    2,728,59818,172,541
                    
                    
                    
                    22,102,667





Amounts
due to related parties:


At December 31,2008
                        
                        
                        2009$
                        
                        
                        
                        $Trade-related
      balance
                        
                        
                        246,465
                        
                        
                        
                        2,240,422Non-trade
      related balance
                        
                        
                        -
                        
                        
                        
                        128,115Amounts
      due to related parties
                        
                        
                        246,465
                        
                        
                        
                        2,368,537


F-38




CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise stated)


16.
            RELATED
      PARTY TRANSACTIONS AND BALANCES -
continued





Trade
related balances pertain to payables and pre collected amounts in respect of
rental, inventory and fixed assets purchases and sales to/from related parties
with common ultimate investors.  Details of trade related balances
with such parties are as follows:





At
      December 31,Name
      of related party
                    
                    2008
                    
                    
                    2009$
                    
                    
                    
                    $CEEG
      (Nanjing) Special Transformer Co., Ltd.
                    
                    
                    17,560
                    
                    
                    
                    26,361China
      Electric Equipment Group Co., Ltd.
                    
                    
                    150,119
                    
                    
                    
                    140,313China
      Electric Equipment Group (Hongkong) Limited
                    
                    
                    76,618
                    
                    
                    
                    -CEEG
      (Nanjing) New Energy Co., Ltd.
                    
                    
                    2,168
                    
                    
                    
                    -CEEG
      (Nanjing) Semiconductor Co., Ltd.
                    
                    
                    -
                    
                    
                    
                    2,073,748246,465
                    
                    
                    
                    2,240,422





In 2009,
the non-trade related balance pertains to a payment that was collected on behalf
of CEEG Nanjing International Trade Co., Ltd. from a third party.





Related
party transactions





Other
than as disclosed in Note 6, details of related party transactions are as
follow:





Sales to
related parties with common ultimate investors:





Name of related party
                    
                    Years ended December 31,2007
                    
                    
                    2008
                    
                    
                    2009$
                    
                    
                    
                    $
                    
                    
                    
                    $CEEG
      Nanjing International Trade Co., Ltd.
                    
                    
                    3,234,428
                    
                    
                    
                    -
                    
                    
                    
                    -CEEG
      (Shanghai) Solar Science and Technology Co., Ltd.
                    
                    
                    5,192,155
                    
                    
                    
                    46,575,536
                    
                    
                    
                    54,921,565CEEG
      (Nanjing) Solar Research Institute
                    
                    
                    1,521,110
                    
                    
                    
                    1,265,956
                    
                    
                    
                    688,835CEEG
      (Nanjing) New Energy Co., Ltd.
                    
                    
                    41,927
                    
                    
                    
                    7,159,226
                    
                    
                    
                    26,691,008CEEG
      (Nanjing) Semiconductor Co., Ltd.
                    
                    
                    602,796
                    
                    
                    
                    -
                    
                    
                    
                    42,283China
      Electric Equipment Group (Hongkong) Limited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,41710,592,416
                    
                    
                    
                    55,000,718
                    
                    
                    
                    82,345,108





Purchase
of raw materials from related parties with common ultimate investors are as
follows:





Name of related party
                    
                    Years ended December 31,2007
                    
                    
                    2008
                    
                    
                    2009$
                    
                    
                    
                    $
                    
                    
                    
                    $CEEG
      (Nanjing) Solar Research Institute
                    
                    
                    155,374
                    
                    
                    
                    11,147
                    
                    
                    
                    475CEEG
      Nanjing International Trade Co., Ltd.
                    
                    
                    1,166,712
                    
                    
                    
                    -
                    
                    
                    
                    -CEEG
      (Shanghai) Solar Science and Technology Co., Ltd.
                    
                    
                    704,880
                    
                    
                    
                    257,301
                    
                    
                    
                    4,193,444CEEG
      (Nanjing) Semiconductor Co., Ltd.
                    
                    
                    1,425,888
                    
                    
                    
                    7,076,920
                    
                    
                    
                    6,529,087China
      Electric Equipment Group (Hongkong) Limited
                    
                    
                    -
                    
                    
                    
                    76,713
                    
                    
                    
                    319,271CEEG
      (Nanjing) New Energy Co., Ltd.
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    227,919Jiangxi
      Jingde Semiconductor New Material Co., Ltd
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,169,4763,452,854
                    
                    
                    
                    7,422,081
                    
                    
                    
                    13,439,672


F-39


CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise stated)





16.
            RELATED
      PARTY TRANSACTIONS AND BALANCES -
continued





Related party
transactions - continued





In 2007,
Sunergy Nanjing purchased the right to use a parcel of land of approximately
26,000 square meters from China Electric Equipment Group Co., Ltd, or CEEG, for
approximately $1.2 million. The land use right is with a period of 46 years,
starting from August 21, 2007.





In
October 2007, Sunergy Nanjing and CEEG entered into an agreement to jointly
construct a transformer substation, which is a mechanical device that transfers
electricity from one circuit to another. The total budget investment for the
construction was $4.79 million, which was 50% funded by the Jiangning
Development Zone Administration Committee funds and 50% by Sunergy Nanjing and
CEEG Group. Pursuant to the agreement, Sunergy Nanjing should contribute
approximately $1.33 million, which represents 55.7% of the investment
contributed by Sunergy Nanjing and CEEG Group. The construction completed in
2008, and Sunergy Nanjing has paid approximately $1.26 million and $0.07 million
in 2008 and 2009, respectively. The investment by Sunergy Nanjing was recorded
as a long-term deferred asset in Balance Sheet, and amortized over 10
years.





In 2008,
the Group purchased equipments from CEEG, including electric transformers,
high-voltage switch cabinet, power distribution boxes, switch cabinets and
frequency converter cabinet in the total amount of approximately $1.4 million.
The Group also entered into an agreement to lease the land use right over a plot
of land of 360 square meters from CEEG (Nanjing) Special Transformer Co., Ltd.
for a term until March 2013 to construct a nitrogen station. The tenancy
agreement provides for annual rental payments of approximately
$3,000.





17.
            COMMITMENTS
      AND CONTINGENCIES





a)
            Operating
      lease commitments





The Group
has operating lease agreements principally for staff quarters and for warehouse
premises in the PRC.  Such leases have remaining terms within 60
months, and are renewable upon negotiation.  Rental expense was
$253,779, $390,649 and $302,253 for the years ended December 31, 2007, 2008 and
2009, respectively.





Future
minimum lease payments under non-cancelable operating lease agreements at
December 31, 2009 were as follows:





Twelve-month
period ending December 31,





2010
                      
                      $
                      236,6182011
                      
                      $
                      158,5782012
                      
                      $
                      51,6682013
                      
                      $
                      26,3612014
                      
                      $
                      26,361Over
      5 years
                      
                      $
                      160,364$
                      659,950


F-40




CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise
stated)


17.
            COMMITMENTS
      AND CONTINGENCIES - continued





b)
            Purchase
      commitments





At December 31,2007
                  
                  
                  2008
                  
                  
                  2009$
                  
                  
                  
                  $
                  
                  
                  
                  $Commitments
      to purchase property, plant and equipment
                  
                  
                  22,857,763
                  
                  
                  
                  10,024,744
                  
                  
                  
                  2,742,662Commitments
      to purchase silicon raw materials
                  
                  
                  204,932,508
                  
                  
                  
                  828,705,901
                  
                  
                  
                  -227,790,271
                  
                  
                  
                  838,730,645
                  
                  
                  
                  2,742,662





In 2008,
the commitments to purchase silicon raw materials were mainly resulted from the
purchase contract signed with REC Sitech AS and Hitachi Hi-Tech. During 2009,
due to the alleviated situation in the raw material supply market, the Company
exited from the long term purchase contracts and as of December 31, 2009, there
were no purchase commitment.





c)
            Contingencies





(1) Class
action





In 2009,
the Company agreed to settle a securities class action that was filed against it
on September 7, 2007 in the United States District Court for the Southern
District of New York on behalf of purchasers of the Company's American
Depositary Shares during the period from May 17, 2007 through August 23, 2007.
The proposed settlement agreement, filed with the court on October 16, 2009, was
still pending and must be approved by the court before become final. The Company
recorded its best estimate of the probable amount of $1.05 million for the final
settlement in the consolidated financial statements as of and during the year
ended December 31, 2009.





(2) Dispute
with REC





On
September 9, 2009, REC Wafer announced that it terminated a long-term
take-or-pay contract with the Group for deliveries of mono wafers. REC Wafer
called upon a USD 50 million bank guarantee established by the Group to cover
its payment obligations.





In
September 2009, the Group initiated a lawsuit against REC Wafer and requested
for an injunction at the People's High Court of Jiangsu Province, China("the PRC
Court"). The court accepted the case and issued an injunction to the related
banks for the purpose of preventing those banks from making payments under the
bank guarantees. REC Wafer challenged the jurisdiction of the PRC Court over
this case. In a 2010 ruling, the PRC Court upheld its jurisdiction over this
case.





The Group
has also served a writ to REC claiming that REC Wafer is not a party to the
contract originally entered into between China Sunergy and the dissolved REC
Sitech. An oral hearing is scheduled in June 2010.




F-41




CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise
stated)


17.
            COMMITMENTS
      AND CONTINGENCIES - continued





c)
            Contingencies
      – continued





(2) Dispute
with REC - continued





In
parallel, the Group requested an injunction to prevent REC Wafer from accessing
the bank guarantees.The Salten District Court
initially granted an injunction prohibiting REC Wafer from drawing on the bank
guarantee but later rejected our request for an extension of the injunction upon
a hearing held in January 2010. The Group is currently in the process of
appealing to the supreme court of Norway and a ruling from the Supreme Court
will probably not be given before mid June 2010.





The Group
will vigorously defend its interests and will continue to monitor the
developments of the REC legal proceedings under both PRC and Norwegian courts.
As of December 31, 2009, the Company believes the outcome of the dispute and
related litigation proceedings is still highly uncertain and there is no
reliable evidence that would enable the Group to reasonably estimate either the
likelihood or an amount of the potential outcome. Therefore, no accrual of such
contingent loss, if any, has been recorded in the consolidated financial
statements as of and for the year ended December 31, 2009.





18.
            SEGMENT
      INFORMATION





The
Group's chief operating decision maker has been identified as the Chief
Executive Officer, who reviews consolidated results when making decisions about
allocating resources and assessing performance of the Group. Based on this
assessment, the Group has determined that it operates in a single business
segment that includes the design, development, and manufacture of solar cells
and modules.  The following table summarizes the Group's net revenues
generated from different geographic locations:





Years ended December 31,2007
                        
                        
                        2008
                        
                        
                        2009$
                        
                        
                        
                        $
                        
                        
                        
                        $Europe:-
      Germany
                        
                        
                        62,313,810
                        
                        
                        
                        126,859,750
                        
                        
                        
                        67,119,945-
      Italy
                        
                        
                        8,980,140
                        
                        
                        
                        6,127,527
                        
                        
                        
                        7,557,142-
      Spain
                        
                        
                        -
                        
                        
                        
                        9,399,022
                        
                        
                        
                        2,742,703-
      Others
                        
                        
                        1,802,956
                        
                        
                        
                        51,109
                        
                        
                        
                        1,782,935Europe
      total
                        
                        
                        73,096,906
                        
                        
                        
                        142,437,408
                        
                        
                        
                        79,202,725PRC
                        
                        
                        151,057,878
                        
                        
                        
                        196,628,021
                        
                        
                        
                        185,176,939South
      Africa
                        
                        
                        83,437
                        
                        
                        
                        -
                        
                        
                        
                        -India
                        
                        
                        2,332,253
                        
                        
                        
                        1,153,918
                        
                        
                        
                        1,657,445South
      Korea
                        
                        
                        6,418,664
                        
                        
                        
                        10,256,856
                        
                        
                        
                        408,947Australia
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        11,947,449America
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,568,090Others
                        
                        
                        1,918,763
                        
                        
                        
                        443,758
                        
                        
                        
                        3,903,774Total
      net revenues
                        
                        
                        234,907,901
                        
                        
                        
                        350,919,961
                        
                        
                        
                        284,865,369





Substantially
all the identifiable assets of the Group are located in the
PRC.


F-42




CHINA
SUNERGY CO., LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 (In
U.S. dollars, except share data and unless otherwise
stated)


19.
            MAJOR
      CUSTOMERS





Details
of the customers accounting for 10% or more of total net sales are as
follows:





Name of Customer
                  
                  Years ended December 31,2007
                  
                  
                  2008
                  
                  
                  2009Company
      A
                  
                  
                  *
                  
                  
                  
                  13
                  %
                  
                  
                  19
                  %Company
      B
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  11
                  %Company
      C
                  
                  
                  17
                  %
                  
                  
                  18
                  %
                  
                  
                  *Company
      D
                  
                  
                  24
                  %
                  
                  
                  15
                  %
                  
                  
                  *





* Less
than  10%





Accounts
receivable from customers accounting for 10% or more of total gross accounts
receivable are as follows:





Name of Customer
                  
                  Years ended December
    31,2007
                  
                  
                  2008
                  
                  
                  2009Company
      A
                  
                  
                  76
                  %
                  
                  
                  47
                  %
                  
                  
                  25
                  %Company
      B
                  
                  
                  *
                  
                  
                  
                  43
                  %
                  
                  
                  14
                  %Company
      C
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  12
                  %Company
      D
                  
                  
                  11
                  %
                  
                  
                  *
                  
                  
                  
                  *





20.
            SUBSEQUENT
      EVENTS





On March
15, 2010, the Group announced two separate agreements to acquire 100% of the
shares of two related module manufacturers, CEEG (Shanghai) Solar Science &
Technology Co., Ltd and CEEG (Nanjing) New Energy Co., Ltd, which have common
ultimate investors as the Company. The total consideration is approximately
US$47 million. The consideration is payable by the Group to China Electric
Equipment Group and Sundex Holdings Limited in a series of installments. The
transactions have been reviewed and approved by all three companies' Boards of
Directors, while is subject to government approval. The Group expects to
complete the acquisitions by June 30, 2010.




*     *     *     *     *     *


F-43


ADDITIONAL
INFORMATION-FINANCIAL STATEMENTS SCHEDULE 1





CHINA
SUNERGY CO., LTD.





These
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States.





BALANCE
SHEET


(In
U.S. dollars)





December 31,2008
                  
                  
                  2009$
                  
                  
                  
                  $ASSETSCurrent
      assets:Cash
                  
                  
                  7,255,917
                  
                  
                  
                  2,122,457Restricted
      cash
                  
                  
                  11,250,000
                  
                  
                  
                  11,250,000Amount
      due from subsidiaries
                  
                  
                  98,542,114
                  
                  
                  
                  100,848,016Dividend
      receivable
                  
                  
                  15,827,573
                  
                  
                  
                  15,827,573Other
      receivables
                  
                  
                  158,545
                  
                  
                  
                  122,060Total
      current assets
                  
                  
                  133,034,149
                  
                  
                  
                  130,170,106Investments
      in subsidiaries
                  
                  
                  89,354,208
                  
                  
                  
                  81,975,097Restricted
      cash-collateral account
                  
                  
                  17,502,450
                  
                  
                  
                  20,471,220Convertible
      senior notes issuance cost
                  
                  
                  3,450,859
                  
                  
                  
                  2,480,588Total
      assets
                  
                  
                  243,341,666
                  
                  
                  
                  235,097,011Liabilities
      and equity:Liabilities:Amount
      due to subsidiary
                  
                  
                  1,253,578
                  
                  
                  
                  1,506,841Other
      liabilities
                  
                  
                  1,529,893
                  
                  
                  
                  2,530,850Total
      current liabilities
                  
                  
                  2,783,471
                  
                  
                  
                  4,037,691Collateral
      account payable
                  
                  
                  17,502,450
                  
                  
                  
                  20,471,220Convertible
      senior notes payable
                  
                  
                  48,098,364
                  
                  
                  
                  44,000,000Total
      liabilities
                  
                  
                  68,384,285
                  
                  
                  
                  68,508,911Equity:Ordinary
      shares (par value $0.0001; 463,247,600 shares authorized,267,766,443
      and 267,287,253 shares issued and outstandingas
      of December 31, 2008 and 2009, respectively)
                  
                  
                  26,777
                  
                  
                  
                  26,729Additional
      paid-in capital
                  
                  
                  182,070,348
                  
                  
                  
                  183,396,950Subscription
      receivable
                  
                  
                  (405,313
                  )
                  
                  
                  (405,313
                  )Accumulated
      deficit
                  
                  
                  (27,792,246
                  )
                  
                  
                  (37,638,616
                  )Accumulated
      other comprehensive income
                  
                  
                  21,057,815
                  
                  
                  
                  21,208,350Total
      equity
                  
                  
                  174,957,381
                  
                  
                  
                  166,588,100TOTAL
      LIABILITIES AND EQUITY
                  
                  
                  243,341,666
                  
                  
                  
                  235,097,011




F-44





STATEMENT
OF OPERATIONS


(In
U.S. dollars)





Year ended
                
                
                Year ended
                
                
                Year endedDecember 31,
                
                
                December 31,
                
                
                December 31,2007
                
                
                2008
                
                
                2009$
                
                
                
                $
                
                
                
                $General
      and administrative expenses
                
                
                (1,670,018
                )
                
                
                (4,622,480
                )
                
                
                (3,808,452
                )Total
      operating expenses
                
                
                (1,670,018
                )
                
                
                (4,622,480
                )
                
                
                (3,808,452
                )Loss
      from operations
                
                
                (1,670,018
                )
                
                
                (4,622,480
                )
                
                
                (3,808,452
                )Interest
      expense
                
                
                -
                
                
                
                (2,179,735
                )
                
                
                (3,154,440
                )Interest
      income
                
                
                1,062,420
                
                
                
                2,841,185
                
                
                
                2,307,727Equity
      in losses of subsidiaries
                
                
                (4,408,014
                )
                
                
                (23,426,736
                )
                
                
                (7,529,646
                )Other
      income, net
                
                
                160,962
                
                
                
                4,450,170
                
                
                
                2,338,441Net
      loss
                
                
                (4,854,650
                )
                
                
                (22,937,596
                )
                
                
                (9,846,370
                )Net
      loss attributable to Company shareholders
                
                
                (4,854,650
                )
                
                
                (22,937,596
                )
                
                
                (9,846,370
                )Dividend
      on Series A redeemable convertible preferred shares
                
                
                (154,723
                )
                
                
                -
                
                
                
                -Dividend
      on Series B redeemable convertible preferred shares
                
                
                (330,229
                )
                
                
                -
                
                
                
                -Dividend
      on Series C redeemable convertible preferred shares
                
                
                (233,125
                )
                
                
                -
                
                
                
                -Net
      loss attributable to Company ordinary shareholders
                
                
                (5,572,727
                )
                
                
                (22,937,596
                )
                
                
                (9,846,370
                )




F-45





STATEMENT
OF CASH FLOWS


(In
U.S. dollars)





Year ended
                          
                          
                          Year ended
                          
                          
                          Year endedDecember 31,
                          
                          
                          December 31,
                          
                          
                          December 31,2007
                          
                          
                          2008
                          
                          
                          2009$
                          
                          
                          
                          $
                          
                          
                          
                          $Operating
      activities:Net
      loss attributable to China Sunergy Co., Ltd
                          
                          
                          (4,854,650
                          )
                          
                          
                          (22,937,596
                          )
                          
                          
                          (9,846,370
                          )Adjustments
      to reconcile net income (loss) to net cash used inoperating
      activities:Equity
      in losses of subsidiaries
                          
                          
                          4,408,014
                          
                          
                          
                          23,426,736
                          
                          
                          
                          7,529,646Share-based
      compensation
                          
                          
                          535,856
                          
                          
                          
                          3,231,594
                          
                          
                          
                          1,327,033Gain
      on repurchase of convertible senior notes
                          
                          
                          -
                          
                          
                          
                          (4,525,625
                          )
                          
                          
                          (2,155,000
                          )Amortization
      of convertible senior notes
                          
                          
                          -
                          
                          
                          
                          886,715
                          
                          
                          
                          970,271Others
                          
                          
                          -
                          
                          
                          
                          (258,333
                          )
                          
                          
                          494,346Changes
      in operating assets and liabilities:Other
      receivables
                          
                          
                          (849,731
                          )
                          
                          
                          691,186
                          
                          
                          
                          36,484Other
      liabilities
                          
                          
                          615,382
                          
                          
                          
                          1,071,207
                          
                          
                          
                          (1,168,212
                          )Amounts
      due from subsidiaries
                          
                          
                          -
                          
                          
                          
                          (2,192,788
                          )
                          
                          
                          -Net
      cash used in operating activities
                          
                          
                          (145,129
                          )
                          
                          
                          (606,904
                          )
                          
                          
                          (2,811,802
                          )Investing
      activity:Investments
      in subsidiaries
                          
                          
                          (29,035,190
                          )
                          
                          
                          (4,670,000
                          )
                          
                          
                          -Amounts
      due from subsidiaries
                          
                          
                          (43,232,922
                          )
                          
                          
                          (49,541,380
                          )
                          
                          
                          (729,442
                          )Increase
      in restricted cash
                          
                          
                          (19,000,000
                          )
                          
                          
                          7,750,000
                          
                          
                          
                          -Net
      cash used in investing activity
                          
                          
                          (91,268,112
                          )
                          
                          
                          (46,461,380
                          )
                          
                          
                          (729,442
                          )Financing
      activities:Proceeds
      from issuance of ordinary shares
                          
                          
                          107,525,000
                          
                          
                          
                          -
                          
                          
                          
                          -Issuance
      cost of ordinary shares
                          
                          
                          (11,616,804
                          )
                          
                          
                          -
                          
                          
                          
                          -Amounts
      due to subsidiaries
                          
                          
                          884,259
                          
                          
                          
                          269,729
                          
                          
                          
                          253,263Cancellation
      of restricted shares
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (479
                          )Proceeds
      from issuance of convertible senior notes
                          
                          
                          -
                          
                          
                          
                          54,500,000
                          
                          
                          
                          -Payment
      of debt issuance costs
                          
                          
                          -
                          
                          
                          
                          (4,337,573
                          )
                          
                          
                          -Payment
      of convertible senior notes repurchase
                          
                          
                          -
                          
                          
                          
                          (1,974,375
                          )
                          
                          
                          (1,845,000
                          )Net
      cash provided by financial activities
                          
                          
                          96,792,455
                          
                          
                          
                          48,457,781
                          
                          
                          
                          (1,592,216
                          )Net
      increase in cash and cash equivalents
                          
                          
                          5,379,214
                          
                          
                          
                          1,389,497
                          
                          
                          
                          (5,133,460
                          )Cash
      and cash equivalents at the beginning of the year
                          
                          
                          487,206
                          
                          
                          
                          5,866,420
                          
                          
                          
                          7,255,917Cash
      and cash equivalents at the end of the year
                          
                          
                          5,866,420
                          
                          
                          
                          7,255,917
                          
                          
                          
                          2,122,457Supplemental
      disclosure of non-cash investing activities:Restricted
      cash collateral received in connectionwith
      share-lending arrangement
                          
                          
                          -
                          
                          
                          
                          17,502,450
                          
                          
                          
                          2,968,770




F-46


Notes
to Schedule 1




1)
Schedule I has been provided pursuant to the requirements of Rule 12-04(a) and
5-04(c) of Regulation S-X, which require condensed financial information as to
the financial position, changes in financial position and results of operations
of a parent company as of the same dates and for the same periods for which
audited consolidated financial statements have been presented when the
restricted net assets of consolidated subsidiaries exceed 25 percent of
consolidated net assets as of the end of the most recently completed fiscal
year.




2) The
condensed financial information of China Sunergy Co., Ltd. has been prepared
using the same accounting policies as set out in the accompanying consolidated
financial statements except that the equity method has been used to account for
investments in its subsidiaries.





*     *     *     *     *     *


F-47