UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
¨ | 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, 2014.
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
Commission file number: 001-34615
JinkoSolar Holding 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)
1 Jingke Road
Shangrao Economic Development Zone
Jiangxi Province, 334100
People’s Republic of China
(86-793) 846-9699
(Address of principal executive offices)
Haiyun (Charlie) Cao, Chief Financial Officer
1 Jingke Road
Shangrao Economic Development Zone
Jiangxi Province, 334100
People’s Republic of China
Tel: (86-793) 846-9699
Fax: (86-793) 846-1152
E-mail:
charlie.cao@jinkosolar.com
(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 registered | |
American Depositary Shares, each representing four ordinary shares, par value US$0.00002 per share | New York Stock Exchange |
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.
124,292,030 ordinary shares, excluding 488,055 ADSs representing 1,952,220 ordinary shares reserved for future grants under our long-term incentive plan and 1,723,200 ordinary shares as treasury stock, as of December 31, 2014
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP x | International Financial Reporting Standards as issued by the International Accounting Standards Board ¨ | Other ¨ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by 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 ¨ No ¨
TABLE OF CONTENTS
i |
CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT
Unless otherwise indicated and except where the context otherwise requires, references in this annual report on Form 20-F to:
· | “we,” “us,” “our company,” “our” or “JinkoSolar” refer to JinkoSolar Holding Co., Ltd., a Cayman Islands holding company, its current and former subsidiaries for the relevant periods; |
· | “2009 Long Term Incentive Plan” refers to the 2009 Long Term Incentive Plan adopted on July 10, 2009, which was subsequently amended and restated. |
· | “2012”, “2013” and “2014” refers to our fiscal years ended December 31, 2012, 2013 and 2014, respectively; |
· | “2014 Equity Incentive Plan” refers to the 2014 Equity Incentive Plan adopted on August 18, 2014; |
· | “ADRs” refers to the American depositary receipts evidencing our American depositary shares; |
· | “ADSs” refers to our American depositary shares, each representing four ordinary shares; |
· | “CE” refers to CE certification, a verification of electromagnetic compatibility (EMC) compliance issued by SGS Taiwan Ltd. certifying compliance with the principal protection requirement of directive 2004/108/EC of the European Union and EN61000-6-3:2001+A11:2004 and EN61000-6-1:2001 standards; |
· | “CQC” refers to the certificate issued by China Quality Certification Centre certifying that our solar modules comply with IEC61215:2005 and IEC61730-2:2004 standards; |
· | “DG projects” refers to distributed generation solar power projects, including ground-mounted distributed generation projects and rooftop distributed generation projects; |
· | “DQS-UL” refers to the certificate issued by DQS GmbH certifying that our quality management system for both of the manufacture of silicon wafers and the design, manufacture and relative activities of solar modules in Jiangxi Jinko complies with ISO9001:2008 standard; |
· | “EPC” refers to engineering, procurement and construction; |
· | “Euro”, “EUR” or “€” refers to the legal currency of the European Union; |
· | “FIT” refers to feed-in tariff(s), the government guaranteed and subsidized electricity sale price at which solar power projects can sell to the national power grids, which is set by the central government consisting of the applicable national government subsidies paid from the Renewable Energy Development Fund, as well as the desulphurized coal benchmark electricity price paid by State Grid; |
· | “ground-mounted projects” refers to solar power projects built on the ground, consisting of ground-mounted DG projects and utility-scale projects; |
· | “ground-mounted DG projects” refers to small-scale ground-mounted projects with capacity less than or equal to 20 MW and 35 kV or lower grid connection voltage grade (except in the northeastern regions, where connection voltage must be 66 kV or lower) and with a substantial portion of the electricity generated to be consumed within the substation area of the grid connection points; |
· | “JET” refers to the certificate issued by Japan Electrical Safety & Environment Technology Laboratories certifying that our modules comply with IEC61215:2005, IEC61730-1:2004 and IEC61730-2:2004 standards; |
· | “Jiangxi Desun” refers to Jiangxi Desun Energy Co., Ltd., an entity in which our founders and substantial shareholders, Xiande Li, Kangping Chen and Xianhua Li, each holds more than 10%, and collectively hold 73%, of the equity interest; |
1 |
· | “Jiangxi Jinko” refers to Jinko Solar Co., Ltd., our wholly-owned operating subsidiary incorporated in the PRC; |
· | “Jiangxi Materials” refers to Jiangxi Photovoltaic Materials Co., Ltd., our wholly-owned operating subsidiary incorporated in the PRC by Jiangxi Jinko on December 1, 2010; |
· | “JinkoSolar Power” refers to JinkoSolar Power Engineering Group Limited, our majority-owned subsidiary; |
· | “JIS Q 8901” refers to the certificate for the Japanese market from TUV that demonstrates that a company’s management system ensures the highest standards of reliability in their products; |
· | “JPY” refers to Japanese Yen; |
· | “kV” refers to kilovolts; |
· | “kWh” refers to kilowatt hour(s), where “MWh” refers to megawatt hour(s); |
· | “kWp” refers to kilowatt-peak, a measurement of power output, most often used in relation to photovoltaic solar energy devices; |
· | “local grid companies” refers to the subsidiaries of the State Grid in China; |
· | “LRQA” refers to the certificate issued by Lloyd’s Register Quality Assurance to certify that our quality management system of the design, development and production of solar cells and solar modules in Zhejiang Jinko complies with the ISO9001:2008 standard; |
· | “MCS” refers to MCS certificate of factory production control issued by British Approvals Board for Telecommunications certifying that the production management system of our certain types of solar panels complies with MCS005 Issue 2.3 and MCS010 Issue 1.5 standards; |
· | “NDRC” refers to the National Development and Reform Commission of China; |
· | “NEA” refers to the National Energy Administration in China; |
· | “NYSE” or “New York Stock Exchange” refers to the New York Stock Exchange Inc.; |
· | “OEM” refers to an original equipment manufacturer who manufactures products or components that are purchased by another company and retailed under that purchasing company’s brand name; |
· | “PPA” refers to power purchase agreements; |
· | “PRC” or “China” refers to the People’s Republic of China, excluding, for purposes of this annual report, Taiwan, Hong Kong and Macau; |
· | “PV” refers to photovoltaic; |
· | “RMB” or “Renminbi” refers to the legal currency of China; |
· | “rooftop DG projects” refers to distributed generation solar power projects built on roof tops; |
· | “Shares” or “ordinary shares” refers to our ordinary shares, par value US$0.00002 per share; |
· | “State Grid” refers to State Grid Corporation of China and the local grid companies; |
· | “Subsidy Catalog” refers to the Renewable Energy Electricity Subsidy Catalog issued by the Ministry of Finance, the NDRC and the National Energy Administration from time to time. Solar power projects can only receive central government subsidies after completing certain administrative and perfunctory procedures to be listed in the Subsidy Catalog; |
· | “Topoint” refers to Zhejiang Topoint Photovoltaic Co., Ltd., Zhejiang Yutai Photovoltaic Material Co., Ltd., Zhejiang Weishida Photovoltaic Material Co., Ltd., and Zhejiang Jiutai New Energy Co., Ltd., collectively; |
2 |
· | “TÜV” refers to TÜV certificates, issued by TÜV Rheinland Product Safety GmbH certifying that certain types of our solar modules comply with IEC 61215:2005, EN 61215:2005, IEC 61730-1:2004, IEC 61730-2:2004, EN 61730-1:2007 and EN 61730-2:2007 standards; |
· | “UL” refers to the certificate issued by Underwriters Laboratories Inc., to certify that certain types of our solar modules comply with its selected applicable standards; |
· | “US$,” “dollars” or “U.S. dollars” refers to the legal currency of the United States; |
· | “utility-scale projects” refers to ground-mounted projects that are not ground-mounted DG projects; |
· | “watt” or “W” refers to the measurement of electrical power, where “kilowatt” or “kW” means one thousand watts, “megawatts” or “MW” means one million watts and “gigawatt” or “GW” means one billion watts; and |
· | “Zhejiang Jinko” refers to Zhejiang Jinko Solar Co., Ltd., formerly Zhejiang Sun Valley Energy Application Technology Co., Ltd., a solar cell supplier incorporated in the PRC which has been our wholly-owned subsidiary since June 30, 2009. |
Names of certain companies provided in this annual report are translated or transliterated from their original Chinese legal names.
Discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.
This annual report on Form 20-F includes our audited consolidated financial statements for 2012, 2013 and 2014 and as of December 31, 2013 and 2014.
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 |
Our Selected Consolidated Financial Data
The following selected consolidated statements of operations data for 2012, 2013 and 2014 and the selected consolidated balance sheet data as of December 31, 2013 and 2014 are derived from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statements of operations data for 2010 and 2011 and the consolidated balance sheet data as of December 31, 2010, 2011 and 2012 are derived from our audited consolidated financial statements, which are not included in this annual report. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The historical results are not necessarily indicative of results to be expected in any future periods.
3 |
2010 | 2011 | 2012 | 2013 | 2014 | ||||||||||||||||||||
(RMB) | (RMB) | (RMB) | (RMB) | (RMB) | (US$) | |||||||||||||||||||
(in thousands, except share, per share and per ADS data) | ||||||||||||||||||||||||
Consolidated Statements of Operations Data: | ||||||||||||||||||||||||
Revenues | 4,654,854.7 | 7,384,951.4 | 4,794,768.4 | 7,078,838.5 | 9,978,528.6 | 1,608,246.9 | ||||||||||||||||||
Cost of revenues | (3,297,468.9 | ) | (6,235,100.2 | ) | (4,562,531.3 | ) | (5,641,487.1 | ) | (7,738,488.5 | ) | (1,247,217.9 | ) | ||||||||||||
Gross profit | 1,357,385.8 | 1,149,851.2 | 232,237.1 | 1,437,351.4 | 2,240,040.1 | 361,028.9 | ||||||||||||||||||
Total operating expenses | (367,463.5 | ) | (833,965.5 | ) | (1,465,724.3 | ) | (791,806.0 | ) | (1,308,428.1 | ) | (210,880.3 | ) | ||||||||||||
Income/(loss) from operations | 989,922.3 | 315,885.7 | (1,233,487.2 | ) | 645,545.4 | 931,612.0 | 150,148.6 | |||||||||||||||||
Interest expenses, net | (64,268.4 | ) | (182,502.2 | ) | (221,719.8 | ) | (223,376.9 | ) | (287,667.7 | ) | (46,363.6 | ) | ||||||||||||
Convertible senior notes issuance costs | — | (30,154.1 | ) | — | — | (26,052.9 | ) | (4,199.0 | ) | |||||||||||||||
Subsidy income | 15,696.6 | 25,553.8 | 40,902.6 | 7,583.2 | 49,785.3 | 8,023.9 | ||||||||||||||||||
Investment (loss)/gain | 60.1 | — | — | — | — | — | ||||||||||||||||||
Exchange loss | (10,143.4 | ) | (138,994.3 | ) | (36,472.7 | ) | (38,468.0 | ) | (147,057.9 | ) | (23,701.4 | ) | ||||||||||||
Other(expense)/ income, net | (1,357.9 | ) | 28,257.1 | 4,263.5 | 6,871.9 | (1,692.2 | ) | (272.7 | ) | |||||||||||||||
Change in fair value of forward contracts | 98,039.3 | 36,604.9 | (9,043.1 | ) | 48,390.4 | (714.7 | ) | (115.2 | ) | |||||||||||||||
Change in fair value of embedded derivatives | 55.0 | — | — | — | — | — | ||||||||||||||||||
Change in fair value of convertible senior notes and capped call options | — | 299,747.7 | (97,160.7 | ) | (212,906.6 | ) | 64,101.6 | 10,331.3 | ||||||||||||||||
Income/(loss) before income taxes | 1,028,003.6 | 354,398.6 | (1,552,717.4 | ) | 233,639.4 | 582,313.6 | 93,851.9 | |||||||||||||||||
Income tax (expense)/benefit | (146,130.4 | ) | (81,072.7 | ) | 8,917.6 | (18,532.4 | ) | 134,334.0 | 21,650.7 | |||||||||||||||
Equity in losses of affiliated companies | — | — | (16.3 | ) | (25,615.0 | ) | 9,549.3 | 1,539.1 | ||||||||||||||||
Net income/(loss) | 881,873.2 | 273,325.9 | (1,543,816.1 | ) | 189,492.0 | 726,196.9 | 117,041.7 | |||||||||||||||||
Less: Net income/(loss) attributable to the non-controlling interests | — | (16.9 | ) | (1,394.0 | ) | 1,480.1 | 851.2 | 137.2 | ||||||||||||||||
Less: Accretion to redemption value of redeemable non-controlling interests | — | — | — | — | 52,320.7 | 8,432.6 | ||||||||||||||||||
Net income/(loss) attributable to JinkoSolar Holding Co., Ltd. | 881,873.2 | 273,342.8 | (1,542,422.1 | ) | 188,011.8 | 673,025.1 | 108,471.9 | |||||||||||||||||
Net income/(loss) attributable to JinkoSolar Holding Co., Ltd’s ordinary shareholders per share | ||||||||||||||||||||||||
Basic | 11.16 | 2.91 | (17.38 | ) | 2.00 | 5.47 | 0.88 | |||||||||||||||||
Diluted | 10.92 | (1.23 | ) | (17.38 | ) | 1.96 | 3.86 | 0.62 | ||||||||||||||||
Net income/(loss) attributable to JinkoSolar Holding Co., Ltd’s ordinary shareholders per ADS(1) | ||||||||||||||||||||||||
Basic | 44.64 | 11.64 | (69.52 | ) | 8.00 | 21.88 | 3.52 | |||||||||||||||||
Diluted | 43.69 | (4.92 | ) | (69.52 | ) | 7.84 | 15.44 | 2.48 | ||||||||||||||||
Weighted average ordinary shares outstanding | ||||||||||||||||||||||||
Basic | 74,896,543 | 93,966,535 | 88,752,706 | 94,018,394 | 122,980,870 | 122,980,870 | ||||||||||||||||||
Diluted | 80,748,080 | 102,686,971 | 88,752,706 | 96,035,985 | 153,786,531 | 153,786,531 |
(1) | Each ADS represents four ordinary shares. |
4 |
As of December 31, | ||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | ||||||||||||||||||||
(RMB) | (RMB) | (RMB) | (RMB) | (RMB) | (US$) | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||||||
Cash and cash equivalents | 521,204.8 | 433,851.0 | 279,130.0 | 456,076.2 | 1,777,020.7 | 286,403.7 | ||||||||||||||||||
Restricted cash | 416,789.7 | 146,175.5 | 140,760.8 | 398,499.7 | 517,055.4 | 83,334.2 | ||||||||||||||||||
Restricted short-term investments | 34,705.8 | 494,215.0 | 722,461.3 | 734,093.3 | 1,599,301.9 | 257,760.7 | ||||||||||||||||||
Short-term investments | — | — | — | — | 112,000.0 | 18,051.1 | ||||||||||||||||||
Account receivable, net – related parties | 100.4 | 31,010.2 | 105,531.4 | 284,142.0 | 174,533.8 | 28,129.7 | ||||||||||||||||||
Accounts receivable, net – third parties | 576,796.4 | 1,600,206.9 | 1,712,685.2 | 1,648,748.0 | 3,118,303.4 | 502,579.3 | ||||||||||||||||||
Notes receivable – related parties | — | — | — | 42,900.0 | — | — | ||||||||||||||||||
Notes receivable, net – third parties | — | — | — | 254,773.8 | 72,880.6 | 11,746.2 | ||||||||||||||||||
Advances to suppliers, net – related parties | — | — | — | — | 1,183.8 | 190.8 | ||||||||||||||||||
Advances to suppliers, net – third parties | 339,738.1 | 208,104.1 | 63,553.0 | 70,017.2 | 80,922.3 | 13,042.3 | ||||||||||||||||||
Inventories | 819,514.5 | 798,075.3 | 527,962.4 | 712,029.2 | 1,891,148.1 | 304,797.7 | ||||||||||||||||||
Total current assets | 3,194,474.1 | 4,608,473.7 | 3,985,609.2 | 5,342,722.6 | 10,407,319.6 | 1,677,355.4 | ||||||||||||||||||
Project assets | — | 272,504.7 | 536,391.1 | 1,358,944.5 | 4,353,070.4 | 701,587.6 | ||||||||||||||||||
Property, plant and equipment, net | 1,938,978.2 | 3,568,294.3 | 3,329.872.7 | 3,186,998.0 | 3,101,795.2 | 499,918.6 | ||||||||||||||||||
Land use rights, net | 261,858.6 | 368,042.9 | 365,749.2 | 359,084.9 | 371,932.2 | 59,944.6 | ||||||||||||||||||
Advances to suppliers to be utilized beyond one year | 234,577.1 | 209,630.9 | — | — | — | — | ||||||||||||||||||
Total assets | 5,880,345.8 | 9,176,399.3 | 8,372,320.3 | 10,611,225.1 | 19,087,636.4 | 3,076,368.6 | ||||||||||||||||||
Accounts payable – a related party | — | 35,887.8 | 30,045.2 | 2,468.4 | 1,478.5 | 238.3 | ||||||||||||||||||
Accounts payable – third parties | 355,011.7 | 340,998.6 | 1,347,327.0 | 1,765,268.3 | 3,147,731.8 | 507,322.3 | ||||||||||||||||||
Notes payable | 571,522.2 | 909,830.6 | 1,149,136.5 | 1,411,994.1 | 2,452,443.8 | 395,262.2 | ||||||||||||||||||
Accrued payroll and welfare expenses | 96,853.9 | 176,647.8 | 206,425.1 | 238,654.5 | 312,431.4 | 50,354.8 | ||||||||||||||||||
Advance from third party customers | 164,956.9 | 85,524.0 | 121,031.2 | 147,583.3 | 423,088.5 | 68,189.5 | ||||||||||||||||||
Bonds payable and accrued interests | — | 1,039,635.3 | 313,689.8 | 66,725.8 | 66,725.8 | 10,754.2 | ||||||||||||||||||
Short-term borrowings (including current portion of long-term borrowings) | 1,171,776.3 | 2,200,032.1 | 2,245,630.8 | 1,974,593.9 | 2,606,866.5 | 420,150.6 | ||||||||||||||||||
Total current liabilities | 2,941,912.9 | 5,642,586.6 | 6,238,443.5 | 7,237,114.3 | 10,523,364.6 | 1,696,058.5 | ||||||||||||||||||
Long-term borrowings | 269,250.0 | 155,500.0 | 167,000.0 | 362,000.0 | 956,500.0 | 154,159.8 | ||||||||||||||||||
Convertible senior notes | — | 387,777.2 | 483,581.7 | — | 1,540,398.6 | 248,267.2 | ||||||||||||||||||
Total liabilities | 3,215,143.9 | 6,271,225.8 | 6,998,508.9 | 8,590,611.5 | 14,119,231.9 | 2,275,607.1 | ||||||||||||||||||
Series A redeemable convertible preferred shares | — | — | — | — | — | — | ||||||||||||||||||
Series B redeemable convertible preferred shares | — | — | — | — | — | — | ||||||||||||||||||
Total JinkoSolar Holding Co., Ltd. shareholders’ equity | 2,665,201.9 | 2,895,190.5 | 1,365,122.3 | 2,009,742.8 | 3,507,097.3 | 565,241.5 | ||||||||||||||||||
Non-controlling interests | — | 9,983.1 | 8,689.1 | 10,870.8 | 25,721.9 | 4,145.6 | ||||||||||||||||||
Total liabilities and shareholders’ equity | 5,880,345.8 | 9,176,399.3 | 8,372,320.3 | 10,611,225.1 | 19,087,636.4 | 3,076,368.6 |
Exchange Rate Information
We publish our consolidated financial statements in Renminbi. The conversion of Renminbi into U.S. dollars in this annual report is solely for the convenience of readers. The exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB6.2046 to US$1.00, the noon buying rate in effect as of December 31, 2014. The Renminbi is not freely convertible into foreign currency. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. On April 10, 2015, the exchange rate, as set forth in the H.10 statistical release of the Federal Reserve Board, was 6.2082 to US$1.00.
The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.
Period | Period End | Average(1) | Low | High | ||||||||||||
(RMB per US$1.00) | ||||||||||||||||
2010 | 6.6000 | 6.7603 | 6.8330 | 6.6000 | ||||||||||||
2011 | 6.2939 | 6.4475 | 6.6364 | 6.2939 | ||||||||||||
2012 | 6.2301 | 6.3043 | 6.3879 | 6.2221 | ||||||||||||
2013 | 6.0537 | 6.1412 | 6.2438 | 6.0537 | ||||||||||||
2014 | 6.2046 | 6.1704 | 6.2591 | 6.0402 | ||||||||||||
October | 6.1124 | 6.1251 | 6.1385 | 6.1107 | ||||||||||||
November | 6.1429 | 6.1249 | 6.1429 | 6.1117 |
5 |
Period | Period End | Average(1) | Low | High | ||||||||||||
December | 6.2046 | 6.1886 | 6.2256 | 6.1490 | ||||||||||||
2015 (through April 10, 2015) | 6.2082 | 6.2317 | 6.2741 | 6.1870 | ||||||||||||
January | 6.2495 | 6.2181 | 6.2535 | 6.1870 | ||||||||||||
February | 6.2695 | 6.2518 | 6.2695 | 6.2399 | ||||||||||||
March | 6.1990 | 6.2386 | 6.2741 | 6.1955 | ||||||||||||
April (through April 10, 2015) | 6.2082 | 6.1989 | 6.2082 | 6.1930 |
(1) | Annual averages are calculated by averaging the rates on the last business day of each month during the annual period. Monthly averages are calculated by averaging the rates on each business day during the month. |
B. | Capitalization and Indebtedness |
Not Applicable.
C. | Reasons for the Offer and Use of Proceeds |
Not Applicable.
D. | Risk Factors |
Our business, financial condition and results of operations are subject to various changing business, competitive, economic, political and social conditions in China and worldwide. In addition to the factors discussed elsewhere in this annual report, the following are some of the important factors that could adversely affect our operating results, financial condition and business prospects, and cause our actual results to differ materially from those projected in any forward-looking statements.
Risks Related to Our Business and Industry
Our future growth and profitability depend on the demand for and the prices of solar power products and the development of photovoltaic technologies.
The rate and extent of market acceptance for solar power depends on the availability of government subsidies and the cost-effectiveness, performance and reliability of solar power relative to conventional and other renewable energy sources. Changes in government policies towards solar power and advancements in photovoltaic, or PV, technologies could significantly affect the demand for solar power products.
Demand for solar power products is also affected by macroeconomic factors, such as energy supply, demand and prices, as well as regulations and policies governing renewable energies and related industries. For example, in 2011, a decrease in payment to solar power producers, in the form of FIT and other reimbursements, and a reduction in available financing caused a decrease in the demand for solar power products, including solar modules, in the European markets. Payments to solar power producers decreased as governments in Europe, under pressure to reduce sovereign debt levels, reduced subsidies such as FIT. Furthermore, many downstream purchasers of solar power products were unable to secure sufficient financing for solar power projects due to the global credit crunch. Demand for solar modules in Europe fell significantly in 2013, but rose again in 2014 as the price of solar modules decreased, reflecting a decrease in the minimum pricing threshold of solar modules in the European Union, and as solar power generation companies constructed more projects in anticipation of a downward adjustment in FIT policies in the United Kingdom. As a result, many solar power producers that purchase solar power products from manufacturers like us were unable or unwilling to expand their operations because of the changes in prices and FIT policies. As a result, many solar power producers that purchase solar power products from manufacturers like us were unable or unwilling to expand their operations. As a result, the average selling price of our solar modules, which represented 91.8% of our total revenue in 2014, decreased from RMB4.3 per watt for 2012 to RMB3.8 per watt for 2013, and further decreased to RMB3.78 per watt (US$0.61 per watt) for 2014.
Any reduction in the price of solar modules will have a negative impact on our revenue and results of operations. As a result, we may not continue to be profitable on a quarterly or annual basis. For example, we experienced net losses in each quarter from the fourth quarter of 2011 to the first quarter of 2013. In addition, if demand for solar power projects and solar power products weakens in the future, our business and results of operations may be materially adversely affected.
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The reduction, modification, delay or elimination of government subsidies and other economic incentives in solar energy industry may reduce the profitability of our business and materially adversely affect our business.
We believe that market demand for solar power and solar power products in the near term will continue to substantially depend on the availability of government incentives because the cost of solar energy currently exceeds, and we believe will continue to exceed in the near term, the cost of conventional fossil fuel energy and certain non-solar renewable energy. Examples of government sponsored financial incentives to promote solar energy include subsidies from the central and local governments, preferential tax rates and other incentives. The availability and size of such subsidies and incentives depend, to a large extent, on political and policy developments relating to environmental concerns and other macro-economic factors. Moreover, government incentive programs are expected to gradually decrease in scope or be discontinued as solar power technology improves and becomes more affordable relative to other types of energy. Negative public or community response to solar energy projects could adversely affect the government support and approval of our business. Adverse changes in government regulations and policies relating to solar energy industry and their implementation, especially those relating to economic subsidies and incentives, could significantly reduce the profitability of our business and materially adversely affect the state of the industry.
We received government grants totaling RMB160.7 million, RMB70.9 million and RMB142.2 million (US$22.9 million) for 2012, 2013 and 2014, respectively, which included government grants for assets, our expansion of production scale, technology upgrades, the development of export markets and the development of solar power projects. In addition, our solar power projects generally receive FIT, part of which is subsidized by the PRC government. We cannot assure you that we will continue to receive a similar amount or any amount of government subsidy in future periods.
As substantially all of our operations are in the PRC and our solar power projects are located in the PRC, the policies and regulations adopted by the PRC government towards the solar energy industry are key to the continuing success of our business. In June 2014, the General Office of the State Council of the PRC government set a target of 100 GW of solar capacity by 2020. In March 2015, the National Energy Administration, or NEA, revised China’s 2015 solar electricity installation target upwards by 20% to 17.8 GW of capacity for ground-mounted projects and indicated that rooftop DG projects would no longer be subject to a quota. On April 2, 2015, the State Grid announced that 10.0 GW of solar power projects will be grid-connected every year until 2020. Pursuant to the relevant regulations, rooftop DG projects generally receive a national subsidy of RMB0.42 per kWh plus the local desulphurized coal benchmark electricity price for the electricity sold to the State Grid or a negotiated electricity purchase price for electricity sold directly to consumers. Ground-mounted projects, as well as rooftop DG projects that sell all electricity generated to the local grid companies, are entitled to FIT of RMB0.90 per kWh, RMB0.95 per kWh or RMB1.00 per kWh, depending on where the project is located (excluding on-grid solar power projects located in Tibet). Moreover, a solar power project that has obtained government approval on or after January 1, 2008 is fully exempted from PRC corporate income tax for three years starting from the year in which such project generates revenue from the sale of electricity, and is 50% exempted from PRC corporate income tax for another three years.
However, the subsidies, preferential tax treatment and other economic incentives provided by the PRC government are subject to uncertainty, and we cannot assure you that we will receive such benefits on schedule or that such benefits will not decrease or expire. For example, there have historically been significant delays in the listing of projects in the Subsidy Catalog. See “—Solar power projects can only receive central government subsidies after they are listed in the Subsidy Catalog.” We may also experience delays in subsidy payments due to changes in regulation or other reasons. For example, our Longchang project in Jinchang prefecture in Gansu Province has not yet been allocated the subsidy from the government for 2013, though it has been allocated a subsidy for 2014 by the local grid company in its annual subsidy budget. An economic downturn could impair the ability of the PRC central, provincial or local governments to maintain existing incentive programs or offer new incentive programs. Although regulatory support for solar power generation has increased in recent years, future government policies may not be as supportive. Governments may reduce or eliminate existing incentive programs for political, financial or other reasons, which will be difficult for us to predict. New government regulations or utility policies pertaining to solar power projects may result in significant reductions in revenues or additional expenses for us. If local, provincial or national governments delay in providing economic incentives, our solar power projects may be less profitable. In addition, local or provincial governments may delay the implementation or fail to fully implement central government regulations, policies and initiatives. Some of the reductions may even apply retroactively to existing solar power projects, which could significantly reduce the economic benefits we receive from the existing solar power projects. Until the solar energy industry becomes commercially profitable without subsidies, a significant reduction in the scope of or the discontinuation of government incentive programs in the PRC or other jurisdictions that we may expand into, could delay payments for electricity sold and reduce the profitability of our solar power projects.
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Besides the PRC, various governments have used policy initiatives to encourage or accelerate the development and adoption of solar power and other renewable energy sources, including certain countries in Europe, notably Italy, Germany, France, Belgium and Spain; certain countries in Asia, including Japan, India and South Korea; countries in North America, such as the United States and Canada; as well as Australia and South Africa. Examples of government-sponsored financial incentives to promote solar power include capital cost rebates, FIT, tax credits, net metering and other incentives to end-users, distributors, project developers, system integrators and manufacturers of solar power products.
Governments may reduce or eliminate existing incentive programs for political, financial or other reasons, which will be difficult for us to predict. Reductions in FIT programs may result in a significant fall in the price of and demand for solar power and solar power products. For example, subsidies have been reduced or eliminated in some countries such as Germany, Italy, Spain and Canada. The German market represents a major portion of the world’s solar market due in large part to government policies that established high FIT rates. However, since 2010, the German government has introduced legislation to reduce the FIT program due to the strong growth of its domestic solar market. In 2009, the Spanish government continued reductions in the FIT as a result of its government’s spending cut backs, which resulted in a weakened solar market. In 2010, Italy also announced annual reductions to FIT beginning in 2011 in an effort to impede overheating of its solar market. In 2011 and 2012, several countries, including Germany, Italy, Spain, our three largest export markets, and certain other major markets for solar power and solar power products, such as Greece, France and Belgium, continued to reduce their FIT as well as other incentive measures.
In 2014, we generated 56.3% of our total revenue from overseas markets, and the United States, the United Kingdom and Chile, our three largest export markets, represented 17.7%, 12.7% and 5.8% of our total revenue, respectively. As a result, any significant reduction in the scope or discontinuation of government incentive programs in the overseas markets, especially where our major customers are located, could cause demand for our products and our revenue to decline and have a material adverse effect on our business, financial condition, results of operations and prospects. In addition, the announcement of a significant reduction in incentives in any major market may have an adverse effect on the trading price of our ADSs.
We require a significant amount of cash to fund our operations and future business developments; if we cannot obtain additional funding on terms satisfactory to us when we need it, our growth prospects and future profitability may be materially adversely affected.
We require a significant amount of cash to fund our operations, including the development of solar power projects and payments to suppliers for our polysilicon feedstock. We may also require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue, as well as our research and development activities in order to remain competitive.
Historically, China Development Bank and China Minsheng Bank have provided us with loans for our solar power project financing. As these loans are driven, in part, by policy considerations, to the extent that the government changes their position on the solar industry, the terms and availability of these loans may change. If we cannot obtain funding on commercially attractive terms from these banks or other banks going forward, we may have difficulty funding our projects. We cannot guarantee that we will be successful in locating additional suitable sources of financing in the time periods required or at all, or on terms or at costs that we find attractive or acceptable, which may make it difficult or impossible for us to execute our growth plans.
We had negative working capital as of December 31, 2014. Management believes that our current cash position, the cash expected to be generated from operations, the proceeds from our recent equity and debt offerings, and funds available from borrowings under our bank facilities will be sufficient to meet our working capital and capital expenditure requirements for at least the 12 months following December 31, 2014.
Our ability to obtain external financing is subject to a number of uncertainties, including:
· | our future financial condition, results of operations and cash flow; |
· | the general condition of the global equity and debt capital markets; |
· | regulatory and government support, such as subsidies, tax credits and other incentives; |
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· | the continued confidence of banks and other financial institutions in our company and the solar power industry; |
· | economic, political and other conditions in the PRC and elsewhere; and |
· | our ability to comply with any financial covenants under the debt financing. |
Any additional equity financing may be dilutive to our shareholders and any debt financing may require restrictive covenants. Additional funds may not be available on terms commercially acceptable to us. Failure to manage discretionary spending and raise additional capital or debt financing as required may adversely impact our ability to achieve our intended business objectives. See “—Our substantial indebtedness could adversely affect our business, financial condition and results of operations.”
The oversupply of solar cells and modules in the solar industry may cause substantial downward pressure on the prices of our products and reduce our revenue and earnings.
In 2011, the solar industry experienced oversupply across the value chain, and by the end of the year, solar module, cell and wafer pricing all decreased. Demand for solar products remained soft in 2012 and at the end of 2012, solar module, cell and wafer pricing had all further decreased. Although the global economy has improved since 2013, demand for solar modules in Europe fell significantly in 2013. As a result, many solar power producers that typically purchase solar power products from manufacturers like us were unable or unwilling to expand their operations.
Our average module selling price decreased from RMB4.3 per watt for 2012 to RMB3.8 per watt for 2013 and RMB3.8 per watt (US$0.61 per watt) for 2014. Continued increases in solar module production in excess of market demand may result in further downward pressure on the price of solar cells and modules, including our products. Increasing competition could also result in us losing sales or market share. If we are unable, on an ongoing basis, to procure silicon, solar wafers and solar cells at reasonable prices, or mark up the price of our solar modules to cover our manufacturing and operating costs, our revenue and gross margin will be adversely impacted, either due to higher costs compared to our competitors or due to inventory write-downs, or both. In addition, our market share may decline if our competitors are able to price their products more competitively.
Volatility in the prices of silicon raw materials makes our procurement planning challenging and could have a material adverse effect on our results of operations and financial condition.
The prices of polysilicon, the essential raw material for solar cell and module products and silicon wafers have been subject to significant volatility. Historically, increases in the price of polysilicon had increased our production costs. Since the first half of 2010, as a result of the growth of newly available polysilicon manufacturing capacity worldwide, there has been an increased supply of polysilicon, which has driven down its price and the price of its downstream products. Since the second half of 2011, the prices of polysilicon and silicon wafers further fell significantly. As the polysilicon raw materials became more accessible to producers, the global production and supply of solar cell and module products has experienced considerable growth, which has imposed substantial downward pressure on the price of solar module products, including our solar module products. From 2011 to 2012, the prices of solar products declined, and prices began to stabilize in the first half of 2013.
We expect that the prices of virgin polysilicon feedstock may continue to be subject to volatility, making our procurement planning challenging. For example, if we refrain from entering into fixed-price, long-term supply contracts, we may miss the opportunities to secure long-term supplies of virgin polysilicon at favorable prices if the spot market price of virgin polysilicon increases significantly in the future. On the other hand, if we enter into more fixed-price, long-term supply contracts, we may not be able to renegotiate or otherwise adjust the purchase prices under such long-term supply contracts if the spot market price declines. As a result, our cost of silicon raw materials could be higher than that of our competitors who source their supply of silicon raw materials through floating-price arrangements or spot market purchases. To the extent we may not be able to fully pass on higher costs and expenses to our customers, our profit margins, results of operations and financial condition may be materially adversely affected.
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We may not be able to obtain sufficient silicon raw materials in a timely manner or on commercially reasonable terms, which could have a material adverse effect on our results of operations and financial condition.
In 2012, 2013 and 2014, our five largest suppliers accounted for approximately 63.2%, 62.1% and 52.8%, respectively, of our total silicon purchases by value. In 2014, three of our suppliers individually accounted for more than 10% and our largest supplier accounted for 16.0% of our total silicon purchases by value. In 2013, two of our suppliers individually accounted for more than 10% and our largest supplier accounted for 24.2% of our total silicon purchases by value. In 2012, four of our suppliers individually accounted for more than 10% and our largest supplier accounted for 20.5% of our total silicon purchases by value.
Although the global supply of polysilicon has increased significantly, we may experience interruption to our supply of silicon raw materials or late delivery in the future for the following reasons, among others:
· | suppliers under our silicon material supply contracts may delay deliveries for a significant period of time without incurring penalties; |
· | our virgin polysilicon suppliers may not be able to meet our production needs consistently or on a timely basis; |
· | compared with us, some of our competitors who also purchase virgin polysilicon from our suppliers have longer and stronger relationships with and have greater buying power and bargaining leverage over some of our key suppliers; and |
· | our supply of silicon raw materials is subject to the business risk of our suppliers, some of whom have limited operating history and limited financial resources, and one or more of which could go out of business for reasons beyond our control in the current economic environment. |
Our failure to obtain the required amounts of silicon raw materials in a timely manner and on commercially reasonable terms could increase our manufacturing costs and substantially limit our ability to meet our contractual obligations to our customers. Any failure by us to meet such obligations could have a material adverse effect on our reputation, ability to retain customers, market share, business and results of operations and may subject us to claims from our customers and other disputes. Furthermore, our failure to obtain sufficient silicon raw materials would result in under-utilization of our production facilities and an increase in our marginal production costs. Any of the above events could have a material adverse effect on our growth, profitability and results of operations.
The loss of, or a significant reduction in orders from, any of our customers could significantly reduce our revenue and harm our results of operations.
In 2012, 2013 and 2014, sales to our top five customers represented 18.3%, 30.3% and 17.2% of our total revenue, respectively. In 2014, our largest customer accounted for 4.4% of our total revenue. In 2013, our largest customer accounted for 10.7% of our total revenue. In 2012, no customer generated sales that individually exceeded 10% of our total revenue. Our relationships with our key customers for solar modules have been developed over a relatively short period of time and are generally in nascent stages. We cannot assure you that we will be able to continue to generate significant revenue from these customers or that we will be able to maintain these customer relationships. In addition, we purchase solar wafers and cells and silicon raw materials through toll manufacturing arrangements that require us to make significant capital commitments to support our estimated production output. In the event our customers cancel their orders, we may not be able to recoup prepayments made to suppliers, which could adversely influence our financial condition and results of operations. The loss of sales to any of these customers could also have a material adverse effect on our business, prospects and results of operations.
We manufacture a majority of our products in two locations in China, which exposes us to various risks relating to long-distance transportation of our silicon wafers and solar cells in the manufacturing process.
The geographical separation of our manufacturing facilities necessitates constant long-distance transportation of substantial volumes of our silicon wafers and solar cells between Shangrao, Jiangxi Province and Haining, Zhejiang Province. We produce and will continue to produce silicon ingots, silicon wafers and most of our solar modules in our manufacturing facilities in Shangrao, while also producing solar cells and solar modules in our manufacturing facilities in Haining. As a result, we transport a substantial volume of our silicon wafers from Shangrao to Haining to be processed into solar cells and a substantial volume of our solar cells from Haining back to Shangrao to be processed into solar modules.
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The distance between Shangrao and Haining is approximately 410 kilometers and the two cities are connected by roads and railway. The constant long-distance transportation of a large volume of our silicon wafers and solar cells may expose us to various risks, including (i) increases in transportation costs, (ii) loss of our silicon wafers or solar cells as a result of any accidents that may occur in the transportation process; (iii) delays in the transportation of our silicon wafers or solar cells as a result of any severe weather conditions, natural disasters or other conditions adversely affecting road traffic between Haining and Shangrao; and (iv) disruptions to our production of solar cells and solar modules as a result of delays in the transportation of our silicon wafers and solar cells. Any of these risks could have a material adverse effect on our business and results of operations.
Prepayment arrangements to suppliers for the procurement of silicon raw materials expose us to the credit risks of such suppliers and may also significantly increase our costs and expenses, which could in turn have a material adverse effect on our financial condition, results of operations and liquidity.
Our supply contracts generally include prepayment obligations for the procurement of silicon raw materials. As of December 31, 2014, we had approximately RMB80.9 million (US$13.0 million) of advances to suppliers. We generally do not receive collateral to secure such payments for these contracts and the collateral we received are deeply subordinated and shared with all other customers and other senior lenders of the supplier.
Our prepayments, secured or unsecured, expose us to the credit risks of our suppliers, and reduce our chances of obtaining the return of such prepayments in the event that our suppliers become insolvent or bankrupt. Moreover, we may have difficulty recovering such prepayments if any of our suppliers fails to fulfill its contractual delivery obligations to us. Accordingly, a default by our suppliers to whom we have made substantial prepayment may have a material adverse effect on our financial condition, results of operations and liquidity. For example, on June 13, 2012, we terminated our supply agreement with one of our former polysilicon providers, Hoku Materials, Inc., or Hoku, in light of adverse developments in Hoku’s operations. We did not receive any shipments from Hoku throughout the term of the supply agreement. Upon the termination of the supply agreement, we demanded that Hoku return all outstanding prepayments we made to Hoku as well as pay associated charges and interests, but we have not yet received such payments. As a result, we fully provided for RMB129.8 million of the outstanding balance of prepayments we made to Hoku. In addition, in January 2013, we notified Wuxi Zhongcai Technological Co. Ltd., or Wuxi Zhongcai, another of our former polysilicon providers, to terminate our long-term supply agreement, in response to adverse developments in Wuxi Zhongcai’s business. In February 2013, we became involved in litigation with Wuxi Zhongcai over the supply agreement. We have fully provided for RMB93.2 million of the outstanding balance of prepayments to Wuxi Zhongcai. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Administrative Proceedings.”
Decreases in the price of silicon raw materials and solar power products, including solar modules, may result in additional provisions for inventory losses.
We typically plan our production and inventory levels based on our forecasts of customer demand, which may be unpredictable and can fluctuate materially. Recent market volatility has made it increasingly difficult for us to accurately forecast future product demand trends. Due to the decrease in the prices of silicon raw materials and solar power products, including solar modules, which have been our principal products since 2010, we recorded inventory provisions of RMB332.3 million, RMB163.7 million and RMB75.9 million (US$12.2 million) in 2012, 2013 and 2014, respectively. If the prices of silicon materials and solar power products continue to decrease, the carrying value of our existing inventory may exceed its market price in future periods, thus requiring us to make additional provisions for inventory valuation, which may have a material adverse effect on our financial position and results of operations.
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Increases in electricity costs or a shortage or disruption of electricity supply may adversely affect our business.
We consume a significant amount of electricity in our operations. Electricity prices in China have increased in the past few years and are expected to continue to increase in the future. Our average per kilowatt-hour, or kWh, electricity prices were RMB0.734, RMB0.700 and RMB0.681 (US$0.11) in 2012, 2013 and 2014, respectively. Our electricity costs may become substantially higher than our competitors, which could diminish our competitive advantage and adversely affect our business, financial condition and results of operations. Moreover, with the rapid development of the PRC economy, demand for electricity has continued to increase. There have been shortages or disruptions in electricity supply in various regions across China, especially during peak seasons, such as the summer, or when there are severe weather conditions. We cannot assure you that there will not be disruptions or shortages in our electricity supply or that there will be sufficient electricity available to us to meet our future requirements. Increases in electricity costs, shortages or disruptions in electricity supply may significantly disrupt our normal operations, cause us to incur additional costs and adversely affect our profitability.
We face intense competition in solar power product markets and solar power projects. If we fail to adapt to changing market conditions and to compete successfully with existing or new competitors, our business prospects and results of operations would be materially adversely affected.
The markets for solar power products are intensely competitive. We compete with manufacturers of solar power products such as Trina Solar Ltd., or Trina, Yingli Green Energy Holding Co., Ltd., or Yingli Green Energy, Canadian Solar Inc. and JA Solar Holdings Co., Ltd, or JA Solar, in a continuously evolving market. Recently, some downstream manufacturers have also built out or expanded their silicon wafer or solar cell production operations. Some of these competitors are also our customers and suppliers.
Some of our current and potential competitors have a longer operating history, stronger brand recognition, more established relationships with customers, greater financial and other resources, a larger customer base, better access to raw materials and greater economies of scale than we do. Furthermore, some of our competitors are integrated players in the solar industry that engage in the production of virgin polysilicon. Their business models may give them competitive advantages as these integrated players place less reliance on the upstream suppliers, downstream customers or both.
We may also face extensive competition in developing solar power projects and providing solar system integration services from competitors such as Shunfeng, Aikang and state-owned power generation companies. Some of our potential competitors in that market may have a longer history, more extensive experience in this industry, greater financial and other resources, stronger brand recognition, stronger relationships with customers and greater economies of scale than we do. Moreover, the key barriers to entry into the solar power generation and system integration business at present consist of availability of financing, availability of experienced technicians and executives who are familiar with the industry. If these barriers disappear or become more easily surmountable, new competitors may successfully enter into the market, resulting in the loss of our market share and increased price competition, which could adversely affect our operating and net margins.
The solar industry faces competition from other types of renewable and non-renewable power industries.
The solar industry faces competition from other renewable energy companies and non-renewable power industries, including nuclear energy and fossil fuels such as coal, petroleum and natural gas. Technological innovations in these other forms of energy may reduce their costs or increase their safety. Large-scale new deposits of fossil fuel may be discovered, which could reduce their costs. Local governments may decide to strengthen their support for other renewable energy sources, such as wind, hydro, biomass, geothermal and ocean power, and reduce their support for the solar industry. The inability to compete successfully against producers of other forms of power or otherwise enter into power purchase agreements favorable to us would negatively affect our ability to develop and finance our projects and negatively impact our revenue.
Technological changes in the solar power industry could render our products uncompetitive or obsolete, which could reduce our market share and cause our revenue and net income to decline.
The solar power industry is characterized by evolving technologies and standards. These technological evolutions and developments place increasing demands on the improvement of our products, such as solar cells with higher conversion efficiency and larger and thinner silicon wafers and solar cells. Other companies may develop production technologies that enable them to produce silicon wafers, solar cells and solar modules with higher conversion efficiencies at a lower cost than our products. Some of our competitors are developing alternative and competing solar technologies that may require significantly less silicon than crystalline silicon wafers and solar cells, or no silicon at all. Technologies developed or adopted by others may prove more advantageous than ours for commercialization of solar power products and may render our products obsolete. As a result, we may need to invest significant 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. Our failure to further refine and enhance our products and processes or to keep pace with evolving technologies and industry standards could cause our products to become uncompetitive or obsolete, which could materially adversely reduce our market share and affect our results of operations.
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Existing regulations and policies and changes to these regulations and policies may present technical, regulatory and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products.
The market for electricity generation products is heavily influenced by government regulations and policies concerning the electric utility industry, as well as by policies adopted by electric utility companies. These regulations and policies often relate to electricity pricing and technical interconnection requirements for customer-owned electricity generation. In a number of countries, these regulations and policies are being modified and may continue to be modified. Customer purchases of, or further investment in the research and development of, alternative energy sources, including solar power technology, could be deterred by these regulations and policies, which could result in a significant reduction in the demand for our products. For example, without a regulatory mandated exception for solar power systems, utility customers may be charged interconnection or standby fees for putting distributed power generation on the electric utility grid. These fees could increase the cost of and reduce the demand for solar power, thereby harming our business, prospects, results of operations and financial condition.
In addition, we anticipate that solar power 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. Any new government regulations or utility policies pertaining to solar power products may result in significant additional expenses to the users of solar power products and, as a result, could eventually cause a significant reduction in demand for our products.
We may face termination and late charges and risks relating to the termination and amendment of certain equipment purchases contracts. Our reliance on equipment and spare parts suppliers may also expose us to potential risks.
We transact with a limited number of equipment suppliers for all our principal manufacturing equipment and spare parts, including our silicon ingot furnaces, squaring machines, wire saws, diffusion furnaces, firing furnaces and screen print machine. In 2014, our top three equipment suppliers included Wuxi Autowell Technology Co. Ltd, Yingkou Jinchen Machinery Co. Ltd and Shanxi Hermaion Solar Co. Ltd. These suppliers have supplied 28.8% of our current principal equipment and spare parts. We have entered into purchase agreements for purchasing additional manufacturing equipment. As we have shifted our focus from capacity expansion to improving efficiency, we may terminate these equipment purchase agreements or revise their terms in line with our new plan and as a result, may be subject to cancellation, late charges or forfeiture of prepayments. For example, we made a prepayment of RMB44.2 million to Miyamoto for the purchase of equipment for capacity expansion. As we were focusing on improving our efficiency, we did not place any purchase orders for equipment from Miyamoto in 2012 and we made a provision of RMB44.2 million in 2012 for the balance of our prepayments. We have entered into a purchase agreement with Miyamoto in 2014 and will resume purchasing equipment.
We may rely on certain major suppliers to provide a substantial portion of the principal manufacturing equipment and spare parts if we implement any expansion plan in the future. If we fail to develop or maintain our relationships with these and other equipment suppliers, or should any of our major equipment suppliers encounter difficulties in the manufacturing or shipment of its equipment or spare parts to us, including due to natural disasters or otherwise fail to supply equipment or spare parts according to our requirements, it will be difficult for us to find alternative providers for such equipment on a timely basis and on commercially reasonable terms. As a result, our production and result of operation could be adversely affected.
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Selling our products on credit terms may increase our working capital requirements and expose us to the credit risk of our customers.
To accommodate and retain customers in the negative market environment, many solar module manufacturers, including us, shifted from demanding advance payments towards increasing credit sales and providing longer credit terms to both existing and new customers. Starting from the third quarter of 2011, we began to offer new customers credit terms of 60 to 120 days as well as extend similar credit terms to certain existing customers under new contracts. Most of our sales are made on credit terms and we allow our customers to make payments after a certain period of time subsequent to the delivery of our products. The increased use of credit sales and the longer credit terms have led to increased accounts receivable turnover and bad debt risks. Our accounts receivable turnover were 156 days, 114 days and 102 days in 2012, 2013 and 2014, respectively. In particular, in 2012, 2013 and 2014, our accounts receivable turnover in the United States were 37 days, 45 days and 34 days, respectively, our accounts receivable turnover in South Africa were nil, 50 days and 81 days, respectively, and our accounts receivable turnover in China were 119 days, 131 days and 146 days, respectively. Correspondingly, we recorded provisions for accounts receivable of RMB673.7 million, RMB446.0 million and RMB428.6 million (US$69.1 million) as of December 31, 2012, 2013 and 2014, respectively. We had reversal of bad debt provisions of RMB308.2 million and RMB161.4 million (US$26.0 million) for 2013 and 2014 as a result of the subsequent cash collection of long-aged accounts receivable.
We expect the use of credit sales to continue in the industry and this trend will continue to negatively affect our liquidity and our accounts receivable turnover. Selling our products on credit terms has increased, and may continue to increase our working capital requirements, which may negatively impact our short-term liquidity. We may not be able to maintain adequate working capital primarily through cash generated from our operating activities and may need to secure additional financing for our working capital requirements. Based on our ongoing assessment of the recoverability of our outstanding accounts receivable, we may need to continue to provide for doubtful accounts and write off overdue accounts receivable we determine as not collectible. If we fail to secure additional financing on a timely basis on terms acceptable to us or at all, our financial conditions, results of operations and liquidity may be adversely affected. In addition, we are exposed to the credit risk of customers to which we have made credit sales in the event that any of such customers becomes insolvent or bankrupt or otherwise does not make timely payments.
We face risks associated with the manufacturing, marketing, distribution and sale of our products internationally, and if we are unable to effectively manage these risks our ability to expand our business abroad may be restricted.
We commenced export sales in May 2008 when we exported a small portion of our products to Hong Kong, and have since continued to increase export sales. In 2012, 2013 and 2014, we generated 54.5%, 51.1% and 56.3%, respectively, of our total revenue from export sales and 54.9%, 51.3% and 56.4%, respectively, of our total revenue were denominated in foreign currencies, including U.S. dollars and Euros. We also have manufacturing facilities in South Africa, Portugal and Malaysia. We plan to continue to increase sales outside China and expand our customer base overseas. However, the marketing, distribution and sale of our products in export markets may expose us to a number of risks, including those associated with:
· | fluctuations in currency exchange rates; |
· | costs associated with understanding local markets and trends; |
· | marketing and distribution costs; |
· | customer services and support costs; |
· | risk management and internal control structures for our overseas operations; |
· | compliance with the different commercial, environmental and legal requirements; |
· | obtaining or maintaining certifications for our products or services; |
· | maintaining our reputation as an environmentally friendly enterprise for our products or services; |
· | obtaining, maintaining or enforcing intellectual property rights; |
· | changes in prevailing economic conditions and regulatory requirements; |
· | transportation and freight costs; |
· | employing and retaining sales personnel who are knowledgeable about, and can function effectively in, export markets; |
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· | trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make us less competitive in some countries; |
· | challenges due to our unfamiliarity with local laws, regulation and policies, our absence of significant operating experience in local market, increased cost associated with establishment of overseas subsidiaries and maintaining a multi-national organizational structure; and |
· | other various risks that are beyond our control. |
We derive a significant amount of revenue from our exports to foreign markets, increasing the risk that any unfavorable trade policies in foreign markets could affect the sale of our products. As our manufacturing bases are located in China, we may be affected by any claims of unfair trade practices that are brought against the PRC government through the imposition of tariffs, non-tariff barriers to trade or other trade remedies. For example, in 2012, we became subject to anti-dumping and countervailing (i.e., anti-subsidy) duties imposed by the U.S. government; in 2013, we became subject to annual import quotas imposed by the European Commission; in 2014, we became subject to new anti-dumping and countervailing duties imposed by the U.S. government; and we may be subject to new anti-dumping and countervailing duties imposed by the Canadian government. See “—We are subject to anti-dumping and countervailing duties imposed by the U.S. government and quotas imposed by the European Union.” Any significant changes in international trade policies, practices or trade remedies, especially those instituted in our target markets or markets where our major customers are located, could increase the price of our products compared to our competitors or decrease our customers’ demand for our products, which may adversely affect our business prospects and results of operations.
We are subject to anti-dumping and countervailing duties imposed by the U.S. government and quotas imposed by the European Union.
Our direct sales to the U.S. market accounted for 2.8%, 5.9% and 17.7% of our total revenue in 2012, 2013 and 2014, respectively.
In 2011, solar panel manufacturing companies in the United States led by SolarWorld Industries America Inc., filed a broad trade case with the United States Department of Commerce (the “U.S. Department of Commerce”) and United States International Trade Commission (the “U.S. International Trade Commission”) against the Chinese solar industry, accusing Chinese producers of crystalline silicon photovoltaic cells, whether or not assembled into modules, of selling their products (i.e., CSPV cells or modules incorporating these cells) in United States at less than fair value, and of receiving financial assistance from the Chinese governments that benefited the production, manufacture, or exportation of such products. JinkoSolar is on the list of the solar companies subject to such investigations by the U.S. Department of Commerce. On November 9, 2011, the U.S. Department of Commerce announced that it launched the antidumping duty and countervailing duty investigation into the accusations (the “Investigation”). On December 7, 2012, the U.S. Department of Commerce issued the antidumping duty order and countervailing duty order. As a result, the cash deposits are required to pay on import into US of the crystalline silicon photovoltaic cells, whether or not assembled into modules from China. The announced cash deposit rates applicable to us are 13.94% (for dumping margin) and 15.24% (for subsidy rate). The actual antidumping duty and countervailing duty rates at which entries of covered merchandise will be finally assessed may differ from the announced deposit rates because they are subject to the following administrative reviews by U.S. Department of Commerce.
On January 23, 2014, the U.S. Department of Commerce announced that it launched the new antidumping duty and countervailing duty investigation into these new accusations (the “New Investigation”). On June 3, 2014 and July 25, 2014, the U.S. Department of Commerce respectively announced its affirmative preliminary determination in the New Investigations, in accordance with which the following subject merchandise is subject to the New Investigations:
The modules, laminates and/or panels assembled in China consisting of crystalline silicon photovoltaic cells that are completed or partially manufactured within a customs territory other than China, using ingots that are manufactured in China, wafers that are manufactured in China, or cells where the manufacturing process begins in China and is completed outside China.
The above subject merchandise was adjusted in the final determination made by U.S. Department of Commerce. According to the final determination, the final subject merchandise should be as follows:
The modules, laminates and/or panels assembled in China consisting of crystalline silicon photovoltaic cells produced in a customs territory other than China.
In February 18, 2015, following the affirmative injury determination made by U.S. International Trade Commission, the U.S. Department of Commerce issued the antidumping duty order and countervailing duty order. As a result, the final cash deposits are required to pay on import into US of above subject merchandise. The announced cash deposit rates applicable to us are 65.36% (for dumping margin) and 38.43% (for subsidy rate). The actual antidumping duty and countervailing duty rates at which entries of covered merchandise will be finally assessed may differ from the announced deposit rates because they are subject to the following administrative reviews by U.S. Department of Commerce.
Our sales in the United States may be adversely affected by these anti-dumping and countervailing duties, which may in turn materially adversely affect our business, financial condition and results of operations. We made provisions of RMB12.9 million (US$2.1 million) for preliminary U.S. countervailing and anti-dumping duties in 2014.
Our direct sales to the European market accounted for 48.0%, 18.2% and 15.6% of our total revenue in 2012, 2013 and 2014, respectively. On June 6, 2013, the European Union imposed provisional anti-dumping duty on the solar panels originating in or consigned from China, including JinkoSolar’s products, at the starting rate of 11.8% until August 5, 2013, and followed by an increased rate averaging 47.6%.
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On July 27, 2013, the European Union and Chinese trade negotiators announced that a price undertaking has been reached pursuant to which Chinese manufacturers, including JinkoSolar, would limit their exports of solar panels to the European Union and for no less than a minimum price, in exchange for the European Union agreeing to forgo the imposition of anti-dumping duties on these solar panels from China. The offer was approved by the European Commission on August 2, 2013. The China Chamber of Commerce for Import and Export of Machinery and Electronic Products, or CCCME, is responsible for allocating the quota among Chinese export producers, and JinkoSolar has been allocated a portion of the quota. Solar panels imported exceeding the annual quota will be subject to anti-dumping duties. On December 5, 2013, the European Council announced its final decision imposing definitive anti-dumping and anti-subsidy duties on imports of crystalline silicon PV cells and modules originating in or consigned from China. An average duty of 47.7%, consisting of the anti-dumping and anti-subsidy duties, will be applied for a period of two years beginning on December 6, 2013 to Chinese solar panel exporters who cooperated with the European Commission’s investigations. On the same day, the European Commission announced its decision to confirm the acceptance of the price undertaking offered by Chinese export producers, including JinkoSolar, with CCCME in connection with the anti-dumping proceeding and to extend the price undertaking to the anti-subsidy proceeding, which will exempt them from both anti-dumping and anti-subsidy duties.
The European Union is one of the most important markets for solar products. Anti-dumping, countervailing duties or both imposed on imports of our products into the European Union could materially adversely affect our affiliated European Union import operations, increase our cost of selling into the European Union, and adversely affect our European Union export sales.
Imposition of anti-dumping and countervailing orders in one or more markets may result in additional costs to us, our customers or both, which could materially adversely affect our business, financial condition, results of operations and future prospects.
We are exposed to various risks related to legal or administrative proceedings or claims that could adversely affect our financial condition, results of operations and reputation, and may cause loss of business.
Litigation in general can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We and/or our directors and officers may be involved in allegations, litigation or legal or administrative proceedings in the from time to time.
On October 11, 2011, JinkoSolar, along with our directors and officers at the time of our initial public offering, or the Individual Defendants, and the underwriters of our initial public offering were named as defendants in a putative shareholder class action lawsuit filed in the United States District Court for the Southern District of New York captioned Marco Peters v. JinkoSolar Holding Co., Ltd., et al., Case No. 11-CV-7133 (S.D.N.Y.). In an amended complaint filed on June 1, 2012, the plaintiff, representing a class of all purchasers and acquirers of ADSs of JinkoSolar between May 13, 2010 and September 22, 2011, inclusive, alleged that the defendants violated Sections 11 and 12(a)(2) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, by making material misstatements or failing to disclose material information regarding, among other things, JinkoSolar’s compliance with environmental regulations at its Haining facility. The amended complaint also asserted claims against the Individual Defendants for control person liability under Section 15 of the Securities Act and Section 20(a) of the Exchange Act. On January 22, 2013, the District Court issued a Memorandum and Order dismissing the amended complaint as against all defendants. The plaintiff appealed the District Court’s Order to the United States Court of Appeals for the Second Circuit, which issued an order on July 31, 2014 vacating the District Court’s Order and remanding the case to the District Court for further proceedings. Defendants filed a further motion to dismiss the amended complaint, which remains pending before the District court. We are unable to reliably estimate the probability of prevailing in the case and the scope of any liabilities.
Regardless of the merits, responding to allegations, litigation or legal or administration proceedings and defending against litigation can be time consuming and costly, and may result in us incurring substantial legal and administrative expenses, as well as divert the attention of our management. Any such allegations, lawsuits or proceedings could have a material adverse effect on our business operations. Further, unfavorable outcomes from these claims or lawsuits could adversely affect our business, financial condition and results of operations.
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Our future success depends in part on our ability to expand our business into the downstream solar power generation markets. Any failure to successfully implement this strategy could have a material adverse effect on our growth, business prospects and results of operations in future periods.
We have been expanding our business downstream into the solar power generation market domestically. These expansion plans may include investments in downstream companies and joint ventures and alliances with third parties for balance of system technologies, engineering, procurement and construction services, and related financing needs. These plans may require significant capital expenditures, which could be used in pursuit of other opportunities and investments. Additionally, our experience in the solar power products manufacturing industry may not be as relevant or applicable downstream. We may also face intense competition from companies with greater experience or established presence in the targeted downstream markets or competition from our industry peers with similar expansion plans. Furthermore, we may not be able to manage or control entities which we invest in or provide adequate resources to such entities to maximize the return on our investments. We may also consider acquisitions of existing downstream players, in which we may face difficulties related to the integration of the operations and personnel of acquired businesses and the division of resources between our existing and acquired downstream operations.
We cannot assure you that we will be successful in expanding our business into downstream markets along the solar power product value chain. Any failure to successfully identify, execute and integrate our acquisitions, investments, joint ventures and alliances as part of entering into downstream markets may have a material adverse impact on our growth, business prospects and results of operations, which could lead to a decline in the price of our ADSs.
Solar power projects can only receive central government subsidies after they are listed in the Subsidy Catalog.
Solar power projects can only receive central government subsidies after completing certain administrative and perfunctory procedures with the relevant authorities of finance, price and energy to be listed in the Subsidy Catalog. In order to be listed in the Subsidy Catalog, ground-mounted projects submit applications to the relevant provincial authorities; and rooftop DG projects submit applications to the local grid companies in the area where the projects are located. After preliminary review of the applications, the relevant provincial authorities and the local grid companies will report to the Ministry of Finance, or MOF, NDRC, and NEA.
The MOF, NDRC and NEA will review the applications for all solar power projects and decide whether to list the projects in the Subsidy Catalog. In 2013, these agencies instituted a number of measures to standardize the approval process and the settlement of subsidies, but there have been significant delays in the listing of projects in the Subsidy Catalog, even after electricity has been sold to the power grid, which has delayed the payment of the government subsidy portion of our revenues. As of the date of this annual report, the most recent Subsidy Catalog released on August 21, 2014 included all of our projects that were connected to the power grid up to August 2013, and we still await receipt of the subsidies for projects connected after August 2013. As of December 31, 2014, we had RMB150.7 million (US$24.3 million) in accounts receivable, representing unpaid subsidies to be paid after listing in the Subsidy Catalog. If we cannot receive subsidies for our projects as expected, our cash flow and financial condition may be materially adversely affected.
Local grid companies may reduce the electricity they purchase from us, which may cause our revenues to decline.
Although the local grid companies are obliged to purchase all the electricity generated by us, they may adjust the amount of electricity they purchase from us as result of constraints on grid connection capacity. If this happens, our revenues will be negatively impacted. Although the State Grid has made significant investments to build a network of ultra-high voltage, or UHV, transmission infrastructure across the country, grid capacity is expected to continue to be constrained, and our projects may be affected by limits in grid capacity in the near future. For example, our project in Longchang, Gansu with attributable capacity of 20 MW has been curtailed since 2014, resulting in the project being utilized at average rate of 58% of its installed capacity in 2014. We believe our project with an attributable capacity of 56 MW in Jinchang, Gansu, in which we are a minority shareholder, also suffered significant curtailment since 2014. Although the NDRC and NEA issued a directive opinion on March 20, 2015, which emphasizes that the competent provincial authorities must strengthen the implementation of the provisions with regard to the purchase of the full amount of electricity generated by renewable energy and avoid any curtailment of solar power projects, we expect that curtailment may continue to affect solar power projects in regions where the supply of energy exceeds local demands, such as Gansu. Although we believe that we have selected geographic regions that are less likely to experience curtailment, and we are diversified geographically to reduce the impact of potential curtailment, additional projects may be curtailed and unable to operate at its full capacity, which may materially adversely affect our business, financial condition and result of operation.
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We may not be able to enter into additional investment agreements and secure or develop additional solar power projects to grow our project portfolio.
Our current business strategy includes plans to further increase the number of solar power projects we own and operate. We typically enter into investment agreements for each of our solar power projects with local government bodies prior to obtaining permits and beginning construction of solar power projects. As a general practice, the provincial governments have allocated such local government bodies a quota that they can allocate and sign under investment agreements. We believe that negotiating and signing the investment agreement is a significant project development milestone for successful project development. Government bodies who are counterparties to the investment agreements selected us based on, among other things, our technical and engineering expertise, financing capabilities and track record. Whether or not we can secure an investment agreement is subject to the discretion of government bodies and may be influenced by factors beyond our control, such as market conditions and the quota allocated to the local governments by the provincial governments. It is difficult to predict whether and when we will secure additional opportunities to develop new solar power projects in the PRC. Any increase in competition for the limited number of solar power projects or the reduction or elimination of solar power project quota could have a significant adverse impact on our project portfolio and market share.
Further, terms of the investment agreements may not be final and enforceable and are subject to changes and modifications. As the investment agreements are preliminary in nature, we expect that a significant number of them will not be completed as originally agreed, and as a result, our project pipeline is subject to uncertainty. If we cannot complete the investment agreement, it will be terminated, with limited continuing obligations to both sides. However, our termination of the agreement may damage our reputation with the government bodies and increase the difficulty of pursuing projects. In addition, if the government bodies terminate the agreement with us, we will have limited recourse. Although the government bodies have historically not terminated the investment agreements with us, there is no assurance that they would not do so in the future.
We may also have difficulties expanding our solar power project portfolio in light of unexpected difficulties when developing solar power projects. See “ — We may encounter unexpected difficulties when developing solar power projects, which could increase our costs, impair our ability to recover our investments and have a material adverse effect on our business, financial condition and results of operations.”
We may encounter unexpected difficulties when developing solar power projects, which could increase our costs, impair our ability to recover our investments and have a material adverse effect on our business, financial condition and results of operations.
The development and construction of solar power projects involve numerous risks and uncertainties. We may be required to spend significant amounts of money in order to successfully develop and construct solar power projects. Success in developing and constructing a particular project is contingent upon, among other things:
· | establishing relationships with local government bodies; |
· | securing investment agreements or development rights; |
· | securing suitable project sites, including obtaining necessary rights of way, and satisfactory land rights or leases for the appropriate locations with proximity to the power grid with sufficient grid capacity and adequate solar irradiation; |
· | negotiating satisfactory leases, land use or access rights; |
· | negotiating and receiving required permits and approvals for project development from government bodies on schedule; |
· | completing all required regulatory and administrative procedures needed to obtain permits and agreements; |
· | procuring rights to interconnect the solar power project to the power grid or to transmit energy; |
· | negotiating favorable payment terms with components and services suppliers; |
· | signing PPAs or other arrangements that are commercially acceptable; |
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· | obtaining construction financing, including debt financing and equity contribution from us to our project companies; and |
· | satisfactorily completing construction on schedule within budget. |
Our ability to complete solar power projects may be adversely affected by numerous factors, including without limitation:
· | unanticipated changes in project plans or defective or delayed execution; |
· | uncertainty in obtaining and maintaining governmental permits, licenses and approvals required by existing laws and regulations or additional regulatory requirements not previously anticipated; |
· | changes in government policies, for example, the institution of a competitive bidding process to allocate project rights; |
· | uncertainty in the timing of grid connection; |
· | the inability to procure adequate financing with acceptable terms; |
· | unforeseeable engineering problems, construction or other unexpected delays and contractor performance shortfalls; |
· | labor, components and materials supply delays, shortages or disruptions, or work stoppages; |
· | adverse weather, environmental and geological conditions, force majeure and other events out of our control; and |
· | cost over-runs, due to any one or more of the foregoing factors. |
Accordingly, some of our solar power projects under development may not be completed or even start construction. If a sufficient number of projects are not completed on schedule or at all, we may not benefit from the FIT our solar power projects are otherwise entitled to, and our business, financial condition and results of operations could be materially adversely affected.
We may not be able to identify suitable additional solar power project sites and obtain related land use rights or leases to expand our solar power generation business.
There is intense competition for a limited number of project sites appropriate for solar power projects. As the downstream solar power market in China continues to evolve, the number of attractive project sites available has decreased and will continue to decrease.
Even if we sign investment agreements, we may not be able to find and secure the use rights to suitable project sites for the relevant projects. We generally obtain land use rights for our ground-mounted projects through land use right granting or assignment by the government, or leasing from the land use right owners; and obtain the access and use rights for our rooftop DG projects through leasing from the roof top owners. Our rights to the properties used for our solar power projects may be challenged by property owners or other third parties, in case of any disputes over the ownership or lease of the properties. It is critical to guarantee and maintain our land use right on the land parcel and access and use right on the roof top during the life cycle of solar power projects. In case the relevant lease agreement were determined null and void by the competent authorities or our land use right and access and use right on roof top were recouped by the government, our solar power projects may be forced to cease operation and our results of operation, financial condition will be materially adversely affected.
We require large and flat land parcels for our utility-scale solar power projects. Also, it is crucial to have a land parcel close to the grid connection point for our ground-mounted projects in order to control the cost for the construction of transmission line and avoid the electricity transmission loss. However, it is increasingly difficult to secure large, flat land parcels close to the transmission line in China. Once we have identified a suitable site, our ability to obtain requisite land use rights or access and use rights to the roof top is subject to growing competition from other solar energy producers that may have better access to local government support, financial or other resources to locate and obtain rights of such sites. Our competitors may impede our development efforts by acquiring control of all or a portion of a solar site we seek to develop. If we were unable to find or obtain use rights for suitable solar power project sites, our ability to develop new solar power projects on a timely basis might be harmed, which could have a material adverse effect on our business, financial condition and results of operations.
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Our ability to transmit and sell the electricity generated from our solar power projects relies on the State Grid, especially, the grid connection and dispatch agreements and PPAs with local grid companies.
Before constructing a solar power project, we have to obtain the relevant local grid company’s preliminary consent on our grid connection application and the final approval on the grid connection plan in order to connect our solar power projects to their power grids.
The State Grid purchases substantially all of the electricity we generate. Our future success will depend, in part, on our ability to renew our grid connection and dispatch agreements and PPAs on satisfactory terms. Our grid connection and dispatch agreements generally have terms of one to five years and our PPAs generally have terms of one to six years. The grid connection and dispatch agreements are, in practice, automatically renewed. The PPAs are subject to renewal by the parties when original terms expire. The PPAs may be terminated by the local grid companies if we cannot produce electricity normally for 30 to 90 days for reasons solely attributed to us. However, all solar projects approved by the NDRC are eligible to receive an attractive fixed FIT for 20 years in principle and we expect our solar power projects to be long-term contracted assets. If we are unable to renew the agreements upon expiration, we may not be able to replace them with agreements with equivalent terms and conditions, or at all, or we may experience significant delays or costs related to securing replacements. If we are unable to agree with the local grid company on a new grid connection and dispatch agreement or PPA, the affected solar power project may temporarily or permanently cease operations, and we may not be able to operate the project beyond the initial term of the PPA. Although the local grid companies are required under PRC laws to purchase all electricity generated by renewable energy producers within its coverage area, if, for any reason, the local grid companies are unable or unwilling to fulfill their related contractual obligations or if they refuse to accept delivery of electricity delivered thereunder or otherwise terminate such agreements prior to the expiration thereof, our business, financial condition, results of operations and cash flow could be materially adversely affected.
If the power grid to which one or more of our solar power projects is connected becomes partially or fully inoperable due to maintenance or unexpected interruptions, the affected project will not be able to transmit electricity to the power grid during that time. We expect power grids to be inoperable for ten days or more per year due to regular maintenance work. The local grid companies will not usually compensate electricity generation companies for lost income due to down time. Although none of the power grids that we have been connected to have been rendered inoperable for significant periods of time, there is no assurance that the power grids will continue to function without any issues.
Any decrease in the desulphurized coal benchmark electricity prices will negatively affect the total electricity price that our rooftop DG projects are entitled to.
We have 21 MW of rooftop DG projects in operation and expect to grid-connect an additional 50 MW within the next twelve months as of December 31, 2014. Pursuant to the relevant regulations, our rooftop DG projects (excluding those from which all electricity generated are connected to the power grid and sold to local grid companies) generally receive a national subsidy of RMB0.42 per kWh plus the local desulphurized coal benchmark electricity price for the electricity sold to the State Grid or a negotiated electricity purchase price for electricity sold directly to consumers. The desulphurized coal benchmark electricity price in China has fluctuated in the past and ranged from RMB0.25 per kWh to RMB0.49 per kWh in 2014. Changes in energy consumption, energy supply, government regulation, technological developments and the price of natural resources could significantly affect the price of energy. If the desulphurized coal benchmark electricity price decreases substantially, our rooftop DG projects (excluding those from which all electricity generated are connected to the power grid and sold to local grid companies) will generate less revenue, which may materially adversely affect our business, results of operation and financial condition.
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We may continue to undertake acquisitions, investments, joint ventures or other strategic alliances, and such undertakings may be unsuccessful.
We may continue to grow our operations through acquisitions, participation in joint ventures or other strategic alliances with suppliers or other companies in China and overseas along the solar power industry value chain in the future. Such acquisitions, participation in joint ventures and strategic alliances may expose us to new operational, regulatory, market and geographical risks as well as risks associated with additional capital requirements and diversion of management resources. For example, beginning on January 16, 2014, we began operating the restructured manufacturing assets of Topoint under an operating lease agreement, including 500 MW capacity for silicon wafers, 500 MW for PV cells and 100 MW for PV modules. Topoint is a high-tech PV manufacturer with production and research and development facilities in the Huangwan Industry Park in Haining, Zhejiang Province. We intended to take ownership of Topoint and continued to operate the manufacturing assets after the reorganization, but the transaction was terminated in 2014. Our acquisitions may expose us to the following risks:
· | There may be unforeseen risks relating to the target’s business and operations or liabilities of the target that were not discovered by us through our legal and business due diligence prior to such acquisition. Such undetected risks and liabilities could have a material adverse effect on our business and results of operations in the future. |
· | There is no assurance that we will be able to maintain relationships with previous customers of the target, or develop new customer relationships in the future. Loss of our existing customers or failure to establish relationships with new customers could have a material adverse effect on our business and results of operations. |
· | Acquisitions will generally divert a significant portion of our management and financial resources from our existing business and the integration of the target’s operations with our existing operations has required, and will continue to require, significant management and financial resources, potentially straining our ability to finance and manage our existing operations. |
· | There is no assurance that the expected synergies or other benefits from any acquisition or joint venture investment will actually materialize. If we are not successful in the integration of a target’s operations, or are otherwise not successful in the operation of a target’s business, we may not be able to generate sufficient revenue from its operations to recover costs and expenses of the acquisition. |
· | Acquisition or participation in new joint venture or strategic alliance may involve us in the management of operation in which we do not possess extensive expertise. |
The materialization of any of these risks could have a material adverse effect on our business, financial condition and results of operations.
We may be subject to non-competition or other similar restrictions or arrangements relating to our business.
We may from time to time enter into non-competition, exclusivity or other restrictions or arrangements of a similar nature as part of our sales agreements with our customers. Such restrictions or arrangements may significantly hinder our ability to sell additional products, or enter into sales agreements with new or existing customers that plan to sell our products, in certain markets. As a result, such restrictions or arrangements may have a material adverse effect on our business, financial condition and results of operation.
Our substantial indebtedness could adversely affect our business, financial condition and results of operations.
We typically require a significant amount of cash to meet our capital requirements, including the expansion of our production capacity, as well as to fund our operations. As of December 31, 2014, we had approximately RMB2,606 million (US$420 million) in outstanding short-term borrowings (including the current portion of long-term bank borrowings) and RMB956 million (US$154 million) in outstanding long-term bank borrowings (excluding the current portion and deferred financing cost).
In addition, we have substantial repayment obligations under the debt securities we issued. On May 17, 2011, we issued convertible senior notes in the principal amount of US$125 million due 2016, bearing an annual interest rate of 4.0% and with an option for holders to require us to repurchase their notes in May 2014 for the principal of the notes plus accrued and unpaid interest, to qualified institutional buyers under Rule 144A of the Securities Act. On December 5, 2011, we repurchased an aggregate principal amount of US$2.0 million of such notes for a total consideration of RMB5.2 million. As of the date of this annual report, our convertible senior notes with principal amount of US$123.0 million are outstanding. On January 29, 2013, Jiangxi Jinko issued six-year bonds with a principal amount of RMB800.0 million, bearing a fixed annual interest rate of 8.99%. At the end of the third year in the life of the bonds, Jiangxi Jinko has the option to raise the interest rate by up to 100 basis points, and the bondholders will have the right to require Jiangxi Jinko to repurchase all or part of their bonds at such time. On March 19, 2013, we entered into loan facilities for an aggregate principal amount of RMB360 million with a term of 15 years with China Development Bank to develop PV projects, which we fully drew down on April 3, 2013. On January 6, 2014, we entered into loan facilities for an aggregate principal amount of RMB400 million (US$66.1 million) with a term of 15 years with China Development Bank for the development of three PV projects in Xinjiang Uyghur Autonomous Region and Qinghai province of the PRC with a total capacity of 50 MW, which we had fully drawn down as of the date of this annual report. On January 22, 2014, we issued convertible senior notes in the principal amount of US$150.0 million due 2019, bearing an annual interest rate of 4.0% and with an option for holders to require us to repurchase their notes in February 2017 for the principal of the notes plus accrued and unpaid interest, to qualified institutional buyers under Rule 144A and in reliance of Regulation S of the Securities Act. In light of the amount of bank borrowings and bonds due in the near term future, sufficient funds may not be available to meet our payment obligations. In July 2014, the Company entered into a five-year RMB1.0 billion strategic financing agreement with China Minsheng Banking Corp., Ltd. In November 2014, the Company signed a US$20.0 million two-year credit agreement with Wells Fargo Bank, National Association, or Wells Fargo. Borrowings under the new credit agreement will be used to support JinkoSolar US’s working capital and business operations.
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This level of debt and the imminent repayment of our notes and other bank borrowings could have significant consequences on our operations, including:
· | reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes as a result of our debt service obligations, and limiting our ability to obtain additional financing; |
· | limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy; and |
· | potentially increasing the cost of any additional financing. |
Any of these factors and other consequences that may result from our substantial indebtedness could have an adverse effect on our business, financial condition and results of operations as well as our ability to meet our payment obligations under our debt.
In addition, we are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes. As of December 31, 2014, RMB948.5 million (US$152.9 million) of our long-term borrowings (including project-level indebtedness) bears interest at variable rates, generally linked to market benchmarks such as the benchmark interest rate issued by People’s Bank of China, or PBOC. Any increase in interest rates would increase our finance expenses relating to our variable rate indebtedness and increase the costs of refinancing our existing indebtedness and issuing new debt.
We may also incur gain or loss in relation to our change in the fair value of our financial instruments. For example, in 2014, we had net gain from a change in fair value of convertible senior notes and capped call options of RMB64.1 million (US$10.3 million). The change in fair value of financial instruments may fluctuate significantly from period to period due to factors that are largely beyond our control, and may result in us recording substantial gains or losses as a result of such changes. As a result of the foregoing, you may not be able to rely on period to period comparisons of our operating results as an indication of our future performance.
Our failure to maintain sufficient collateral under certain pledge contracts for our short-term bank loans may materially adversely affect our financial condition and results of operations.
As of December 31, 2014, we had short-term bank borrowings of RMB1,193.1 million (US$192.3 million), excluding the current portion of long-term bank borrowings, secured by certain of our inventory with net book value of RMB200.4 million (US$32.3 million) and land use rights, property, plant and equipment with total net book value of RMB2,044.3 million (US$329.5 million). Although the net book value of the inventory as of December 31, 2014 exceeded the amount of the pledge required, we cannot assure you that we will not be requested by the pledgees to provide additional collateral to bring the value of the collateral to the level required by the pledgees if our inventory depreciates in the future. If we fail to provide additional collateral, the pledgees will be entitled to require the immediate repayment of the outstanding bank loans. In addition, the pledgees may auction or sell the inventory and negotiate with us to apply the proceeds from the auction or sale to the repayment of the underlying loan. Furthermore, we may be subject to liquidated damages pursuant to relevant pledge contracts. Although the pledgees have conducted regular site inspections on our inventory since the pledge contracts were executed, they have not requested us to provide additional collateral or take other remedial actions. However, we cannot assure you the pledgees will not require us to provide additional collateral in the future or take other remedial actions or otherwise enforce their rights under the pledge contracts and loan agreements. If any of the foregoing occurs, our financial condition and results of operations may be materially adversely affected.
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We rely principally on dividends and other distributions on equity paid by our principal operating subsidiaries, Jiangxi Jinko and Zhejiang Jinko, and limitations on their ability to pay dividends to us could have a material adverse effect on our business and results of operations.
We are a holding company and rely principally on dividends paid by our principal operating subsidiaries, Jiangxi Jinko and Zhejiang Jinko, for cash requirements. Zhejiang Jinko entered into loan agreements with a group of PRC banks on March 31, 2011, which were subsequently amended in August 2011. Pursuant to these loan agreements, Zhejiang Jinko obtained two syndicated loans with an aggregate principal amount of RMB600.0 million from a group of PRC banks. Pursuant to the syndicated loan agreements, Zhejiang Jinko may pay dividends only if it complies with the agreed repayment schedule. Although such debt was incurred by Zhejiang Jinko, we cannot assure you that Jiangxi Jinko will not also enter into instruments that may restrict dividends or other distribution to us on our equity interests in the future. In order to finance similar transactions, the share capital of our principal operating subsidiaries has been commonly used as pledges for securing loans, which may limit dividends or other distributions to us.
Furthermore, applicable PRC laws, rules and regulations permit payment of dividends by our PRC subsidiaries only out of their retained earnings, if any, determined in accordance with PRC accounting standards. Our PRC subsidiaries are required to set aside a certain percentage of their after-tax profit based on PRC accounting standards each year as reserve funds for future development and employee benefits, in accordance with the requirements of relevant laws and provisions in their respective articles of associations. The percentage should not be less than 10%, unless the reserve funds reach 50% of the company’s registered capital. In addition, under PRC laws, our PRC subsidiaries are prohibited from distributing dividends if there is a loss in the current year. As a result, our PRC subsidiaries may be restricted in their ability to transfer any portion of their net income to us whether in the form of dividends, loans or advances. Any limitation on the ability of our subsidiaries to pay dividends to us could materially adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.
Any failure to achieve and maintain effective internal control could have a material adverse effect on our business, results of operations and the market price of the ADSs.
The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring most public companies to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, when a company meets the SEC’s criteria, an independent registered public accounting firm must report on the effectiveness of the company’s internal control over financial reporting.
Our management and independent registered public accounting firm have concluded that our internal control over financial reporting as of December 31, 2014 was effective. However, we cannot assure you that in the future our management or our independent registered public accounting firm will not identify material weaknesses during the Section 404 of the Sarbanes-Oxley Act audit process or for other reasons. In addition, 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. As a result, if we fail to maintain effective internal control over financial reporting or should we be unable to prevent or detect material misstatements due to error or fraud on a timely basis, investors could lose confidence in the reliability of our financial statements, which in turn could harm our business, results of operations and negatively impact the market price of the ADSs, and harm our reputation. Furthermore, we have incurred and expected to continue to incur considerable costs and to use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
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Failure to achieve satisfactory production volumes of our products could result in higher unit production costs.
The production of silicon wafers, solar cells, solar modules, silicon ingots and recovered silicon materials involves complex processes. Deviations in the manufacturing process can cause a substantial decrease in output and, in some cases, disrupt production significantly or result in no output. From time to time, we have experienced lower-than-anticipated manufacturing output during the ramp-up of production lines. This often occurs during the introduction of new products, the installation of new equipment or the implementation of new process technologies. As we bring additional lines or facilities into production, we may operate at less than intended capacity during the ramp-up period. In addition, the decreased demand in global solar power product market, including the demand for solar modules, may also cause us to operate at less than intended capacity. This would result in higher marginal production costs and lower output, which could have a material adverse effect on our business, financial condition and results of operations.
Demand for solar power products may be adversely affected by seasonality.
Demand for solar power products tends to be weaker during the winter months partly due to adverse weather conditions in certain regions, which complicate the installation of solar power systems, our operating results may fluctuate from period to period based on the seasonality of industry demand for solar power products. Our sales in the first quarter of any year may also be affected by the occurrence of the Chinese New Year holiday during which domestic industrial activity is normally lower than that at other times. Such fluctuations may result in the underutilization of our capacity and increase our average costs per unit. In addition, we may not be able to capture all of the available demand if our capacity is insufficient during the summer months. As a result, fluctuations in the demand for our products may have a material adverse effect on our business, financial condition and results of operations.
Unsatisfactory performance of or defects in our products may cause us to incur additional expenses and warranty costs, damage our reputation and cause our sales to decline.
Our products may contain defects that are not detected until after they are shipped or inspected by our customers.
Our silicon wafer sales contracts normally require our customers to conduct inspection before delivery. We may, from time to time, allow those of our silicon wafer customers with good credit to return our silicon wafers within a stipulated period, which normally ranges from 7 to 15 working days after delivery, if they find our silicon wafers do not meet the required specifications. Our standard solar cell sales contract requires our customer to notify us within 7 days of delivery if such customer finds our solar cells do not meet the specifications stipulated in the sales contract. If our customer notifies us of such defect within the specified time period and provides relevant proof, we will replace those defective solar cells with qualified ones after our confirmation of such defects.
Our solar modules are typically sold with a 10-year warranty for material and workmanship and a 25-year linear power output warranty against the maximum degradation of the actual power output for each year after the warranty start date. If a solar module is defective during the relevant warranty period, we will either repair or replace the solar module. As we continue to increase our sales to the major export markets, we may be exposed to increased warranty claims.
In May 2011, we engaged PowerGuard Specialty Insurance Services, or PowerGuard, a firm specialized in unique insurance and risk management solutions for the wind and solar energy industries, to provide insurance coverage for the product warranty services of our solar modules worldwide effective from May 1, 2011. Since May 2011, we have renewed the insurance policy upon its expiration in May for each year for a period of one year. The policy offers back-to-back coverage through a maximum of ten-year limited product defects warranty, as well as a 12-year and 25-year linear warranty against declines of more than 10.0% and 20.0%, respectively, from the initial minimum power generation capacity at the time of delivery.
If we experience a significant increase in warranty claims, we may incur significant repair and replacement costs associated with such claims. In addition, product defects could cause significant damage to our market reputation and reduce our product sales and market share, and our failure to maintain the consistency and quality throughout our production process could result in substandard quality or performance of our products. If we deliver our products with defects, or if there is a perception that our products are of substandard quality, we may incur substantially increased costs associated with returns or replacements of our products, our credibility and market reputation could be harmed and our sales and market share may be materially adversely affected.
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Fluctuations in exchange rates could adversely affect our results of operations.
We derive a substantial portion of our sales from international customers and a significant portion of our total revenue have been denominated in foreign currencies, particularly, Euros and U.S. dollars. Our export sales represented 54.5%, 51.1% and 56.3% of our total revenue in 2012, 2013 and 2014, respectively. As a result, we may face significant risks resulting from currency exchange rate fluctuations, particularly, among Renminbi, Euros and U.S. dollars. Furthermore, we have outstanding debt obligations, and may continue to incur debts from time to time, denominated and repayable in foreign currencies. We incurred foreign-exchange losses of approximately RMB36.5 million, RMB38.5 million and RMB147.1 million (US$23.7 million), in 2012, 2013 and 2014, respectively. 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.
Our consolidated financial statements are expressed in Renminbi. The functional currency of our principal operating subsidiaries, Jiangxi Jinko and Zhejiang Jinko, is also Renminbi. To the extent we hold assets denominated in Euros or U.S. dollars, any appreciation of Renminbi against the Euro or U.S. dollar could reduce the value of our Euro-or U.S. dollar-denominated consolidated assets. On the other hand, if we decide to convert our Renminbi amounts into Euros or U.S. dollars for business purposes, including foreign debt service, a decline in the value of Renminbi against the Euro or U.S. dollar would reduce the Euro or U.S. dollar equivalent amounts of the Renminbi we convert. In addition, a depreciation of Renminbi against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the price of our ADSs.
In July 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi was permitted to fluctuate within a band against a basket of certain foreign currencies. As a result, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. However, the People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange rates and achieve policy goals. For almost two years after July 2008, the Renminbi traded within a very narrow range against the U.S. dollar, remaining within 1% of its July 2008 high. As a consequence, the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. In June 2010, the PRC government announced that it would increase the exchange rate flexibility of the Renminbi, though it did not specify how the increased flexibility would be implemented. In April 2012, the People’s Bank of China announced that it would expand the floating range of the trading price of the Renminbi against the U.S. dollar from 0.5% to 1.0%, beginning on April 16, 2012. In 2013, the Renminbi appreciated 2.71% against the U.S. dollar. In March 2014, the People’s Bank of China further expanded the floating range of the trading price of the Renminbi against the U.S. dollar to 2.0%. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar. The Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the long term, depending on the fluctuation of the basket of currencies against which it is currently valued or it may be permitted to enter into a full float, which may also result in a significant appreciation or depreciation of the Renminbi against the U.S. dollar. Any currency exchange losses we recognize may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. Although we have entered into a number of foreign-exchange forward contracts with local banks to manage our risks associated with foreign-exchange rates fluctuations, we cannot assure you that our hedging efforts will be effective. Our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on our results of operations.
Our operating history may not be a reliable predictor of our prospects and future results of operations.
We commenced processing recoverable silicon materials in June 2006, and manufacturing silicon ingots and silicon wafers in 2007 and 2008, respectively. We commenced producing solar cells in July 2009 following our acquisition of Zhejiang Jinko, which has manufactured solar cells since June 2007, and we commenced producing solar modules in August 2009. We commenced our solar power generation and solar system integration service business in late 2011.
Although our revenue experienced significant growth in the past, we cannot assure you that our revenue will increase at previous rates or at all, or that we will be able to continue to operate profitably in future periods. We also experienced net losses in each quarter from the fourth quarter of 2011 to the first quarter of 2013. Our operating history may not be a reliable predictor of our future results of operations, and past revenue growth experienced by us should not be taken as indicative of the rate of revenue growth, if any, that can be expected in the future. We believe that period to period comparisons of our operating results and our results for any period should not be relied upon as an indication of future performance.
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Our operations are subject to natural disasters, adverse weather conditions, operating hazards, environmental incidents and labor disputes.
We may experience earthquakes, floods, mudslides, snowstorms, typhoon, power outages, labor disputes or similar events beyond our control that would affect our operations. Our manufacturing processes involve the use of hazardous equipment, such as furnaces, squaring machines and wire saws. We also use, store and generate volatile and otherwise dangerous chemicals and waste during our manufacturing processes, which are potentially destructive and dangerous if not properly handled or in the event of uncontrollable or catastrophic circumstances, including operating hazards, fires and explosions, natural disasters, adverse weather conditions and major equipment failures, for which we cannot obtain insurance at a reasonable cost or at all.
In addition, our silicon wafer and solar module production and storage facilities are located in close proximity to one another in the Shangrao Economic Development Zone in Jiangxi Province, and our solar cell production and storage facilities are located in close proximity to one another in Haining, Zhejiang Province. The occurrence of any natural disaster, unanticipated catastrophic event or unexpected accident in either of the two locations could result in production curtailments, shutdowns or periods of reduced production, which could significantly disrupt our business operations, cause us to incur additional costs and affect our ability to deliver our products to our customers as scheduled, which may adversely affect our business, financial condition and results of operations. Moreover, such events could result in severe damage to property, personal injuries, fatalities, regulatory enforcement proceedings or in our being named as a defendant in lawsuits asserting claims for large amounts of damages, which in turn could lead to significant liabilities.
Our Haining facility suspended operation from September 17, 2011 to October 9, 2011 due to an environmental incident. See “—Compliance with environmentally safe production and construction regulations can be costly, while non-compliance with such regulations may result in adverse publicity and potentially significant monetary damages, fines and suspension of our business operations.” Occurrences of natural disasters, as well as accidents and incidents of adverse weather in or around Shangrao and Haining in the future may result in significant property damage, electricity shortages, disruption of our operations, work stoppages, civil unrest, personal injuries and, in severe cases, fatalities. Such incidents may result in damage to our reputation or cause us to lose all or a portion of our production capacity, and future revenue anticipated to be derived from the relevant facilities.
Our founders collectively have significant influence over our management and their interests may not be aligned with our interests or the interests of our other shareholders.
As of the date of this annual report, our founders, Xiande Li who is our chairman, Kangping Chen who is our chief executive officer, and Xianhua Li who is our vice president, beneficially owned approximately 16.2%, 9.7% and 4.9%, respectively, or approximately 30.7% in the aggregate, of our outstanding ordinary shares. If the founders act collectively, they will have a substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors, dividend policy and other significant corporate actions. They may take actions that are not in the best interest of our company or our securities holders. For example, 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. On the other hand, if the founders are in favor of any of these actions, these actions may be taken even if they are opposed by a majority of our other shareholders, including you and those who invest in ADSs. In addition, under our current articles of association, the quorum required for the general meeting of our shareholders is two shareholders entitled to vote and present in person or by proxy or, if the shareholder is a corporation, by its duly authorized representative representing not less than one-third in nominal value of our total issued voting shares. As such, a shareholders resolution may be passed at our shareholders meetings with the presence of our founders only and without the presence of any of our other shareholders, which may not represent the interests of our other shareholders, including holders of ADSs.
We have limited insurance coverage and may incur losses resulting from product liability claims, business interruption or natural disasters.
We are exposed to risks associated with product liability claims in the event that the use of our products results in property damage or personal injury. Since our products are ultimately incorporated into electricity generating systems, it is possible that users could be injured or killed by devices that use our products, whether as a result of product malfunctions, defects, improper installations or other causes. Due to our limited operating history, we are unable to predict whether product liability claims will be brought against us in the future or to predict the impact of any resulting adverse publicity on our business. The successful assertion of product liability claims against us could result in potentially significant monetary damages and require us to make significant payments. We carry limited product liability insurance and may not have adequate resources to satisfy a judgment in the event of a successful claim against us. In addition, we do not carry any business interruption insurance. As the insurance industry in China is still in its early stage of development, even if we decide to take out business interruption coverage, such insurance available in China offers limited coverage compared with that offered in many other countries. Any business interruption or natural disaster could result in substantial losses and diversion of our resources and materially adversely affect our business, financial condition and results of operations.
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The grant of employee share options and other share-based compensation could adversely affect our net income.
As of the date of annual report, share options with respect to 9,325,122 ordinary shares have been granted to our directors, officers and employees pursuant to our 2009 Long Term Incentive Plan, and there are 5,734,742 ordinary shares issuable upon the exercise of outstanding options granted under the plan. As of the date of annual report, share options with respect to 10,117,980 ordinary shares have been granted to our directors, officers and employees pursuant to our 2014 Equity Incentive Plan, and there are 10,117,980 ordinary shares issuable upon the exercise of outstanding options granted under the plan. U.S. GAAP requires us to recognize share-based compensation as compensation expense in the consolidated statement of operations based on the fair value of equity awards on the date of the grant, with the compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. If we grant more share options to attract and retain key personnel, the expenses associated with share-based compensation may adversely affect our net income. However, if we do not grant share options or reduce the number of share options that we grant, we may not be able to attract and retain key personnel.
Our lack of sufficient patent protection in and outside of China may undermine our competitive position and subject us to intellectual property disputes with third parties, both of which may have a material adverse effect on our business, results of operations and financial condition.
We have developed various production process related know-how and technologies in the production of our products. Such know-how and technologies play a critical role in our quality assurance and cost reduction. In addition, we have implemented a number of research and development programs with a view to developing techniques and processes that will improve production efficiency and product quality. Our intellectual property and proprietary rights from our research and development programs will be crucial in maintaining our competitive edge in the solar power industry. As of the date of this annual report, we had 130 patents and 156 pending patent applications in China. We plan to continue to seek to protect our intellectual property and proprietary knowledge by applying for patents for them. However, we cannot assure you that we will be successful in obtaining patents in China in a timely manner or at all. Moreover, even if we are successful, China currently affords less protection to a company’s intellectual property than some other countries, including the United States. We also use contractual arrangements with employees and trade secret protections to protect our intellectual property and proprietary rights. Nevertheless, contractual arrangements afford only limited protection and the actions we may take to protect our intellectual property and proprietary rights may not be adequate.
In addition, others may obtain knowledge of our know-how and technologies through independent development. Our failure to protect our production process, related know-how and technologies, our intellectual property and proprietary rights or any combination of the above may undermine our competitive position. Third parties may infringe or misappropriate our proprietary technologies or other intellectual property and proprietary rights. Policing unauthorized use of proprietary technology can be difficult and expensive. Litigation, which can be costly and divert management attention and other resources away from our business, may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of our proprietary rights. We cannot assure you that the outcome of such potential litigation will be in our favor. An adverse determination in any such litigation will impair our intellectual property and proprietary rights and may harm our business, prospects and reputation.
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We may be exposed to intellectual property infringement or misappropriation claims by third parties, which, if determined adversely to us, could cause us to pay significant damage awards.
Our success depends on our ability to use and develop our technology and know-how, and to manufacture and sell our recovered silicon materials, silicon ingots, silicon wafers, solar cells and solar modules, develop solar power projects or otherwise operate our business in the solar industry without infringing the intellectual property or other rights of third parties. We may be subject to litigation involving claims of patent infringement or violation of intellectual property rights of third parties. The validity and scope of claims relating to solar power technology patents involve complex scientific, legal and factual questions and analyses and, therefore, may be highly uncertain. The defense and prosecution of intellectual property suits, patent opposition proceedings, trademark disputes and related legal and administrative proceedings can be both costly and time consuming and may significantly divert our resources and the attention of our technical and management personnel. An adverse ruling in any such litigation or proceedings could subject us to significant liability to third parties, require us to seek licenses from third parties, to pay ongoing royalties, or to redesign our products or subject us to injunctions prohibiting the 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.
Our business depends substantially on the continuing efforts of our executive officers and key technical personnel, as well as our ability to maintain a skilled labor force. Our business may be materially adversely affected if we lose their services.
Our success depends on the continued services of our executive officers and key personnel, in particular our founders, Mr. Xiande Li, Mr. Kangping Chen and Mr. Xianhua Li. We do not maintain key-man life insurance on any of our executive officers and key personnel. If one or more of our executive officers and key personnel are unable or unwilling to continue in their present positions, we may not be able to readily replace them, if at all. As a result, our business may be severely disrupted and we may have to incur additional expenses in order to recruit and retain new personnel. In addition, if any of our executives joins a competitor or forms a competing company, we may lose some of our customers. Each of our executive officers and key personnel has entered into an employment agreement with us that contains confidentiality and non-competition provisions. However, if any dispute arises between our executive officers or key personnel and us, we cannot assure you, in light of uncertainties associated with the PRC legal system, that these agreements could be enforced in China where most of our executive officers and key personnel reside and hold most of their assets. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could have a material adverse effect on us” in this annual report.
Furthermore, recruiting and retaining capable personnel, particularly experienced engineers and technicians familiar with our products and manufacturing processes, is vital to maintain the quality of our products and improve our production methods. There is substantial competition for qualified technical personnel, and we cannot assure you that we will be able to attract or retain qualified technical personnel. If we are unable to attract and retain qualified employees, key technical personnel and our executive officers, our business may be materially adversely affected.
Compliance with environmentally safe production and construction regulations can be costly, while non-compliance with such regulations may result in adverse publicity and potentially significant monetary damages, fines and suspension of our business operations.
We are required to comply with all PRC national and local environmental protection regulations. Regulations on emission trading and pollution permits in Zhejiang Province allow entities to increase their annual pollution discharge limit by purchasing emissions trading credits. Entities that purchase emission credits can increase their annual discharge limit by registering the credits with the relevant environmental authorities and amending their pollution permits or obtaining new ones. We have entered into several emissions trading contracts to purchase credits to increase our annual discharge limit and registered all credits as required under a local regulation that became effective on October 9, 2010. However, as our business grows, we may increase our discharge level in the future and we cannot guarantee you that we will continue to be below our annual discharge limit. The penalties for exceeding the annual discharge limit may include corrective orders, fines imposed by the local environmental authority of up to RMB50,000 or, in extreme circumstances, revocation of our pollution permit. Some of our PRC subsidiaries need to obtain and maintain pollution discharge permits, which are subject to renewal or extension on an annual basis or within a longer period. We cannot assure you that we are or will be able to renew or extend these permits in a timely manner or at all.
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We use, store and generate volatile and otherwise dangerous chemicals and wastes during our manufacturing processes, and are subject to a variety of government regulations related to the use, storage and disposal of such hazardous chemicals and waste. In accordance with the requirements of the revised Regulation on the Safety Management of Hazardous Chemicals, which became effective on December 1, 2011, we are required to engage State-qualified institutions to conduct the safety evaluation on our storage instruments related to our use of hazardous chemicals and file the safety evaluation report with the competent safety supervision and administration authorities every three years. In compliance with Jiaxing City environmental authority’s requests, we commenced efforts to meet their targets for hazardous chemical and wastes in May 2012. Environmental authorities of Haining City and Jiaxing City evaluated our efforts and confirmed that we satisfied their targets in September 2012. Moreover, we also need to timely file a report with the competent safety supervision and administration authorities and public security agencies concerning the actual storage situation of our hyper-toxic chemicals and other hazardous chemicals that constitute major of hazard sources. We have not conducted the safety evaluation or filed safety evaluation reports with respect to certain of our storage instruments in compliance with the revised Regulation on the Safety Management of Hazardous Chemicals and we cannot assure you that we will be able to file the safety evaluation reports on time. Failure to make such filing on time may subject us to an order to rectify such conduct within a prescribed time period, fines of up to RMB100,000 or a revocation of our qualification certification and business license.
Moreover, we are required to obtain construction permits before commencing constructing production facilities. We are also required to obtain the approvals from PRC environmental protection authorities before commencing commercial operations of our manufacturing facilities. We commenced construction of a portion of our solar cell and solar module production facilities and solar power generation plants prior to obtaining the construction permits and commenced operations of certain of our production facilities prior to obtaining the environmental approvals for commencing commercial operation and completing the required safety evaluation procedure. Although we have subsequently obtained all required environmental approvals covering all of our existing production capacity except a portion of our solar cell and solar module production capacity, we cannot assure you that we will not be penalized by the relevant government authorities for our non-compliance with the PRC environmental protection, safe production and construction regulations.
In late August 2011, our Haining facility experienced a suspected leakage of fluoride into a nearby small water channel due to extreme and unforeseen weather conditions. On September 15, 2011, residents of Hongxiao Village in proximity to the Haining facility gathered to protest the discharge. The Haining facility suspended production on September 17, 2011. We also took steps recommended by an environmental engineering firm licensed by the PRC government (“Licensed Engineers”). On September 28, 2011, a committee of experts (the “Experts Committee”) established by the Haining government approved a set of recommendations developed by the Licensed Engineers with our assistance and the Haining government to be implemented by us. On October 6, 2011, the Experts Committee, the Environmental Bureau of the Haining government and representatives of Hongxiao Village reviewed the steps taken by us based on the recommendations of the Experts Committee and provided their comments to JinkoSolar’s management. On October 9, 2011, the Experts Committee notified us that the Experts Committee was satisfied with the steps taken by us and we resumed production at the Haining facility. In 2012, we carried out a series of environmental protection efforts intended to ensure our compliance with relevant standards and requirements. See “Item 4. Information on the Company—B. Business Overview—Environmental Matters.” In January 2013, Haining City environmental authority issued the “Environmental Management Compliance Certificate for 2012” to us, confirming our compliance with environmental requirements.
Although we will try to take measures to prevent similar incidents from occurring again in the future, we cannot assure you that our operations will not be disrupted by similar or other environmental incidents. In addition, the PRC government may issue more stringent environmental protection, safe production and construction regulations in the future and the costs of compliance with new regulations could be substantial. If we fail to comply with the future environmentally safe production and construction laws and regulations, we may be required to pay fines, suspend construction or production, or cease operations. Moreover, any failure by us to control the use of, or to adequately restrict the discharge of, dangerous substances could subject us to potentially significant monetary damages and fines or the suspension of our business operations.
Risks Related to Doing Business in China
We may fail to comply with laws and regulations regarding the development, construction and operation of solar power projects and PV production projects in China.
The development, construction and operation of solar power projects and PV production projects are highly regulated activities. Our operations in China are governed by different laws and regulations, including national and local regulations relating to urban and rural planning , building codes, safety, environmental protection, fire control, utility transmission, engineering and metering and related matters.
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Historically, the establishment of a solar power project is subject to the approval of the NDRC or its local branches, pursuant to the Administrative Provisions on Generation of Electricity by Renewable Energy Resources promulgated by the NDRC on January 5, 2006.
Pursuant to the Provisions on the Administration of Electric Power Business Permit, which became effective on December 1, 2005, solar power projects are required to obtain the electric power business permits specifically for power generation from the State Electricity Regulatory Commission, or the SERC. Pursuant to the Interim Measures for the Administration of Distributed Electricity Generation, promulgated by the NDRC on July 18, 2013, the DG projects are exempted from the requirement to obtain electric power business permits.
Pursuant to the Interim Measures for the Administration of Solar Power Projects, promulgated by the NEA on August 29, 2013, solar power projects are subject to filings with the provincial NDRC. Such filing is subject to the national development plan for solar power generation, the regional scale index and implementation plan of the year as promulgated by the competent national energy authority and a pre-condition for connecting to power grid.
Pursuant to the Interim Measures for the Administration of Distributed Generation Projects, or the Distributed PV Interim Measures, promulgated by the NEA on November 18, 2013, DG projects are subject to filings with the provincial or regional NDRC. Such filing is subject to State Council’s rules for administration of investment projects and the regional scale index and implementation plan of the year as promulgated by the competent national energy authority. DG projects in the regional scale index of the year that are not completed or put into operation within two years from their respective filing date must be cancelled and disqualified to receive national subsidies. The Distributed PV Interim Measures also provide that the filing procedures should be simplified and the electric power business permit and permits in relation to land planning, environmental impact review, energy saving evaluation and other supporting documents may be waived. Detailed requirements of the filing are also subject to local regulations, and the effects of the Distributed PV Interim Measures on our business are yet to be evaluated.
Pursuant to the Standard Conditions of Photovoltaic Production Industry, or the Photovoltaic Production Rule, promulgated by the MIIT on September 16, 2013 and effective October 16, 2013, the minimum proportion of capital funds contributed by the producer for newly built, renovation and expansion PV production projects shall be 20%. The Photovoltaic Production Rule also provides, among other matters, requirements in relation to the production scale, cell efficiency, energy consumption and operational life span of various PV products.
Pursuant to the Circular on Regulating the Investment and Development Order of PV Power Stations, promulgated by the NEC on October 28, 2014, the filings of solar power projects will be automatically invalidated if the construction of solar power projects has not commenced prior to the expiration of such filings and no application for extension has been made.
Our failure to obtain the required approvals, permits, licenses, filings or to comply with the conditions associated therewith could result in fines, sanctions, suspension, revocation or non-renewal of approvals, permits or licenses, or even criminal penalties, which could have a material adverse effect on our business, financial condition and results of operations. Any new government regulations pertaining to solar power projects may result in significant additional expenses to the development, construction and operation of solar power projects and, as a result, could cause a significant reduction in demand for our solar power projects and services. Currently, some of our project companies in the PRC have not obtained electric power business permits due to the delay in the governmental review or approval process. Failure to secure such permits may lead to monetary damages, fines or even criminal penalties.
We cannot assure you that we will be able to promptly and adequately respond to changes of laws and regulations, or that our employees and contractors will act in accordance with our internal policies and procedures. Failure to comply with laws and regulations where we develop, construct and operate solar power projects may materially adversely affect our business, financial condition and results of operations.
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Registered public accounting firms in China, including our independent registered public accounting firm, are not inspected by the U.S. Public Company Accounting Oversight Board, which deprives us and our investors of the benefits of such inspection.
Auditors of companies whose shares are registered with the U.S. Securities and Exchange Commission and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the U.S. Public Company Accounting Oversight Board (the “PCAOB”) and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards applicable to auditors. Our independent registered public accounting firm is located in, and organized under the laws of, the PRC, which is a jurisdiction where the PCAOB, notwithstanding the requirements of U.S. law, is currently unable to conduct inspections without the approval of the Chinese authorities. In May 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.
This lack of PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our common stock are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.
If additional remedial measures are imposed on the Big Four PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC, we may have difficulties complying with the requirements of the Securities Exchange Act of 1934.
In December 2012, the SEC instituted administrative proceedings against the Big Four PRC-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ audit work papers with respect to certain PRC-based companies that are publicly traded in the United States. On January 22, 2014, the administrative law judge presiding over the matter rendered an initial decision that each of the firms had violated the SEC’s rules of practice by failing to produce audit work papers to the SEC. The initial decision censured each of the firms and barred them from practicing before the SEC for a period of six months. The Big Four PRC-based accounting firms appealed the administrative law judge’s initial decision to the SEC. The administrative law judge’s decision does not take effect unless and until it is endorsed by the SEC.
In February 2015, the four China-based accounting firms each agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC and audit U.S.-listed companies. The settlement required the firms to follow detailed procedures and to seek to provide the SEC with access to PRC firms’ audit documents via the China Securities Regulatory Commission, or the CSRC. If future document productions fail to meet specified criteria, the SEC retains the authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure.
While we cannot predict if the SEC will further review the four China-based accounting firms’ compliance with specified criteria or if the results of such a review would result in the SEC imposing penalties such as suspensions or restarting the administrative proceedings, if the accounting firms are subject to additional remedial measures, our ability to file our financial statements in compliance with SEC requirements could be impacted. A determination that we have not timely filed financial statements in compliance with SEC requirements could ultimately lead to the delisting of our ADSs from NYSE or the termination of the registration of our ADSs under the Securities Exchange Act of 1934, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.
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The approval of the PRC Ministry of Commerce, or MOFCOM, for or in connection with our corporate restructuring in 2007 and 2008 may be subject to revocation, which will have a material adverse effect on our business, operating results and trading price of our ADSs.
On August 8, 2006, six PRC governmental and regulatory agencies, including the Ministry of Commerce of the People’s Republic of China, or the MOFCOM and the CSRC promulgated a rule entitled “Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors,” or Circular 10, which became effective on September 8, 2006 and was amended in June 2009. Article 11 of Circular 10 requires PRC domestic enterprises or domestic natural persons to obtain the prior approval of MOFCOM when an offshore company established or controlled by them proposes to merge with or acquire a PRC domestic company with which such enterprises or persons have a connected relationship.
We undertook a restructuring in 2007, or the 2007 Restructuring, and our founders and JinkoSolar Technology Limited, previously Paker Technology Limited, or JinkoSolar Technology, obtained the approval of Jiangxi MOFCOM, for the acquisition of certain equity interest in Jiangxi Desun and the pledge by our founders of their equity interest in Jiangxi Desun to Jinko Solar Technology, or the 2007 acquisition and pledge. However, because our founders are PRC natural persons and they controlled both JinkoSolar Technology and Jiangxi Desun, the 2007 acquisition and pledge would be subject to Article 11 of Circular 10 and therefore subject to approval by MOFCOM at the central government level. To remedy this past non-compliance, we undertook another corporate restructuring in 2008, or the 2008 Restructuring, under which the share pledge was terminated on July 28, 2008 and JinkoSolar Technology transferred all of its equity interest in Jiangxi Desun to Long Faith Creation Limited, or Long Faith, an unrelated Hong Kong company, on July 31, 2008. In addition, on November 11, 2008, we received written confirmation from Jiangxi MOFCOM in its reply to our inquiry that there had been no modification to the former approvals for the 2007 acquisition and pledge and JinkoSolar Technology’s transfer of its equity interest in Jiangxi Desun to Long Faith, and we might continue to rely on those approvals for further transactions. Nevertheless, we cannot assure you that MOFCOM will not revoke such approval and subject us to regulatory actions, penalties or other sanctions because of such past non-compliance. If the approval of Jiangxi MOFCOM for the 2007 acquisition and pledge were revoked and we were not able to obtain MOFCOM’s retrospective approval for the 2007 acquisition and pledge, Jiangxi Desun may be required to return the tax benefits to which only a foreign-invested enterprise was entitled and which were recognized by us during the period from April 10, 2007 to December 31, 2007, and the profit distribution to JinkoSolar Technology in December 2008 may be required to be unwound. Under an indemnification letter issued by our founders to us, our founders have agreed to indemnify us for any monetary losses we may incur as a result of any violation of Circular 10 in connection with the restructuring we undertook in 2007. We cannot assure you, however, that this indemnification letter will be enforceable under the PRC law, our founders will have sufficient resources to fully indemnify us for such losses, or that we will not otherwise suffer damages to our business and reputation as a result of any sanctions for such non-compliance.
Meanwhile, given the uncertainty with respect to what constitutes a merger with or acquisition of a PRC domestic enterprise and what constitutes circumvention of its approval requirements under the Circular 10, we cannot assure you that the 2008 Restructuring is in all respects compliance with Circular 10. If MOFCOM subsequently determines that its approval of the 2008 Restructuring was required, we may face regulatory actions or other sanctions by MOFCOM or other PRC regulatory agencies. Such actions may include compelling us to terminate the contracts between Jiangxi Desun and us, the limitation of our operating privileges in China, the imposition of fines and penalties on our operations in China, restrictions or prohibition on the payment or remittance of dividends by Jiangxi Jinko or others that may have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs.
Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of the PRC, which could reduce the demand for our products and materially adversely affect our competitive position.
Our business is based in the PRC and a portion of our sales are made in the PRC. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in the PRC. The PRC economy differs from the economies of most developed countries in many respects, including:
· | the level of government involvement; |
· | the level of development; |
· | the growth rate; |
· | the control of foreign exchange; and |
· | the allocation of resources. |
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While the PRC economy has grown significantly in the past 30 years, the growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may have a negative effect on us. For example, our financial condition and results of operations may be materially adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
The PRC 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 adversely affect our business. The PRC government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. We cannot predict whether changes in China’s political, economic and social conditions, laws, regulations and policies will have any material adverse effect on our current or future business, financial condition and results of operations.
Uncertainties with respect to the PRC legal system could have a material adverse effect on us.
We are incorporated in Cayman Islands and are subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign owned companies. The PRC legal system is based on written statutes. Prior court decisions have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative authorities and courts have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult than in more developed legal systems to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may impede our ability to enforce the contracts we have entered into with our business partners, clients and suppliers. In addition, such uncertainties, including the inability to enforce our contracts, could materially adversely affect our business and operations. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, 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, or the preemption of national laws by local regulations. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
PRC regulations may subject our future mergers and acquisitions activity to national security review.
In February 2011, the State Council promulgated Circular 6, a notice on the establishment of a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Circular 6 became effective on March 3, 2011. To implement Circular 6, MOFCOM promulgated the MOFCOM Security Review Rules on August 25, 2011, which became effective on September 1, 2011. According to Circular 6 and the MOFCOM Security Review Rules, national security review is required to be undertaken to complete mergers and acquisitions (i) by foreign investors of enterprises relating to national defense and (ii) through which foreign investors may acquire de facto control of a domestic enterprise that could raise national security concerns. When determining whether to subject a specific merger or acquisition to national security review, the MOFCOM will look at the substance and actual impact of the transaction. Bypassing national security review by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions by foreign investors is prohibited.
In addition, even if a merger or acquisition by foreign investors is not currently subject to national security review, or is determined to have no impact on national security after such review, it may still be subject to future review. A change in conditions (such as change of business activities, or amendments to relevant documents or agreements) may trigger the national security review requirement, then the foreign investor to the merger or acquisition must apply for the relevant approval with the MOFCOM.
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Currently, there are no public provisions or official interpretations specifically providing that our current businesses fall within the scope of national security review and there is no requirement that foreign investors to those merger and acquisition transactions completed prior to the promulgation of Circular 6 take initiatives to submit such transactions to MOFCOM for national security review. However, as the MOFCOM Security Review Rules and Circular 6 are relatively new and there is no clear statutory interpretation on their implementation, there is no assurance that the relevant PRC regulatory authorities will have the same view as us when applying them. If our future merger and acquisition transactions are subject to the national security review, the application of the MOFCOM Security Review Rules and Circular 6 may further complicate our future merger and acquisition activities, and our expansion strategy may be adversely affected as a result.
PRC regulations relating to overseas investment by PRC residents may restrict our overseas and cross-border investment activities and adversely affect the implementation of our strategy as well as our business and prospects.
On July 4, 2014, the SAFE issued the Circular on the Administration of Foreign Exchange Issues Related to Overseas Investment, Financing and Roundtrip Investment by Domestic Residents through Offshore Special Purpose Vehicles, or the SAFE Circular 37, which replaced the former circular commonly known as “SAFE Circular 75” promulgated on October 21, 2005. The SAFE Circular 37 requires PRC residents to register with the competent local SAFE branch in connection with their direct establishment or indirect control of an offshore special purpose vehicle, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. The SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contribution by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.
We believe that all of our beneficial owners who are PRC citizens or residents have completed their registrations with the competent local SAFE branch in accordance with the SAFE Circular 75 before the promulgation of SAFE Circular 37. However, we may not at all times be fully aware or informed of the identities of all of our beneficial owners who are PRC citizens or residents, and we may have little control over either our present or prospective direct or indirect PRC resident beneficial owners or the outcome of such registration procedures. We cannot assure you that the SAFE registrations of our present beneficial owners or future beneficial owners who are PRC citizens or residents have been or will be amended to reflect, among others, the shareholding information or equity investment as required by the SAFE Circular 37 and subsequent implementation rules at all times. The failure of these beneficial owners to comply with the registration procedures set forth in the SAFE Circular 37 may subject such beneficial owners and our PRC subsidiaries to fines and legal sanctions. Such failure may also result in restrictions on our PRC subsidiaries’ ability to distribute profits to us or our ability to inject capital into our PRC subsidiaries or otherwise materially adversely affect our business, financial condition and results of operations. Furthermore, since the SAFE Circular 37 was recently promulgated and it is unclear how this regulation, and any future regulation concerning offshore or cross-border transactions, will be interpreted and implemented by the relevant PRC government authorities. We cannot predict how these regulations will affect our business operations or future strategy.
On December 25, 2006, the People’s Bank of China promulgated the Measures for Administration of Individual Foreign Exchange, and on January 5, 2007, the SAFE promulgated relevant Implementation Rules. On February 15, 2012, the SAFE promulgated the Notice on Various Issues Concerning Foreign Exchange Administration for Domestic Individuals Participating in Equity Incentive Plans of Overseas Listed Companies, or the Stock Option Notice. The Stock Option Notice terminated the Operating Procedures of Foreign Exchange Administration of PRC Individuals’ Participation in Employee Stock Holding Plans or Stock Option Plans of Overseas Listed Companies issued by the SAFE on March 28, 2007. According to the Stock Option Notice, PRC citizens who are granted shares or share options by a company listed on an overseas stock market according to its employee stock holding plan or stock incentive plan are required to register with the SAFE or its local counterparts by following certain procedures.
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We and our employees who are PRC citizens and individual beneficiary owners, or have been granted restricted shares or share options, are subject to the Individual Foreign Exchange Rules and its relevant implementation regulations. The failure of our PRC individual beneficiary owners and the restricted holders to complete their SAFE registrations pursuant to the SAFE’s requirement or the Individual Foreign Exchange Rules may subject these PRC citizens to fines and legal sanctions. It may also limit our ability to contribute additional capital into our PRC subsidiaries, and limit our PRC subsidiaries’ ability to distribute dividends to us, or otherwise materially adversely affect our business.
Our income is subject to PRC withholding tax under the CIT Law, and we may be subject to PRC corporate income tax at the rate of 25%.
We are a Cayman Islands holding company with substantially all of our operations conducted through our operating subsidiaries in China. Under the Corporate Income Tax Law of the PRC, or the CIT Law, and the Regulation on the Implementation of the CIT Law, or the Implementation Rules of the CIT Law, both of which became effective on January 1, 2008, China-sourced passive income of non-PRC tax resident enterprises, such as dividends paid by a PRC subsidiary to its overseas parent, is generally subject to a 10% withholding tax. Under an arrangement between China and Hong Kong, such dividend withholding tax rate is reduced to 5% if the beneficial owner of the dividends is a Hong Kong tax resident enterprise which directly owns at least 25% of the PRC company distributing the dividends and has owned such equity for at least 12 consecutive months before receiving such dividends. As JinkoSolar Technology is a Hong Kong company and has owned 100% of the equity interest in Jiangxi Jinko and 25% of the equity interest in Zhejiang Jinko directly for more than 12 consecutive months to date, any dividends paid by Jiangxi Jinko and Zhejiang Jinko to JinkoSolar Technology will be entitled to a withholding tax at the reduced rate of 5% after obtaining approval from the competent PRC tax authority, provided that JinkoSolar Technology is deemed the beneficial owner of such dividends and that JinkoSolar Technology is not deemed to be a PRC tax resident enterprise as described below. However, according to the Circular of the State Administration of Taxation on How to Understand and Identify a “Beneficial Owner” under Tax Treaties, effective on October 27, 2009, and the Announcement of the State Administration of Taxation on the Determination of “Beneficial Owners” in the Tax Treaties, effective on June 29, 2012, an applicant for treaty benefits, including benefits under the arrangement between China and Hong Kong on dividend withholding tax, that does not carry out substantial business activities or is an agent or a conduit company may not be deemed a “beneficial owner” of the PRC subsidiary and therefore, may not enjoy such treaty benefits. If JinkoSolar Technology is determined to be ineligible for such treaty benefits, any dividends paid by Jiangxi Jinko and Zhejiang Jinko to JinkoSolar Technology will be subject to the PRC withholding tax at a 10% rate.
The CIT Law, however, also provides that enterprises established outside China whose “de facto management bodies” are located in China are considered “PRC tax resident enterprises” and will generally be subject to the uniform 25% PRC corporate income tax rate as to their global income. Under the Implementation Rules of the CIT Law, “de facto management bodies” is defined as the bodies that have, in substance, overall management control over such aspects as the production and business, personnel, accounts and properties of an enterprise. On April 22, 2009, the State Administration of Taxation, or the SAT, promulgated the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or SAT Circular 82. SAT Circular 82 provides certain criteria for determining whether the “de facto management body” of an offshore-incorporated enterprise controlled by PRC enterprises is located in China. On July 27, 2011, the SAT issued Administrative Measures of Enterprise Income Tax of Chinese-controlled Offshore Incorporated Resident Enterprises (Trial), or Bulletin 45, which became effective on September 1, 2011, to provide further guidance on the implementation of SAT Circular 82. Bulletin 45 clarifies certain issues relating to the determination of PRC tax resident enterprise status, post-determination administration and the authorities responsible for determining offshore-incorporated PRC tax resident enterprise status. Bulletin 45 specifies that when provided with a copy of a PRC tax resident determination certificate issued by the competent tax authorities from an offshore-incorporated PRC tax resident enterprise, the payer should not withhold 10% income tax when paying PRC-sourced dividends, interest and royalties to the offshore incorporated PRC tax resident enterprise. However, as this circular only applies to enterprises incorporated under laws of foreign jurisdictions that are controlled by PRC enterprises or groups of PRC enterprises, it remains unclear how the tax authorities will determine the location of “de facto management bodies” for overseas incorporated enterprises that are controlled by individual PRC tax residents or non-PRC enterprises such as our company and JinkoSolar Technology. Therefore, it remains unclear whether the PRC tax authorities would require or permit our company or JinkoSolar Technology to be recognized as PRC tax resident enterprises. If our company and JinkoSolar Technology are considered PRC tax resident enterprises for PRC corporate income tax purposes, any dividends distributed from Jiangxi Jinko and Zhejiang Jinko to JinkoSolar Technology and ultimately to our company could be exempt from the PRC withholding tax; however, our company and JinkoSolar Technology will be subject to the uniform 25% corporate income tax rate on our global income.
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Dividends payable by us to our foreign investors and gains on the sale of our shares or ADSs may become subject to PRC corporate income tax liabilities.
The Implementation Rules of the CIT Law provide that (i) if the enterprise that distributes dividends is domiciled in China, or (ii) if gains are realized from transferring equity interests of enterprises domiciled in China, then such dividends or capital gains are treated as China-sourced income. It is not clear how “domicile” will be interpreted under the CIT Law. It may be interpreted as the jurisdiction where the enterprise is incorporated or where the enterprise is a tax resident. Therefore, if our company and JinkoSolar Technology are considered PRC tax resident enterprises for tax purposes, any dividends we pay to our overseas shareholders or ADS holders, as well as any gains realized by such shareholders or ADSs holders from the transfer of our shares or ADSs, may be viewed as China-sourced income and, as a consequence, be subject to PRC corporate income tax at 10% or a lower treaty rate. If we are required to withhold PRC income tax on dividends we pay to our overseas shareholders or ADS holders, or if you are required to pay PRC income tax on gains from the transfer of our shares or ADSs, the value of your investment in our shares or ADSs may be materially adversely affected.
Our ability to make distributions and other payments to our shareholders depends to a significant extent upon the distribution of earnings and other payments made by our subsidiaries in the PRC.
We conduct substantially all of our operations through our operating subsidiaries in China. Our ability to make distributions or other payments to our shareholders depends on payments from these operating subsidiaries in China, whose ability to make such payments is subject to PRC regulations. 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. According to the relevant PRC laws and regulations applicable to our operating subsidiaries in China and their respective articles of association, these subsidiaries are each required to set aside at least 10% of their after-tax profits based on PRC accounting standards each year as general reserves until the accumulative amount of these reserves reaches 50% of their registered capital. These reserves are not distributable as cash dividends. As of December 31, 2014, these general reserves amounted to RMB251.9 million (US$40.6 million), accounting for 2.4% of the total registered capital of all of our operating subsidiaries in China. In addition, under the CIT Law and its Implementation Rules, which became effective January 1, 2008, dividends from our operating subsidiaries in China to us are subject to withholding tax to the extent that we are considered a non-PRC tax resident enterprise under the CIT Law. See “—Our China-sourced income is subject to PRC withholding tax under the Corporate Income Tax Law of the PRC, and we may be subject to PRC corporate income tax at the rate of 25% when more detailed rules or precedents are promulgated.” Furthermore, if our operating subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.
Restrictions on currency exchange may limit our ability to receive and use our revenue effectively.
Certain portions of our revenue and expenses are denominated in Renminbi. If our revenue denominated in Renminbi increases or expenses denominated in Renminbi decrease in the future, we may need to convert a portion of our revenue into other currencies to meet our foreign currency obligations, including, among others, payment of dividends declared, if any, in respect of our ADSs. Under China’s existing foreign exchange regulations, foreign currency under current account transactions, such as dividend payments and trade-related transactions are generally convertible. Accordingly, our operating subsidiaries in China are able to pay dividends in foreign currencies without prior approval from the SAFE, by complying with certain procedural requirements. However, the PRC government could take further measures in the future to restrict access to foreign currencies for current account transactions. Foreign exchange transactions by our operating subsidiaries in China 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 one of our operating subsidiaries in China borrows foreign currency loans from us or other foreign lenders, these loans must be registered with the SAFE.
If we finance our subsidiaries in China by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the Ministry of Commerce, or MOFCOM or its local counterparts. On August 29, 2008, the SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of foreign currency into Renminbi by restricting how the converted Renminbi may be used. The notice requires that Renminbi converted from the foreign currency-denominated capital of a foreign-invested company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments in the PRC unless otherwise provided by laws and regulations. In addition, the SAFE strengthened its oversight of the flow and use of Renminbi funds converted from the foreign currency denominated capital of a foreign-invested company. The use of such Renminbi may not be changed without approval from the SAFE, and may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used for purposes within the company’s approved business scope. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Regulations. These regulations may sinnificantly limit our ability of our operating subsidiaries in China to obtain foreign exchange through debt or equity financing.
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On March 30, 2015, the SAFE issued the Circular on Reforming the Administration Approach Regarding the Foreign Exchange Capital Settlement of Foreign-invested Enterprises, or Circular 19, which will replace the Circular 142 when it becomes effective on June 1, 2015. Circular 19 provides that, among other things, the Renminbi capital converted from the foreign currency registered capital of a foreign-invested enterprise may be used for equity investments within the PRC. Since Circular 19 was recently issued, there are uncertainties in interpretation and implementation as to actual transactions.
The expiration or reduction of tax incentives by the PRC government may have a material adverse effect on our operating results.
The CIT Law imposes a uniform tax rate of 25% on all PRC enterprises, including foreign-invested enterprises, and eliminates or modifies most of the tax exemptions, reductions and preferential treatments available under the previous tax laws and regulations. Under the CIT Law, enterprises that were established before March 16, 2007 and already enjoyed preferential tax treatments have (i) in the case of preferential tax rates, continued to enjoy such tax rates that were gradually increased to the new tax rates within five years from January 1, 2008 or, (ii) in the case of preferential tax exemptions or reductions for a specified term, continued to enjoy the preferential tax holiday until the expiration of such term.
Zhejiang Jinko, Jiangxi Jinko and Jiangxi Materials were designated by the relevant local authorities as “High and New Technology Enterprises” under the CIT Law. Jiangxi Jinko and Jiangxi Materials were and would be subject to a preferential tax rate of 15% for their fiscal years ended December 31, 2014 and 2015 if the relevant conditions are met. Zhejiang Jinko was subject to a preferential tax rate of 15% for the fiscal year ended December 31, 2014. Applications for the preferential tax rate of Zhejiang Jinko for the fiscal years ending December 31, 2015 to 2017 are currently under review. We cannot assure you that Zhejiang Jinko, Jiangxi Jinko or Jiangxi Materials will continue to qualify as “High and New Technology Enterprises” when subject to reevaluation in the future. In addition, there are uncertainties on how the CIT Law and its Implementation Rules will be enforced, and whether its future implementation will be consistent with its current interpretation. If the corporate income tax rates of some of our PRC subsidiaries increase, our financial condition and results of operations would be materially adversely affected.
According to the Circular on Issues Concerning the Execution of the Catalog of Public Infrastructure Projects Entitled for Preferential Enterprise Income Tax Treatment issued by the SAT and the MOF on September 23, 2008 and the Circular on Issues Concerning the Implementation of the Key Public Infrastructure Projects Supported by the State and Entitled for Preferential Enterprise Income Tax Treatment issued by the SAT on April 16, 2009, some of our solar power projects are fully exempted from PRC corporate income tax for three years starting from the year in which revenue is first generated from the sale of electricity, and are 50% exempted from PRC corporate income tax for the subsequent three years. The expiration of these tax benefits may have a material adverse effect on our operation results.
According to the Interim Regulations on Value-added Tax as amended on November 10, 2008, and the Implementing Rules of the Interim Regulations on Value-added Tax as amended on October 28, 2011, gross proceeds from sales and importation of goods and provision of services are generally subject to a value-added tax, or VAT, of 17% with exceptions for certain categories of goods that are taxed at a rate of 13%.
On September 23, 2013, the SAT and the MOF issued the Circular on the Value-added Tax Policy for Solar Power Generation, according to which, from October 1, 2013 to December 31, 2015, solar power producers selling electricity are entitled to a 50% immediate refund of any VAT tax paid.
The State Council promulgated the Circular of the State Council on Cleaning up and Standardizing Preferential Policies on Tax and Other Aspects, or Circular 62, on November 27, 2014 in an effort to render the preferential policies on tax, non-tax income, fiscal expenditure, and other aspects of the local government consistent with the PRC central laws and regulations. According to the Circular 62, preferential policies violating PRC central laws and regulations shall be declared ineffective and repealed and preferential policies not violating PRC central laws and regulations shall be retained. In addition, all provincial governments and relevant authorities shall, prior to the end of March 2015, report the outcome of the special clean-up action in respect of preferential policies on tax and other aspects to the MOF, and the MOF shall then forward the outcome to the State Council for final determination. The repeal of any preferential policy on tax and other aspects may materially adversely affect our financial condition and business operations.
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We face uncertainty with respect to indirect transfers of equity interests in PRC tax resident enterprises by non-PRC holding companies.
Under the current PRC tax regulations, indirect transfers of equity interests and other properties of PRC tax resident enterprises by non-PRC holding companies may be subject to PRC tax. Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, issued by the SAT on December 10, 2009 with retroactive effect from January 1, 2008, where a non-PRC tax resident enterprise transfers the equity interests of a PRC tax resident enterprise indirectly by disposing of the equity interests of an overseas holding company (exclusive of trading the stocks of a PRC tax resident enterprise in a public capital market), gains derived from such indirect transfer may be subject to PRC withholding tax at a rate of up to 10%. On February 3, 2015, the SAT issued the Announcement of the State Administration of Taxation on Several Issues concerning the Enterprise Income Tax on the Indirect Transfers of Properties by Non-Resident Enterprises, or SAT Announcement 7, which expanded and further strengthened certain rules of SAT Circular 698.
According to SAT Announcement 7, where a non-resident enterprise indirectly transfers equity interests or other properties of PRC tax resident enterprises, or PRC Taxable Property to avoid its tax liabilities by implementing arrangements without reasonable commercial purpose, such indirect transfer shall be recharacterized and recognized as a direct transfer of PRC Taxable Property. As a result, gains derived from such indirect transfer and attributable to PRC Taxable Property may be subject to PRC withholding tax at a rate of up to 10%. In the case of an indirect transfer of property of establishments of a foreign enterprise in the PRC, the applicable tax rate would be 25%. SAT Announcement 7 imposes tax filing obligations of such indirect transfers on both parties to the transfer transaction, compared to merely the transferor as required by Circular 698, as well as the PRC tax resident entity being indirectly transferred. Furthermore, SAT Announcement 7 illustrates certain circumstances which would indicate a lack of reasonable commercial purpose. SAT Announcement 7 also sets forth certain “safe harbors” which would be deemed to have a reasonable commercial purpose. As a general principle, the SAT also issued the Administration of General Anti-Tax Avoidance (Trial Implementation), or GATA, which became effective on February 1, 2015 and empowers the PRC tax authorities to apply special tax adjustments for “tax avoidance arrangements”.
There is uncertainty as to the application of SAT Circular 698 as well as the newly issued SAT Announcement 7 and GATA. For example, it may be difficult to evaluate whether or not the transaction has a reasonable commercial purpose, and such evaluation may be based on ambiguous criteria which have not been formally declared or stated by tax authorities. As a result, any of our disposals or acquisitions of the equity interests of non-PRC entities which indirectly hold PRC Taxable Property or any offshore transaction related to PRC Taxable Property, including potential overseas restructuring, might be deemed an indirect transfer under PRC tax regulations. Therefore, we may be at risk of being taxed under SAT Circular 698 and SAT Announcement 7 and we may be required to expend valuable resources to comply with SAT Circular 698 and SAT Announcement 7 or to establish that we should not be taxed thereunder, which may materially adversely affect our financial condition and results of operations.
As a foreign company, our acquisitions of PRC companies may take longer and be subject to higher level of scrutiny by the PRC government, which may delay or prevent any intended acquisition.
Circular 10 established additional procedures and requirements including the requirements that in certain instances foreign investors obtain MOFCOM’s approval when they acquire equity or assets of a PRC domestic enterprise. In the future, we may want to grow our business in part by acquiring complementary businesses, although we do not have plans to do so at this time. Complying with Circular 10 to complete these transactions could be time-consuming and costly, and could result in an extensive review by the PRC government and its increased control over the terms of the transaction, and any required approval processes may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
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Our failure to make payments of statutory social welfare and housing funds to our employees could adversely and materially affect our financial condition and results of operations.
According to the relevant PRC laws and regulations, we are required to pay certain statutory social security benefits, including medical care, injury insurance, unemployment insurance, maternity insurance and pension benefits, and housing funds, for our employees. Our failure to comply with these requirements may subject us to monetary penalties imposed by the relevant PRC authorities and proceedings initiated by our employees, which could materially adversely affect our business, financial condition and results of operations.
In line with local customary practices, we have made contributions to the social insurance funds which met the requirement of the local minimum wage standard, instead of the employees’ actual salaries as required, and have not made full contribution to the housing funds. We estimate the aggregate amount of unpaid social security benefits and housing funds to be RMB154.8 million, RMB175.1 million and RMB210.3 million (US$33.9 million), respectively, as of December 31, 2012, 2013 and 2014. We may be required by the relevant PRC authorities to pay these statutory social security benefits and housing funds within a designated time period. In addition, an employee is entitled to seek compensation by resorting to labor arbitration at the labor arbitration center or filing a labor complaint with the labor administration bureau within a designated time period. We have made provisions for such unpaid social security benefits and housing funds of our former and current PRC subsidiaries. All employee participants in our share incentive plans who are domestic individual participants may be required to register with SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt additional option plans for our directors and employees under PRC law.
All employees participating in our share incentive plans who are domestic individual participants may be required to register with SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt additional option plans for our directors and employees under PRC law.
On February 15, 2012, SAFE released the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Individuals’ Participating in Equity Incentive Plans of Overseas Listed Companies, or the Stock Option Notice, which superseded the Operating Procedures of Foreign Exchange Administration for PRC Individuals Participation in Employee Stock Holding Plans or Stock Option Plans of an Overseas-Listed Company, issued by SAFE in 2007. According to the Stock Option Notice, PRC individual participants include directors, supervisors, senior management personnel and other employees who are PRC citizens (which includes citizens of Hong Kong, Macau and Taiwan) or foreign individuals who reside in the PRC for 12 months consecutively. Under the Stock Option Notice, PRC and foreign citizens who receive equity grants from an overseas listed company are required, through a PRC agent or PRC subsidiary of such listed company, to register with SAFE and complete certain other bank and reporting procedures. In addition, according to the Stock Option Notice, domestic individual participants must complete the registration with SAFE or its local branch within three days rather than 10 days from the beginning of each quarter.
Failure to comply with such provisions may subject us and the participants of our share incentive plans who are domestic individual participants to fines and legal sanctions and prevent us from further granting options under our share incentive plans to our employees, and we may become subject to more stringent review and approval processes with respect to our foreign-exchange activities, such as in regards to our PRC subsidiaries’ dividend payment to us or in regards to borrowing foreign currency, which could adversely affect our business operations.
It may be difficult to effect service of process on, or to enforce any judgments obtained outside the PRC against, us, our directors, or our senior management members who live inside the PRC.
Substantially all of our existing directors and senior management members reside in the PRC and substantially all of our assets and the assets of such person are located in the PRC. Accordingly, it may be difficult for investors to effect service of process on any of these persons or to enforce judgments obtained outside of the PRC against us or any of these persons. The PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments awarded by courts in many developed countries, including the Cayman Islands, the United States and the United Kingdom. Therefore, the recognition and enforcement in the PRC of judgments of a court in any of these jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or even impossible.
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Higher labor costs and inflation in China may adversely affect our business and our profitability.
Labor costs in China have risen in recent years as a result of the enactment of new labor laws and social development. In addition, inflation in China has increased. According to the National Bureau of Statistics of China, consumer price inflation in China was 2.6%, 2.6% and 2.1% in 2012, 2013 and 2014, respectively. Because we purchase raw materials from suppliers in China, higher labor cost and inflation in China increases the costs of labor and raw materials we must purchase for manufacturing. China’s inflation rates are expected to rise further in 2015. As we expect our production staff to increase and our manufacturing operations to become more labor intensive when we commence silicon wafer and solar module production, rising labor costs may increase our operating costs and therefore negatively impact our profitability.
Under current policies, solar power projects approved by or filed with the NDRC or its local branches are entitled to the FIT at an attractive fixed price or receive fixed national subsidies for 20 years in principle, but such FIT is not adjusted for inflation without the approval from the NDRC, nor do we hedge for inflation. As a result, our solar power projects are subject to the risks of inflation. Because we source contractors and purchase raw materials in China, higher labor cost and inflation in China increases the costs of labor and raw materials we procure for construction. In addition, our suppliers may also be affected by higher labor costs and inflation. Rising labor costs may increase our operating costs and partially erode the cost advantage of our China-based operations and therefore negatively impact our profitability.
We face risks related to health epidemics and other outbreaks.
Our business could be adversely affected by the effects of influenza A, or H1N1, avian flu, severe acute respiratory syndrome, or SARS, or other epidemic outbreak. In April 2009, an outbreak of influenza A caused by the H1N1 virus occurred in Mexico and the United States, and spread into a number of countries rapidly. There have also been reports of outbreaks of a highly pathogenic avian flu, caused by the H1N1 virus, in certain regions of Asia and Europe. In past few years, there were reports on the occurrences of avian flu in various parts of China, including a few confirmed human cases. In April 2013, there were reports of cases of H7N9 avian flu in southeast China, including deaths in Shanghai and Zhejiang Province. An outbreak of avian flu in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, particularly in Asia. Additionally, any recurrence of SARS, a highly contagious form of atypical pneumonia, similar to the occurrence in 2003 which affected China, Hong Kong, Taiwan, Singapore, Vietnam and certain other countries, would also have similar adverse effects. These outbreaks of contagious diseases and other adverse public health developments in China would have a material adverse effect on our business operations. These could include our ability to travel or ship our products outside 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 financial condition and 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.
Risks Related to Our ADSs
The market price for our ADSs has been volatile, which could result in substantial losses to investors.
The market price for our ADSs has been and may continue to be highly volatile and subject to wide fluctuations, which could result in substantial losses to investors. The closing prices of our ADSs ranged from US$17.74 to US$36.85 per ADS in 2014. The price of our ADSs may continue to fluctuate in response to factors including the following:
· | announcements of new products by us or our competitors; |
· | technological breakthroughs in the solar and other renewable power industries; |
· | reduction or elimination of government subsidies and economic incentives for the solar industry; |
· | news regarding any gain or loss of customers by us; |
· | news regarding recruitment or loss of key personnel by us or our competitors; |
· | announcements of competitive developments, acquisitions or strategic alliances in our industry; |
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· | changes in the general condition of the global economy and credit markets; |
· | general market conditions or other developments affecting us or our industry; |
· | the operating and stock price performance of other companies, other industries and other events or factors beyond our control; |
· | regulatory developments in our target markets affecting us, our customers or our competitors; |
· | announcements regarding patent litigation or the issuance of patents to us or our competitors; |
· | announcements of studies and reports relating to the conversion efficiencies of our products or those of our competitors; |
· | actual or anticipated fluctuations in our quarterly results of operations; |
· | changes in financial projections or estimates about our financial or operational performance by securities research analysts; |
· | changes in the economic performance or market valuations of other solar power technology companies; |
· | release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs; |
· | sales or perceived sales of additional ordinary shares or ADSs; and |
· | commencement of, or our involvement in, litigation. |
Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.
We cannot give any assurance that these factors
will not occur in the future again. In addition, the securities market has 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 the past, following periods of volatility in the market price
of their stock, many companies have been the subject of securities class action litigation. See
“—We are exposed to various risks related to legal or administrative proceedings or claims that could adversely affect
our financial condition, results of operations and reputation, and may cause loss of business.” If we become involved in
similar securities class action litigation in the future, it could result in substantial costs and diversion of our management’s
attention and resources and could harm our stock price, business, prospects, financial condition and results of operations.
You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.
Under Cayman Islands law, we may only pay dividends out of our profits or our share premium account subject to our ability to service our debts as they fall due in the ordinary course of our business. Our ability to pay dividends will therefore depend on our ability to generate sufficient profits. We cannot give any assurance that we will declare dividends of any amounts, at any rate or at all in the future. We have not paid any dividends in the past. Future dividends, if any, will be paid at the discretion of our board of directors and will depend upon our future operations and earnings, capital expenditure requirements, general financial conditions, legal and contractual restrictions and other factors that our board of directors may deem relevant. Our shareholders may, by ordinary resolution, declare a dividend, but no dividend may exceed the amount recommended by our board of directors. See “—Risks Related to Doing Business in China—We rely principally on dividends and other distributions on equity paid by our principal operating subsidiaries, Jiangxi Jinko and Zhejiang Jinko, and limitations on their ability to pay dividends to us could have a material adverse effect on our business and results of operations” above for additional legal restrictions on the ability of our PRC subsidiaries to pay dividends to us.
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The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible for making such distribution if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing such distributions. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.
Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise those rights.
As a holder of ADSs, you will not be treated as one of our shareholders and you will not have shareholder rights. Instead, the depositary will be treated as the holder of the shares underlying your ADSs. However, you may exercise some of the shareholders’ rights through the depositary, and you will have the right to withdraw the shares underlying your ADSs from the deposit facility.
Holders of ADSs may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under our current articles of association, the minimum notice period required to convene a general meeting is ten days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw the ordinary shares underlying your ADSs to allow you to cast your vote with respect to any specific matter. 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 plan to 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 ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if the shares underlying your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholder meeting.
You may be subject to limitations on transfers of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or government body, or under any provision of the deposit agreement, or for any other reason.
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 shareholder rights than you would under U.S. law.
Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, Companies Law (2013 Revision) of the Cayman Islands 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 duties 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 duties 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 have 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.
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In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before federal courts of the United States.
As we are a Cayman Islands company and substantially all of our consolidated assets are located outside of the United States and substantially all of our current operations are conducted in China, there is uncertainty as to whether the courts of the Cayman Islands or China would recognize or enforce judgments of U.S. courts predicated upon the civil liability provisions of the securities laws of the United States or any state against us and our officers and directors, most of whom are not residents of the United States and the substantial majority of whose assets are located outside the United States. In addition, it is uncertain whether the Cayman Islands or PRC courts would entertain original actions brought in the Cayman Islands or in China against us or our officers and directors predicated on the federal securities laws of the United States. There is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty, and (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. Because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands.
As a result of all of the above, shareholders of a Cayman Islands company 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 company incorporated in a jurisdiction in the United States. For example, contrary to the general practice in most corporations incorporated in the United States, Cayman Islands incorporated companies may not generally require that shareholders approve sales of all or substantially all of a company’s assets. The limitations described above will also apply to the depositary who is treated as the holder of the shares underlying your ADSs.
Our current articles of association contain anti-takeover provisions that could prevent a change in control even if such takeover is beneficial to our shareholders.
Our current articles of association contain provisions that could delay, defer or prevent a change in control of our company that could be beneficial to our shareholders. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that investors are willing to pay in the future for our ADSs. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a price above the then current market price of our ADSs. These provisions provide that our board of directors has authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADSs or otherwise. Our board of directors may decide to issue such preferred shares quickly with terms calculated to delay or prevent a change in control of our company or make the removal of our management more difficult. If our board of directors decides to issue such preferred shares, the price of our ADSs may fall and the voting and other rights of holders of our ordinary shares and ADSs may be materially adversely affected.
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As a company incorporated in the Cayman Islands, we may adopt certain home country practices in relation to corporate governance matters. These practices may afford less protection to shareholders than they would enjoy if we complied fully with the NYSE corporate governance listing standards.
As a non-U.S. company with ADSs listed on the NYSE, we are subject to the NYSE corporate governance listing standards. However, in reliance on Section 303A.11 of the NYSE Listed Company Manual, which permits a foreign private issuer to follow the corporate governance practices of its home country, we have adopted certain corporate governance practices that may differ significantly from the NYSE corporate governance listing standards. For example, we may include non-independent directors as members of our compensation committee and nominating and corporate governance committee, and our independent directors are not required to hold regularly scheduled meetings at which only independent directors are present. Such home country practice differs from the NYSE corporate governance listing standards, because there are no specific provisions under the Companies Law (2013 Revision) of the Cayman Islands imposing such requirements. Accordingly, executive directors, who may also be our major shareholders or representatives of our major shareholders, may have greater power to make or influence major decisions than they would if we complied with all the NYSE corporate governance listing standards. While we may adopt certain practices that are in compliance with the laws of the Cayman Islands, such practices may differ from more stringent requirements imposed by the NYSE rules and as such, our shareholders may be afforded less protection under Cayman Islands law than they would under the NYSE rules applicable to U.S. domestic issuers. See “Item 16G. Corporate Governance.”
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 composition of our assets and income, we believe that we were not a passive foreign investment company, or a PFIC, for U.S. federal income tax purposes with respect to our 2014 taxable year and we do not currently intend or anticipate becoming a PFIC for 2015 or any future taxable year. However, we must make a separate determination each taxable year as to whether we are a PFIC (after the close of each taxable year). Accordingly, we cannot assure you that we will not be a PFIC for our next taxable year ending December 31, 2015 or any future taxable year. A non-U.S. corporation will be considered a PFIC for any taxable year if either (1) at least 75% of its gross income 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 the taxable year) is attributable to assets that produce or are held for the production of passive income. The value of our assets for purposes of the PFIC asset test will generally be determined based on the market price of our ADSs and ordinary shares, which may fluctuate from time to time. If we are treated as a PFIC for any taxable year during which a U.S. Holder (as defined in “Item 10. Additional Information—E. Taxation—U.S. Federal Income Taxation—Passive Foreign Investment Company”) holds an ADS or a share, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. See “Item 10. Additional Information—E. Taxation—U.S. Federal Income Taxation—Passive Foreign Investment Company.”
We may issue additional ordinary shares, other equity or equity-linked or debt securities, which may materially adversely affect the price of our ordinary shares or ADSs. Hedging activities may depress the trading price of our ordinary shares.
We may issue additional equity, equity-linked or debt securities for a number of reasons, including to finance our operations and business strategy (including in connection with acquisitions, strategic collaborations or other transactions), to satisfy our obligations for the repayment of existing indebtedness, to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons. Any future issuances of equity securities or equity-linked securities could substantially dilute your interests and may materially adversely affect the price of our ordinary shares or ADSs. We cannot predict the timing or size of any future issuances or sales of equity, equity-linked or debt securities, or the effect, if any, that such issuances or sales may have on the market price of our ordinary shares or ADSs. Market conditions could require us to accept less favorable terms for the issuance of our securities in the future.
Substantial future sales of our ordinary shares or ADSs in the public market, or the perception that such sales could occur, could cause the price of our ordinary shares or ADSs to decline.
Sales of our ordinary shares or ADSs in the public market, or the perception that such sales could occur, could cause the market price of our ordinary shares to decline. As of December 31, 2014, we had 124,292,030 ordinary shares outstanding, excluding 488,055 ADSs representing 1,952,220 ordinary shares reserved for future grants under our long-term incentive plan and 1,723,200 ordinary shares as treasury stock. The number of ordinary shares outstanding and available for sale will increase when our employees and former employees who are holders of restricted share units and options to acquire our ordinary shares become entitled to the underlying shares under the terms of their units or options. To the extent these shares are sold into the market, or are converted to ADSs which are sold into the market place, the market price of our ordinary shares or ADSs could decline.
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Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make these rights available 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. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause 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.
ITEM 4. | INFORMATION ON THE COMPANY |
A. | History and Development of the Company |
Our legal and commercial name is JinkoSolar Holding Co., Ltd. Our principal executive office is located at 1 Jingke Road, Shangrao Economic Development Zone, Jiangxi Province, 334100, People’s Republic of China. Our telephone number at this address is (86-793) 846-9699 and our fax number is (86-793) 846-1152. Our registered office in the Cayman Islands is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands.
We commenced our operations in June 2006 through our then consolidated subsidiary Jiangxi Desun Energy Co., Ltd. We were incorporated as a limited liability company in the Cayman Islands on August 3, 2007. Following a series of equity transactions, we established a holding company structure with us being the ultimate holding company in 2009. We conduct our business principally through our wholly-owned operating subsidiaries in China, Jiangxi Jinko and Zhejiang Jinko. We have also established subsidiaries and offices in a number of strategic markets, including the United States, the United Kingdom, Chile, South Africa, Japan, Holland, India, Australia and France.
On May 19, 2010, we completed our initial public offering, in which we offered and sold 5,835,000 ADSs representing 23,340,000 ordinary shares, raising US$64.2 million in proceeds before expenses to us. Our ADSs are listed on the New York Stock Exchange under the symbol “JKS”.
On November 10, 2010, we completed a follow-on public offering of 3,500,000 ADSs representing 14,000,000 ordinary shares, of which 2,000,000 ADSs were sold by us and 1,500,000 ADSs were sold by the selling shareholders.
On May 17, 2011, we completed an offering of US$125 million of 4.0% convertible senior notes due 2016. On September 25, 2013, we completed a follow-on public offering of 4,370,000 ADSs representing 17,480,000 ordinary shares, including 570,000 ADSs sold pursuant to the underwriters’ full exercise of their option to purchase additional ADSs.
On January 22, 2014, we completed a follow-on public offering of 3,750,000 ADSs representing 15,000,000 ordinary shares and a concurrent offering of US$150.0 million in aggregate amount of 4.0% convertible senior notes due 2019.
In July 2014, China Development Bank, the Macquarie Greater China Infrastructure Fund and New Horizon Capital agreed to invest a total of US$225.0 million in JinkoSolar Power, our majority-owned subsidiary conducting our solar power generation business. The three investors together held approximately 45% of JinkoSolar Power’s equity after their investment.
In August 2014, we opened a solar module factory with annual production capacity of 120 MW in Cape Town, South Africa.
B. | Business Overview |
We are a global leader in the PV industry based in Jiangxi and Zhejiang Provinces in China. We have built a vertically integrated solar power product value chain, from recovering silicon materials to manufacturing solar modules and solar power generation. We sell most of our solar modules under our own “JinkoSolar” brand, with a small portion of solar modules on an OEM basis. We also sell silicon wafers and solar cells not used in our solar module production. Leveraging our expertise in manufacturing high quality solar modules and our experience in the PV industry, we also develop, own and operate PV projects in China. As of December 31, 2014, our share of completed solar power projects amounted to 503 MW.
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We sell our products in major export markets and China. We have established subsidiaries in a number of strategic markets, including the United States, the United Kingdom, Chile, South Africa, Japan, Holland, India, Australia and France, to conduct sales, marketing and brand development for our products in Europe and around the world. We also opened offices in and began to ship our products to Japan and South Africa in 2013. As of December 31, 2014, we had an aggregate of more than 710 customers for our solar modules globally, including distributors, project developers and system integrators.
Our solar modules utilize advanced solar technologies. All of our solar modules sold in Europe are CE, TÜV, and MCS certified, all of our solar modules sold in Japan are JET certified, all of our solar modules sold in North America are UL certified and our monocrystalline solar modules sold in China are CQC certified. In 2013, our solar modules passed TÜV Nord’s Dust & Sand Certification Test, demonstrating their suitability for installation in desert regions. We also unveiled our “Eagle II” solar modules, which represent a new standard for performance and reliability. The “Eagle II” solar modules can reach peak power output of approximately 260 to 270 watts for a 60-cell module. We have also begun research on our “Eagle+” solar modules, which will be composed of multicrystalline cells that reached conversion efficiencies of approximately 18.5% in lab tests by a third party.
We leverage our vertically integrated platform and cost-efficient manufacturing capabilities in China to produce high quality products and develop projects at competitive costs. Our solar cell and silicon wafer operations support our solar module production, which further supports our solar power generation business, reducing our overall procurement costs. As of December 31, 2014, we had annual capacity of approximately 2.5 GW each for silicon ingots and wafers, 2.0 GW for solar cells and 3.2 GW for solar modules. Our manufacturing facilities are located in Shangrao, Jiangxi Province and Haining, Zhejiang Province, providing convenient and timely access to key resources and suppliers.
We believe that we have one of the largest and fastest growing operating portfolios in China and as of December 31, 2014, our share of completed solar power projects amounted to 503 MW. In 2011, we began developing projects, as one of the first movers in downstream solar development in China. All solar power projects approved by the NDRC are eligible to receive an attractive fixed FIT for a specified quantity of electricity for 20 years. Our ground-mounted projects receive a fixed FIT of RMB0.90 to RMB1.15 per kWh. Our rooftop DG projects that sell electricity to both the State Grid and directly to consumers generate revenue from electricity sales based on a national subsidy of RMB0.42 per kWh plus the local desulphurized coal benchmark electricity price for the electricity sold to the State Grid or a negotiated electricity purchase price for electricity sold directly to consumers. Some of our projects also receive additional local subsidies ranging from RMB0.05 to RMB0.45 per kWh. We also have a dedicated operations and maintenance team and enjoy low operating and maintenance costs for our solar power projects.
As one of the earliest solar developers in China, we have strong strategic relationships with financial institutions, such as China Development Bank, a PRC policy bank that funds large infrastructure projects, as well as China Minsheng Bank. In January 2014, we entered into a project loan agreement with Zhejiang Branch of China Development Bank which will provide us with RMB400.0 million (US$64.5 million) in loans to develop our three solar power projects located in Xinjiang Uygur Autonomous Region and Qinghai Province. In April 2014, we entered into a loan agreement for RMB235.0 million (US$37.9 million) with China Development Bank to finance two of our solar power projects, one in Xinjiang Province and another one in Gansu Province. In July 2014, we entered into a five-year RMB1 billion strategic financing agreement with China Minsheng Bank.
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Our Products, Services and Projects
Our product mix has evolved rapidly since our inception, as we have incorporated more of the solar power value chain through the expansion of our production capabilities and acquisitions. We currently manufacture a series of products from recovered silicon materials to solar modules. Our principal product is solar modules, but we also sell silicon wafers and solar cells from time to time to meet our customers’ demand. In 2014, sales of solar modules, silicon wafers and solar cells represented 91.8%, 2.9% and 2.0%, respectively, of our total revenues. In addition, we also sell small volumes of silicon ingots and recovered silicon materials and provide processing services for fees at the request of customers from time to time to optimize the utilization of our production capacity.
Leveraging our expertise in manufacturing high quality solar modules and substantial experience in the solar industry, we commenced developing solar power projects and providing solar system integration services in late 2011. As of December 31, 2014, our share of completed solar power projects amounted to 503 MW.
The following table sets forth details of our revenues for the periods indicated:
2012 | 2013 | 2014 | ||||||||||||||||||||||||||
Volume | Revenue | Volume | Revenue | Volume | Revenue | |||||||||||||||||||||||
(MW, except recovered silicon materials) | (RMB in thousands) | (MW, except recovered silicon materials) | (RMB in thousands) | (MW, except recovered silicon materials) | (RMB in thousands) | (US$ in thousands) | ||||||||||||||||||||||
Products | ||||||||||||||||||||||||||||
Recovered silicon materials (metric tons) | — | 270.4 | 5.0 | 14,559.7 | 3.9 | 11,272.6 | 1,816.8 | |||||||||||||||||||||
Silicon ingots | 1.1 | 1,885.6 | 0.3 | 1,189.7 | - | - | - | |||||||||||||||||||||
Silicon wafers | 197.4 | 328,428.6 | 54.8 | 70,637.0 | 229.6 | 286,585.0 | 46,189.1 | |||||||||||||||||||||
Solar cells | 78.5 | 138,686.4 | 113.2 | 184,203.1 | 134.2 | 200,643.6 | 32,337.9 | |||||||||||||||||||||
Solar modules | 912.4 | 3,897,288.0 | 1,765.1 | 6,660,317.5 | 2,423.1 | 9,155,396.0 | 1,475,582.0 | |||||||||||||||||||||
Services | ||||||||||||||||||||||||||||
Solar system EPC | — | 213,174.4 | — | 201.1 | — | 11,209.6 | 1,806.7 | |||||||||||||||||||||
Processing services | — | 213,427.9 | — | 71,010.7 | — | 69,581.4 | 11,214.5 | |||||||||||||||||||||
Revenue from generated electricity | — | 1,607.1 | — | 76,719.7 | — | 243,840.3 | 39,299.9 | |||||||||||||||||||||
Total Revenue | 4,794,768.4 | 7,078,838.5 | 9,978,528.6 | 1,608,246.9 |
Solar Modules
We commenced producing solar modules in August 2009. In 2014, we sold 2,423.1 MW of solar modules and generated RMB9.2 billion (US$1.5 billion) of revenue from sales of solar modules. We expect that sales of solar modules will continue to be our largest revenue source in the future. In 2014, we generated 56.3% of our total revenue from overseas markets, and the United States, the United Kingdom and Chile, our three largest export markets, represented 17.7%, 12.7% and 5.8% of our total revenue, respectively. As the domestic market in China grows, we expect to sell increasing volumes of solar modules in the domestic market in China.
In 2012, we launched our WING series solar modules further improved designs, including superior stress analysis results as compared with our previous products. The WING series solar modules are only 30 to 40 millimeters thick and weigh 0.5 kilogram, which makes them suitable for both ground mount systems and rooftop applications. All modules of the WING series received IEC 2400Pa Mechanical Load Test Certificate and passed 5400Pa Mechanical Load Test in our UL WTDP lab.
In 2013, we unveiled our “Eagle” and “Eagle II” solar modules, which represent new standards for performance and reliability. The “Eagle” solar modules are the world’s first potential induced degradation (“PID”) free modules to be certified under weather conditions of 85 degrees Celsius and 85% relative humidity. They can reach 260 watts peak power output and resist PID under inclement weather conditions. The “Eagle II” solar modules can reach peak power output of approximately 260 to 270 watts for a 60-cell module.
In 2014, the “Eagle II” could reach power output of approximately 305 to 320 watts for a 60-cell module.
Solar Cells
We commenced production of solar cells in July 2009 following our acquisition of Zhejiang Jinko. The efficiency of a solar cell converting sunlight into electricity is represented by the ratio of electrical energy produced by the solar cell to the energy from sunlight that reaches the solar cell. The conversion efficiency of solar cells is determined to a large extent by the quality of silicon wafers used to produce the solar cells. All of our monocrystalline solar cells have dimensions of 125 mm x 125 mm and 156 mm x 156 mm. All of our multicrystalline solar cells have dimensions of 156 mm x 156 mm. As of December 31, 2014, our solar cells using monocrystalline silicon wafers had an average conversion efficiency rate of 19.6% and our solar cells using multicrystalline silicon wafers had an average conversion efficiency rate of 18.2%.
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Silicon Ingots and Silicon Wafers
We commenced production of monocrystalline silicon ingots in August 2007, monocrystalline silicon wafers in March 2008, multicrystalline silicon ingots in June 2008 and multicrystalline silicon wafers in July 2008.
Recovered Silicon Materials
We commenced processing of recoverable silicon materials into recovered silicon materials in June 2006. We are able to process and recover a broad range of recoverable silicon materials, which enables us to reduce our overall silicon material costs and improve product quality and yield.
Solar Power Generation and Solar System EPC Services
We commenced developing solar power projects in China in 2011. We generate revenue from sales of electricity generated by our own solar power projects when they are connected to the grid. We also generate revenue from solar system EPC services and solar power project integration services based on the completion percentage of each solar power project that we construct.
Prior to obtaining permits and beginning construction, we typically enter into investment agreements with local government bodies. The investment agreements will outline the preliminary terms for our solar power projects, including the power generation capacity and any deadlines for project development. We believe that signing an investment agreement is a significant project development milestone for successful project development, as local government bodies may have a quota of projects allocated by the provincial governments that they can sign each year. After signing an investment agreement, we will conduct further due diligence. We strive to reduce risks by conducting a thorough feasibility study and identifying potential issues. Pursuant to the investment agreement, we establish a project company to obtain project permits and enter into other definitive agreements with more finalized terms. During the project development phase, we maintain regular contact and may establish a coordination committee with the local government body. We may also provide feasibility reports and other project data to the local government body.
In order to construct a solar power project, connect it to the power grid and operate it, we generally need to obtain four major types of licenses: (i) the approval of the NDRC or its local branches (prior to August 19, 2013) or filing with the provincial or regional NDRC to begin construction, (ii) land use right permits and construction permits; (iii) the grid connection approval from the provincial grid company and (iv) the operation license from the NEA (or formerly SERC prior to its inclusion under NEA) and its local branches for operating and maintaining solar power projects.
We have dedicated engineering and procurement teams that work closely with China’s leading engineering firms to cost-effectively optimize the design and quality of our solar power projects. We enter into contracts covering engineering and construction with third-party contractors and monitor such contractors diligently throughout the process. We procure solar modules and other components ourselves and through third-party contractors and suppliers.
As of December 31, 2014, our share of completed solar power projects amounted to 503 MW. The following table shows the details of the projects we completed and in operation as of December 31, 2014.
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Region | Project Name | Installation Type | Attributable Capacity (MW) | Grid Connection Date | FIT and Local Subsidies | |||||
Haixi Mongol and Tibetan Autonomous Prefecture, Qinghai Province | Delingha Phase I | Utility-scale | 9(1) | December 2011 | 1.15 | |||||
Haixi Mongol and Tibetan Autonomous Prefecture, Qinghai Province | Delingha Phase II | Utility-scale | 18(1) | January 2013 | 1.00 | |||||
Neijiang Prefecture, Gansu Province | Longchang | Utility-scale | 20 | February 2013 | 1.00 | |||||
Jinchang Prefecture, Gansu Province | Jinchang | Utility-scale | 56(2) | August 2013 | 1.00 | |||||
Hainan Tibetan Autonomous Prefecture, Qinghai Province | Gonghe | Utility-scale | 10 | September 2013 | 1.00 | |||||
Xinjiang Uyghur Autonomous Region | Shaya Phase 1 | Utility-scale | 20 | October 2013 | 1.00 | |||||
Xinjiang Uyghur Autonomous Region | Shaya Phase 2 | Utility-scale | 20 | December 2013 | 1.00 | |||||
Xinjiang Uyghur Autonomous Region | Ala’er | Utility-scale | 20 | December 2013 | 1.00 | |||||
Tacheng Prefecture, Xinjiang Uyghur Autonomous Region | Wusu | Utility-scale | 20 | December 2013 | 1.00 | |||||
Xinjiang Uyghur Autonomous Region | Bohu | Utility-scale | 20 | December 2013 | 1.00 | |||||
Lianyungang Prefecture, Jiangsu Province | Erlongshan | Utility-scale | 15 | May 2014 | 1.10 | |||||
Jiangsu Province | Songshan | Utility-scale | 24 | June 2014 | 1.125 | |||||
Yancheng Prefecture, Jiangsu Province | Xiangshui | Utility-scale | 100 | September 2014 | 1.00 | |||||
Alxa Prefecture, Inner Mongolia Autonomous Region | Alxa Left Banner | Utility-scale | 35(3) | December 2014 | 0.90 | |||||
Bayannur Prefecture, Inner Mongolia Autonomous Region | Dengkou | Utility-scale | 43(3) | December 2014 | 0.90 | |||||
Baotou City, Inner Mongolia Autonomous Region | Tumed Right Banner | Utility-scale | 52(3) | December 2014 | 0.90 | |||||
Jiaxing Prefecture, Zhejiang Province | SHJT Science Park | Rooftop DG | 0.6 | May 2014 | 1.08 (three years)(4) | |||||
Jiaxing Prefecture, Zhejiang Province | Gaosheng New Materials | Rooftop DG | 0.8 | May 2014 | 1.08 (three years)(4) | |||||
Jiaxing Prefecture, Zhejiang Province | Senbao | Rooftop DG | 0.8 | September 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Maoshan Clothing | Rooftop DG | 0.6 | September 2014 | 1.08 (three years)(4) | |||||
Jiaxing Prefecture, Zhejiang Province | Jehonn Cleaning Products | Rooftop DG | 0.3 | September 2014 | 1.08 (three years)(4) | |||||
Jiaxing Prefecture, Zhejiang Province | Huaer Insulation | Rooftop DG | 0.4 | September 2014 | 1.08 (three years)(4) | |||||
Jiaxing Prefecture, Zhejiang Province | Hongri Plastics | Rooftop DG | 0.4 | September 2014 | 1.08 (three years)(4) | |||||
Jiaxing Prefecture, Zhejiang Province | Shengda Packaging | Rooftop DG | 0.3 | September 2014 | 1.08 (three years)(4) | |||||
Jiaxing Prefecture, Zhejiang Province | Vanguard Industrial | Rooftop DG | 2 | October 2014 | 1.08 (three years)(4) | |||||
Jiaxing Prefecture, Zhejiang Province | Rejoy Battery | Rooftop DG | 0.6 | December 2014 | 1.08 (three years)(4) | |||||
Jiaxing Prefecture, Zhejiang Province | Yancang Shengda | Rooftop DG | 1 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Nanda EP Technology | Rooftop DG | 3 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Dejun Textile | Rooftop DG | 2 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Chengfeng Lamp | Rooftop DG | 1 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | SCTC | Rooftop DG | 0.7 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Xianfeng Aluminum Plastic | Rooftop DG | 0.3 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Wangbaolong | Rooftop DG | 0.4 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Jinshida Industrial | Rooftop DG | 0.3 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Dongyan Yinran | Rooftop DG | 0.5 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Haixing Packing | Rooftop DG | 0.4 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Maer Mini Electric Motor | Rooftop DG | 0.4 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Xinyuan Technology | Rooftop DG | 0.6 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Yuchang Urethane Elastic | Rooftop DG | 0.4 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Longfei Collector Tube | Rooftop DG | 0.3 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Gaomei Industrial | Rooftop DG | 0.4 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | New Lights | Rooftop DG | 0.4 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Longfei Trading | Rooftop DG | 0.4 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Jinshi Clothing | Rooftop DG | 0.4 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Xueyongxing Water Products | Rooftop DG | 0.7 | December 2014 | 1.33 (five years)(5) | |||||
Jiaxing Prefecture, Zhejiang Province | Chuangneng Machinery | Rooftop DG | 0.4 | December 2014 | 1.08 (three years)(6) |
(1) | Our attributable capacity is calculated by multiplying the total capacity of the project by our percentage equity holding of 88.7%. |
(2) | Our attributable capacity is calculated by multiplying the total capacity of the project by our percentage equity holding of 28.0%. |
(3) | Our attributable capacity is calculated by multiplying the total capacity of the project by our percentage equity holding of 86.7%. |
(4) | A subsidy of RMB0.10 per kWh from the Jiaxing Prefecture Government is applicable to projects constructed between 2013 and 2015 in Xiuzhou District, Jiaxing Prefecture, Zhejiang Province. The subsidy amount will be RMB0.52 per kWh when the RMB0.10 per kWh subsidy from the Jiaxing Prefecture Government expires three years after grid connection. |
(5) | The subsidy amount will be RMB0.52 per kWh after five years when the RMB0.35 per kWh subsidy from the Haining Prefecture Government expires, which is five years after grid connection and may be extended further. |
(6) | A subsidy of RMB0.10 per kWh from the Jiaxing Prefecture Government is applicable to projects constructed between 2013 and 2015 in Nanhu District, Jiaxing Prefecture, Zhejiang Province. The subsidy amount will be RMB0.52 per kWh after the subsidy from the Jiaxing Prefecture Government expires three years after grid connection. |
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Electricity Generation and Sale
Upon completion of construction, the solar power projects must be tested and documented to show that they operate normally, meet specified safety requirements and power grid requirements, have specific measures for recording energy production, meet the licensing requirements for operation and comply with local and national standards and regulations. After demonstrating that our projects meet these standards, we enter into a grid connection and dispatch agreement with the local grid company to connect our solar power project to the power grid. We also enter into a PPA for each completed project, pursuant to which we sell electricity to the local grid company. In 2014, we sold over 99.6% of the electricity we generated to the State Grid, who is a large state-owned enterprise and reliable purchaser for our electricity. The remainder is sold directly to consumers.
Under the existing PRC central government directive, solar power projects enjoy the current FIT arrangement for a period of 20 years. Grid companies are mandated to purchase all solar electricity produced within the coverage of their grids. In order to implement the directive, the State Grid enters into grid connection and dispatch agreements and PPAs with us. The grid connection and dispatch agreements generally have tenures of one to five years, some of which are automatically renewed unless otherwise notified, whereas PPAs generally have tenures of one to six years. Both the grid connection and dispatch agreements and the PPAs have all been renewed on similar commercial terms upon expiration, consistent with the NDRC policy.
The benchmark FIT rates our projects are entitled to for electricity we generate and sell to the local grid companies consist of two components:
· | respective local rates paid for electricity generated from desulfurized coal plants (ranging from RMB0.25 per kWh to RMB0.49 per kWh in 2014) paid directly from the power grid on a monthly basis; and |
· | a subsidy component funded by subsidies from the Renewable Energy Development Fund, which is funded by electricity consumers and collected by the local grid companies. |
When solar power projects connect to the power grid, they immediately generate cash flow by selling electricity to the power grid based on the desulfurized coal benchmark electricity price. At the same time, the subsidy component of the FIT begins to accrue. After the project connects to the power grid and solar power projects complete certain administrative procedures, the NDRC confirms the FIT that the project is entitled to in accordance with the date of approval or filing date of the project and the date of grid connection. However, the subsidy component is not paid as cash until the solar power project is listed in the Subsidy Catalog.
Solar power projects can only receive central government subsidies after completing certain administrative and perfunctory procedures with the relevant authorities of finance, price and energy to be listed in the Subsidy Catalog, which is issued by the MOF, NDRC and NEA from time to time. In order to be listed in the Subsidy Catalog, ground-mounted projects submit applications to the relevant provincial authorities; and rooftop DG projects submit applications to the local grid companies in the area where the projects are located. After preliminary review of the applications, the relevant provincial authorities and the local grid companies will report to the MOF, NDRC and NEA.
The project’s first payment will include amounts accrued from for all prior months the solar power project has been connected to the power grid. As of December 31, 2014, the most recent Subsidy Catalog was released on August 21, 2014. Previously, Subsidy Catalogs have also been released in June 2012, October 2012, December 2012 and February 2013.
Although there has historically been a significant lag between connecting to the power grid and when the project may be included in a published Subsidy Catalog, all of our solar power projects that have been connected to the power grid prior to August 2013 have been listed in published Subsidy Catalogs. See “Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Industry — Solar power projects can only receive central government subsidies after they are listed in the Subsidy Catalog.”
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The following table shows the status of our projects in operation with regards to the Subsidy Catalog as of December 31, 2014.
Utility- Scale | Ground- mounted DG projects | Rooftop DG projects | ||||||||||
(MW) | ||||||||||||
Projects in Operation and Listed in the Subsidy Catalog | 103 | - | - | |||||||||
Projects in Operation and Not Listed in the Subsidy Catalog | 379 | - | 21 |
Manufacturing
We manufacture solar modules, solar cells, silicon wafers, silicon ingots and recovered silicon materials.
Manufacturing Capacity and Facilities
Manufacturing Capacity
The following table sets forth our annual production capacity for silicon wafers, solar cells and solar modules as of December 31, 2012, 2013 and 2014:
Annual Production Capacity as of December 31, | ||||||||||||
2012 | 2013 | 2014 | ||||||||||
(GW) | ||||||||||||
Products | ||||||||||||
Solar modules | 1.2 | 2.0 | 3.2 | |||||||||
Solar cells | 1.2 | 1.5 | 2.0 | |||||||||
Silicon wafers | 1.2 | 1.5 | 2.5 |
Property and Plant
We both own and lease properties for our operations. When we state that we own certain properties in China, we own the relevant land use rights because land is owned by the PRC state under the PRC land system. As of the date of this annual report, we had obtained land use rights to approximately 1.3 million square meters of land. The following table sets forth the size, use and the location of the land, to which we had obtained the land use rights, as the date of this annual report:
Location | Industrial Use (square meters) | Residential Use (square meters) | ||||||
Jiangxi Province | 534,224 | 104,853 | ||||||
Zhejiang Province | 563,375 | 36,958 | ||||||
Total | 1,097,599 | 141,811 |
We also lease manufacturing facilities with a total gross floor area of approximately 32,067 square meters in Shangrao from Jiangxi Desun for production use. We also lease office space and manufacturing facilities in various locations around the world where we maintain subsidiaries and offices.
Except as indicated otherwise, we own the facilities completed and under construction and own the right to use the relevant land for the durations described below (including capacities and major equipment):
Facility | Plant
Size (square |
Duration of Land | Annual
Manufacturing Capacities as of December 31, |
|||||||||||||
Products | Location | No. | meters) | Use Right | 2012 | 2013 | 2014 | Major Equipment | ||||||||
(GW) | ||||||||||||||||
Silicon Ingots and Wafers | Shangrao Economic Development Zone | 1 | 68,396.80 | (i) March 16, 2010 to February 3, 2057; (ii) December 9, 2009 to September 23, 2058; (iii) July 6, 2009 to August 10, 2059; (iv) July 10, 2009 to February 7, 2057; (v) January 6, 2009 to August 10, 2059 | 1.2 | 1.5 | 2.5 | Monocrystalline furnaces, multicrystalline furnaces, wire saws, wire squarers | ||||||||
Solar Cells | Yuanhua Town, Haining | 2 | 107,864.90 | (i) November 23, 2009 to June 6, 2057; (ii) October 29, 2009 to May 26, 2058; (iii) August 17, 2010 to July 25, 2060 | 1.2 | 1.5 | 2.0 | Diffusion furnaces, sintering furnaces, PECVD antireflection coatings manufacturing equipment, automatic printers | ||||||||
Solar Modules | Shangrao Economic Development Zone | 3 | 134,950.58 | July 6, 2009 to August 10, 2059 | 1.2 | 2.0 | 3.2 | Laminating machine, solar cell module production line before and after component lamination, automatic glue-spreads’ working station, solar cell module testing devices | ||||||||
Yuanhua Town, Haining
|
4 | 89,543.00 | (i) October 29, 2009 to May 26, 2058; (ii) August 17, 2010 to July 25, 2060; (iii) September 15, 2010 to August 29, 2060 |
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In addition, there is an electric power transformation and distribution substation constructed by the Shangrao Economic Development Zone Management Committee and Shangrao County Power Supply Co., Ltd. with an annual capacity of 360 million kWh and a gross floor area of 13,127 square meters at Jiangxi Jinko’s manufacturing site to support its operations and assure it of priority supply of electricity. We had our own electric power transformation and distribution substation with an annual capacity of approximately 7.4 million kWh and a gross floor area of approximately 6,667 square meters in Shangrao as of December 31, 2014.
As of December 31, 2014, short-term borrowings of RMB1,183.6 million (US$190.8 million) and long-term borrowings of RMB948.5 million (US$152.9 million) were secured by land use rights, plant, equipment and project assets. We believe our current land use rights, existing facilities and equipment are adequate for our current requirements.
Major Plans to Construct, Expand or Improve Facilities
As of December 31, 2014, we had annual capacity of approximately 2.5 GW each for silicon ingots and wafers, 2.0 GW for solar cells and 3.2 GW for solar modules.
See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We may continue to undertake acquisitions, investments, joint ventures or other strategic alliances, and such undertakings may be unsuccessful.”
We have entered into purchase agreements for purchasing additional manufacturing equipment. Our purchase capital commitments under these contracts amounted to approximately RMB475.0 million (US$76.6 million) as of December 31, 2014, of which RMB456.6 million (US$73.6 million) will be due in 2015 and RMB18.4 million (US$3.0 million) will be due after one year but within five years. As we have shifted our focus from capacity expansion to improving our efficiency, we may terminate these equipment purchase agreements or revise their terms in line with our new plan and as a result, may be subject to cancellation, late charges and forfeiture of prepayments. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We may face termination and late charges and risks relating to the termination and amendment of certain equipment purchases contracts.”
Manufacturing Process
Silicon Ingot Manufacturing
We produce monocrystalline silicon ingots in electric furnaces. We place silicon materials, consisting of virgin polysilicon feedstock and recovered silicon materials of various grades according to formulas developed in-house into a quartz crucible in the furnace, where the silicon materials are melted. While heating the silicon materials, we pump a stream of argon, a chemically inert gas, into the furnace to remove the impurities vaporized during the heating process and to inhibit oxidation, thus enhancing the purity of the silicon ingots. A thin crystal “seed” is dipped into the molten silicon to determine the crystal orientation and structure. The seed is rotated and then slowly extracted from the molten silicon, which adheres to the seed and is pulled vertically upward to form a cylindrical silicon ingots consisting of a single large silicon crystal as the molten silicon and crucible cool.
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We have modified some of our monocrystalline furnaces to allow us to apply our furnace reloading production process, which enables us to increase the size of our silicon ingots while lowering our unit production costs by enhancing the utilization rate of our furnaces and reducing unit costs of consumables and utilities. After the silicon ingot is pulled and cooled, we square the silicon ingots in our squaring machines into blocks.
We produce multicrystalline silicon ingots in electric furnaces. We place silicon materials, consisting of virgin polysilicon feedstock and recovered silicon materials of various grades mixed according to our proprietary formula, into a quartz crucible in the furnace, where the silicon materials are melted. While heating the silicon materials, we pump argon into the furnace to remove impurities and inhibit oxidation. The molten silicon is cast into a block and crystallized, forming a multicrystalline structure as the molten silicon and crucible cool. After the multicrystalline silicon block is cast and cooled, we square it in our squaring machine and cut it into individual blocks. We have improved our high-precision wire squarers and squaring techniques, which allows us to reduce the sizes of silicon ingot tops, tails and other off-cuts during the squaring process, thus increasing the sizes of silicon ingot blocks available to be cut into silicon wafers.
We test monocrystalline and multicrystalline silicon ingots as to their minority carrier lifetime, which is an important measurement of impurity levels of crystalline silicon material, as well as resistivity, electric properties and chemical properties and cut off the unusable parts before they are cut into silicon wafers.
Silicon Wafer Cutting
We cut silicon ingots into silicon wafers with high-precision wire saws which use steel wires carrying slurry to cut silicon wafers from the silicon ingot blocks. Using proprietary know-how and our process technology, we have improved these wire saws to enable us to cut silicon ingot blocks longer than the size that the wire saws were originally designed to cut as well as to increase the number of quality conforming silicon wafers produced from each silicon ingot block, produce silicon wafers with thickness of a high degree of consistency and improve the quality of silicon wafers. We currently manufacture our monocrystalline silicon wafers in 125 mm x 125 mm dimensions with an average thickness 180 microns and our multicrystalline silicon wafers in 156 mm x 156 mm dimensions with an average thickness of 180 microns. The dimensions of the silicon wafers we produce are dictated by current demands for market standard products. However, our production equipment and processes are also capable of producing silicon wafers in other dimensions if market demand should so require.
After silicon wafers are cut from silicon ingots, they are cleaned and inserted into frames. The framed silicon wafers are further cleaned, dried and inspected before packaging.
Solar Cell Manufacturing
Our solar cell manufacturing process starts with the ultrasonic cleaning process to remove oil and surface particles from silicon wafers, after which the silicon wafers undergo a chemical cleaning and texturing etching process to remove impurities and create a suede-like structure on the silicon wafer surface, which reduces the reflection of sunlight and increases the absorption of solar energy of solar cells. Through a diffusion process, we then introduce certain impurities into the silicon wafers to form an electrical field within the solar cell. We achieve the electrical isolation between the front and back surfaces of the silicon wafer by edge isolation, or removing a very thin layer of silicon around the edge. We then apply an anti-reflection coating to the front surface of the silicon wafer to enhance its absorption of sunlight through a process called “plasma-enhanced chemical vapor deposition,” or PECVD. We screen-print negative and positive metal contacts, or electrodes, on the front and back surfaces of the solar cell, respectively, with the front contact in a grid pattern to collect the electrical current. Silicon and metal electrodes are then fused through an electrode firing process in a conveyor belt furnace at a high temperature. After the electrode firing process, solar cells are tested, sorted and packaged.
Solar Module Manufacturing
Solar modules are produced by interconnecting multiple solar cells into desired electrical configurations through welding. The interconnected solar cells are laid out and laminated in a vacuum. Through these processes, the solar modules are weather-sealed, and thus are able to withstand high levels of ultraviolet radiation, moisture, wind and sand. Assembled solar modules are packaged in a protective aluminum frame prior to testing.
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Raw and Ancillary Materials
The raw materials used in our manufacturing process consist primarily of virgin polysilicon and recoverable silicon materials, and the ancillary materials used in our manufacturing process consist primarily of metallic pastes, EVA, tempered glass, aluminum frames, back sheets, junction boxes and other related consumables. The prices of polysilicon and silicon wafers have been subject to significant volatility. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Volatility in the prices of silicon raw materials makes our procurement planning challenging and could have a material adverse effect on our results of operations and financial condition.”
Raw Materials
The principal raw material used in our manufacturing process is virgin polysilicon. We also use recoverable silicon materials in our production. In 2012, 2013 and 2014, virgin polysilicon accounted for approximately 93.8%, 78.5% and 86.4%, respectively, and recoverable silicon materials accounted for approximately 6.2%, 21.5% and 13.6%, respectively, of our total silicon raw material purchases by value. We procure our raw materials from diversified sources. In 2014, purchases from foreign suppliers and domestic suppliers accounted for 26.8% and 73.2% of our total silicon raw material purchases, respectively.
In 2012, 2013 and 2014, our five largest suppliers provided approximately 63.2%, 62.1% and 52.8%, respectively, of our total silicon purchases by value. In 2012, four of our suppliers individually accounted for more than 10%, and our largest supplier accounted for 20.5% of our total silicon purchases by value. In 2013, two of our suppliers individually accounted for more than 10% and our largest supplier accounted for 24.2% of our total silicon purchases by value. In 2014, three of our suppliers individually accounted for more than 10% and our largest supplier accounted for 16.0% of our total silicon purchases by value.
Our supply contracts generally include prepayment obligations for the procurement of silicon raw materials. As of December 31, 2014, we had approximately RMB80.9 million (US$13.0 million) of advances to suppliers.
Virgin Polysilicon
We purchase solar grade virgin polysilicon from both domestic and foreign suppliers. We purchase our virgin polysilicon through spot market purchases to take advantage of decreasing virgin polysilicon prices.
In July 2008, we entered into a long-term supply agreement with Wuxi Zhongcai, a producer of virgin polysilicon materials. We provided a prepayment of RMB95.6 million pursuant to such contract. As a result of the declining market price of virgin polysilicon, Wuxi Zhongcai halted production of virgin polysilicon and we terminated our agreement with Wuxi Zhongcai. On May 3, 2012, we entered into a contract with Lianyungang Zhongcai Technological Co., Ltd., an affiliate of Wuxi Zhongcai, for the purchase of polysilicon, deducting RMB2.4 million from the advance prepayment of RMB95.6 million, leaving a balance of RMB93.2 million remaining. In February 2013, we became involved in litigation with Wuxi Zhongcai regarding the supply agreement. We considered the recovery of the RMB93.2 million unlikely as a result of the polysilicon market conditions, the mutually alleged claims and the adverse developments in the operations of Wuxi Zhongcai and recorded provisions of RMB93.2 million for the balance of the prepayment to Wuxi Zhongcai.
Recoverable Silicon Materials
We purchase pre-screened recoverable silicon materials from our suppliers which are delivered to our facilities for chemical treatment, cleaning and sorting into recovered silicon materials. Currently, we purchase most of our recoverable silicon materials on the spot market.
Ancillary Materials
We use metallic pastes as raw materials in our solar cell production process. Metallic pastes are used to form the grids of metal contacts that are printed on the front and back surfaces of the solar cells through screen-printing to create negative and positive electrodes. We procure metallic pastes from third parties under monthly contracts. In addition, we use EVA, tempered glass, aluminum frames and other raw materials in our solar module production process. We procure these materials from third parties on a monthly basis.
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Customers and Markets
We sell PV products in both China and overseas markets and sell electricity generated by our solar power projects in China. In 2012, 2013 and 2014, we generated 45.5%, 48.9% and 43.7% of our revenues from domestic sales and 54.5%, 51.1% and 56.3% of our revenues from export sales, respectively. As of December 31, 2014, we had more than 280 customers for our solar modules from China and 430 from other countries, including the United States, the United Kingdom, Chile, South Africa, Japan, Holland, India, Australia and France. The following table sets forth our net revenues generated from sales of products and provision of processing services to customers in respective geographic locations, with percentage of net revenues, for the periods indicated.
2012 | 2013 | 2014 | ||||||||||||||||||||||||||
RMB | (%) | RMB | (%) | RMB | US$ | (%) | ||||||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||||||||||
Inside China (including Hong Kong and Taiwan) | 2,179,670.1 | 45.5 | % | 3,461,295.5 | 48.9 | % | 4,357,362.6 | 702,279.4 | 43.7 | % | ||||||||||||||||||
Outside China | ||||||||||||||||||||||||||||
America | 135,839.2 | 2.8 | % | 414,371.3 | 5.9 | % | 1,766,283.0 | 284,673.1 | 17.7 | % | ||||||||||||||||||
UK | 23,684.4 | 0.5 | % | 227,654.7 | 3.2 | % | 1.266.982.3 | 204,200.5 | 12.7 | % | ||||||||||||||||||
Chile | 451.8 | 0.0 | % | 4,601.1 | 0.1 | % | 580,383.8 | 93,540.9 | 5.8 | % | ||||||||||||||||||
South Africa | 202.4 | 0.0 | % | 681,502.4 | 9.6 | % | 534,571.3 | 86,157.2 | 5.4 | % | ||||||||||||||||||
Japan | 11,409.6 | 0.2 | % | 112,460.1 | 1.6 | % | 486,201.3 | 78,361.4 | 4.9 | % | ||||||||||||||||||
Rest of the world | 2,443,510.9 | 51.0 | % | 2,176,953.3 | 30.8 | % | 986,744.4 | 159,034.3 | 9.9 | % | ||||||||||||||||||
Sub-total | 2,615,098.3 | 54.5 | % | 3,617,543.0 | 51.1 | % | 5,621,166.1 | 905,967.4 | 56.3 | % | ||||||||||||||||||
Total | 4,794,768.4 | 100.0 | % | 7,078,838.5 | 100.0 | % | 9,978,528.6 | 1,608,246.8 | 100.0 | % |
Sales of solar modules are our largest revenue contributor, which accounted for 91.8% of our total revenues in 2014. We sell silicon wafers and solar cells to the extent we do not consume them for our own production. We expect that our sales of solar modules will continue to be our largest revenue contributor.
The following table sets forth the primary products sold to our top five customers and the percentage of total revenues generated by sales to our top five customers, for the periods indicated:
2012 | 2013 | 2014 | ||||||||||||||||||||||
Products | (%) | Products | (%) | Products | (%) | |||||||||||||||||||
Top five customers | Solar modules | 18.3 | Solar modules | 30.3 | Solar modules | 17.2 |
We sell our solar modules under our own brand “JinkoSolar” as well as on an OEM basis. Our customers for solar modules include distributors, project developers and system integrators. We have been able to establish strong relationships with a number of major customers, based on the quality of our products and our market reputation. Our module customers include leading players in the PV industry, such as Enel Green Power, BayWa r.e. Solarsysteme GmbH, AMEC, the Juwi Group, Energiebau Solarstrom System GmbH, WBHO Build Energy (Pty) Ltd, Solar Century Holding Ltd and Solairedirect S.A.
Sales and Marketing
We sell solar modules under short-term contracts and by spot market sales. We negotiate payment terms on a case by case basis and we allow most of our overseas’ customers to make full payment within 90 days and our domestic customers to make 90%-95% of payment within 180 days after delivery and the rest will be paid when the Retainage Period ends.
We expect to retain a substantial portion of our solar cells for our own solar module production, while maintaining our flexibility to respond to market changes and price fluctuations by selling a portion of our solar cells in the spot market under favorable circumstances. We sell our solar cells under short-term contracts and by spot market sales. We negotiate payment terms of our solar cell sales contracts on a case-by-case basis, and we allow most of our customers to make full payment within 15 to 90 days after delivery. See “Item 5. Operating and Financial Review and Prospects—A. Operational Results—Principal Factors Affecting Our Results of Operations—Industry Trend for Credit Sales.”
Historically, we made substantial sales of silicon wafers. Currently, we retain a substantial portion of our silicon wafers for our own solar cell production, while selling the remaining to our solar cell suppliers to set off a portion of our payment obligations for our solar cell purchases.
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We made substantial sales of recovered silicon materials and silicon ingots before we built out our silicon wafer, solar cell and solar module production capacity. We currently sell a small volume of recovered silicon materials.
As we continue to diversify our product lines, we have successfully expanded our global marketing footprint. We established a sales and marketing center in Shanghai in January 2009, which provides us with convenient access to domestic and international sales channels. In November 2009, we established JinkoSolar International Limited in Hong Kong to get easy access to major export markets. We began exporting our silicon wafers to Hong Kong in May 2008, and have since expanded our sales to Taiwan, India, the Netherlands, Singapore and Korea. With our entry into the downstream solar module markets, we have further successfully marketed our products to customers in Germany, Italy, Belgium, Spain, France, Israel, U.S. Canada, South Africa, Australia, Singapore, and other countries and regions. We have established 27 overseas subsidiaries in 17 countries, including Germany, France, Italy, Switzerland, Luxemburg, Canada, U.S., Australia, South Africa, Japan, India, Britain, Hong Kong, Singapore, Portugal, Brazil and Mexico. We intend to establish additional subsidiaries and sales offices in the major overseas markets to expand our customer base and increase our market penetration.
In addition, we have devoted significant resources to developing solar module customers and a stable end-user customer base through establishing diversified sales channels comprising project developers, system integrators, distributors and sales agents and diversified marketing activities, including advertising on major industry publications, attending trade shows and exhibits worldwide as well as providing high quality services to our customers. In August 2012, we launched the JinkoSolar Priority Solar Club partner program for our strategic customers to further drive our module sales and reward customer loyalty.
In August 2011, we entered into an advertising agreement with Infront Sports & Media AG, who has the exclusive advertising rights for the home football games and certain away games of the German Men’s “A” National Team for a term of three years ending on June 30, 2014. Such agreement was terminated on August 16, 2012. In March 2012, we agreed to extend our sponsorship of the San Francisco 49ers through February 28, 2014. In April 2012, we renewed our sponsorship with Valencia Club de Futbol, one of the top football teams in Spain, for two more seasons. We believe that our global marketing practice and strategy have and will continue to enable us to explore the overseas market, increase our sales, expand our customer base and increase recognition of our brand domestically and internationally.
In 2015, we entered into advertising agreements with several TV stations and several major city airports. Furthermore, we began to sponsor major PV industry conferences and participated in some industry associations.
In December 2013, we received the 2013 Chinese Excellent Corporate Citizenship Award at the 9th China Annual Corporate Citizenship Awards Ceremony.
In 2014, we were ranked 313th on the List of Top 500 Private Enterprises in China by All-China Federation of Industry & Commerce. We were awarded 2014 China’s Outstanding Corporate Citizen and ranked among the 2014 List of Top 50 Outstanding Corporate Citizens by China Committee of Corporate Citizenship. We were ranked among the List of Top Ten Solar Companies in China by SolarStar, an online media platform covering the solar industry. We were ranked among the List of Top 50 Energy Enterprises with Most Growth Potential in 2014 by Energy, a Chinese magazine covering the energy sector in China. We were the only Chinese solar company that received the 2014 Best Employer in China Award by International Public Management Association for Human Resources Association.
Quality Control
We employ strict quality control procedures at each stage of the manufacturing process in accordance with ISO9001 quality management standards to ensure the consistency of our product quality and compliance with our internal production benchmarks. Our quality management systems in Jiangxi Jinko and Zhejiang Jinko have received the DQS-UL certificate and LRQA certificate, respectively.
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In addition, we have also received international and domestic certifications for certain models of our solar modules. For example, we have received CE, TÜV and MCS certifications for all of our solar modules sold in Europe, UL certifications for all solar modules sold in North America and CQC and CGC certification for all of our solar modules in China. In August 2011, one type of our solar modules ranked 7th among solar modules manufactured by nearly 100 solar module manufacturers from all over the world in terms of yield performance measured by PHOTON Lab’s outdoor test. In September 2011, 15 types of our solar modules received A-rating from Brazil’s National Institute of Metrology, Quality and Technology (Inmetro). In August 2012, our modules became the first to pass TUV-SUD’s stringent potential induced degradation test under 85 degrees Celsius and 85% relative humidity conditions, and our testing facility received certification from China National Accreditation Service for its industry leading quality controls. In May 2013, our modules became the first to pass TUV NORD’s dynamic mechanical load testing with maximum 5400 Pascal downward load. In 2013, our solar modules also passed TUV Nord’s Dust & Sand Certification Test, demonstrating their suitability for installation in desert regions. In December 2014, our modules became the first to pass TUV NORD’s transportation and shipping of PV Module stacks test. Our solar modules received the highest testing result, class 1, in the fire resistance test conducted by Italy’s Istituto Giordano. We also obtained the JIS Q 8901 Certification from TUV Rheinland.
We conduct systematic inspections of incoming raw materials, ranging from silicon raw materials to various ancillary materials. We have formulated and adopted guidelines and continue to devote efforts to developing and improving our inspection measures and standards on recycling recoverable silicon materials, silicon ingots, silicon wafer, solar cell and solar module production. We conduct a final quality check before packing to ensure that our solar power products meet all our internal standards and customers’ specifications.
In February 2012, we opened our PV module testing laboratory in Jiangxi, China, which can conduct over 16 different kinds of tests, ranging from basic pressure and impact tests to challenging hot spot, pre-decay and UV aging tests, all of which conform to UL and International Electrotechnical Commission regulations. In February 2012, the facility was awarded the Underwriters Laboratories (“UL”) Witness Testing Data Program (“WTDP”) Certificate and, in August 2012, the facility was certified by China National Accreditation Service (“CNAS”).
As of December 31, 2014, we had a dedicated team of 999 employees overseeing our quality control processes, and they work collaboratively with our sales team to provide customer support and after-sale services. We emphasize gathering customer feedback for our products and addressing customer concerns in a timely manner. In addition, to ensure the effectiveness of our quality control procedures, we also provide periodic training to our employees.
Competition
We operate in a highly competitive and rapidly evolving market. As we build out our solar cell and solar module production capacity and increase the output of these products, we mainly compete with integrated as well as specialized manufacturers of solar cells and solar modules such as Trina, Yingli Green Energy, Canadian Solar Inc and JA Solar in a continuously evolving market. Recently, some upstream polysilicon manufacturers as well as downstream manufacturers have also built out or expanded their silicon ingots, silicon wafer, solar cell and solar module production operations. We expect to face increased competition as other silicon ingots, silicon wafer, solar cell and solar module manufacturers continue to expand their operations. Some of our current and potential competitors may have a longer operating history, greater financial and other resources, stronger brand recognition, better access to raw materials, stronger relationships with customers and greater economies of scale than we do. Moreover, certain of our competitors are highly-integrated producers whose business models provide them with competitive advantages as these companies are less dependent on upstream suppliers and/or downstream customers in the value chain.
We compete primarily in terms of product quality and consistency, pricing, timely delivery, ability to fill large orders and reputation for reliable customer support services. We believe that our high quality products, our low manufacturing costs and easy access to key resources from our strategically located production bases in China, our recoverable silicon material processing operations and our proprietary process technologies enhance our overall competitiveness.
In addition, some companies are currently developing or manufacturing solar power products based on thin film materials. These new alternative products may cost less than those based on monocrystalline or multicrystalline technologies while achieving the same or similar levels of conversion efficiency in the future. Furthermore, the solar industry generally competes with other renewable energy and conventional energy sources.
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Furthermore, we may also face extensive competition in developing solar power projects and providing solar system integration services. Some of our potential competitors in this industry may have a longer history, a more extensive experience in this industry, greater financial and other resources, stronger brand recognition, stronger relationships with customers and greater economies of scale than we do. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We face intense competition in solar power product markets. If we fail to adapt to changing market conditions and to compete successfully with existing or new competitors, our business prospects and results of operations would be materially adversely affected.”
Production Safety
We are subject to extensive PRC laws and regulations in relation to labor and safety. We have adopted stringent safety procedures at our facilities to limit potential damage and personal injury in the event of an accident or natural disaster, and have devised a number of internal guidelines as well as instructions for our manufacturing processes, including the operation of equipment and handling of chemicals. We distribute safety-related manuals to employees and post bulletins setting forth safety instructions, guidelines and policies throughout our facilities. Failure by employees to follow these guidelines and instructions result in monetary fines. All of our new employees undergo extensive safety training and education. We require our technical staff to attend weekly training programs taught by instructors to enhance their work safety awareness and ensure safe equipment operation. We conduct regular inspections and our experienced equipment maintenance team oversees the operation of our manufacturing lines to maintain proper and safe working conditions. As a result, our occupational health and safety management systems are certified to fulfill the OHSAS 18001:2007 standards starting from March 2012. Since our inception, we have not experienced any major work-related injuries.
We use, store and generate volatile and otherwise dangerous chemicals and wastes during our manufacturing processes, and are subject to a variety of government regulations related to the use, storage and disposal of such hazardous chemicals and waste. In accordance with the requirements of the revised Regulation on the Safety Management of Hazardous Chemical, which became effective on December 1, 2011, we are required to engage State-qualified institutions to conduct the safety evaluation on our storage instruments related to our use of hazardous chemicals and file the safety evaluation report with the competent safety supervision and administration authorities every three years. Moreover, we also need to timely file a report with the competent safety supervision and administration authorities and public security agencies concerning the actual storage situation of our hyper-toxic chemicals and other hazardous chemicals that constitute major of hazard sources. We have not conducted the safety evaluation or filed safety evaluation reports with respect to certain of our storage instruments in compliance with the revised Regulation on the Safety Management of Hazardous Chemicals and we cannot assure you that we will be able to file the safety evaluation reports on time. Failure to make such filing on time may subject us to an order to rectify such conduct within a prescribed time period, fines of up to RMB100,000 or a revocation of our qualification certification and business license.
Environmental Matters
We generate and discharge chemical wastes, waste water, gaseous waste and other industrial waste at various stages of our manufacturing process as well as during the processing of recovered silicon material. We have installed pollution abatement equipment at our facilities to process, reduce, treat, and where feasible, recycle the waste materials before disposal, and we treat the waste water, gaseous and liquid waste and other industrial waste produced during the manufacturing process before discharge. We also maintain environmental teams at each of our manufacturing facilities to monitor waste treatment and ensure that our waste emissions comply with PRC environmental standards. Our environmental teams are on duty 24 hours. We are required to comply with all PRC national and local environmental protection laws and regulations and our operations are subject to periodic inspection by national and local environmental protection authorities. PRC national and local environmental laws and regulations impose fees for the discharge of waste materials above prescribed levels, require the payment of fines for serious violations and provide that the relevant authorities may at their own discretion close or suspend the operation of any facility that fails to comply with orders requiring it to cease or remedy operations causing environmental damage. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Compliance with environmentally safe production and construction regulations can be costly, while non-compliance with such regulations may result in adverse publicity and potentially significant monetary damages, fines and suspension of our business.”
Our factories are equipped with state-of-the-art equipment that has been designed to not only produce the highest quality products, but to also minimize the environmental impact. Our manufacturing plants in Jiangxi Jinko have received the ISO 9001 certification and Zhejiang Jinko have received the ISO 9001 and the ISO14001 certification. In January 2012, we joined the PV Cycle Association for the collection and recycling of end-of-life solar modules at European level.
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We are required to obtain construction permits before commencing constructing production facilities. We are also required to obtain approvals from PRC environmental protection authorities before commencing commercial operations of our manufacturing facilities. We commenced construction of a portion of our solar cell and solar module production facilities prior to obtaining the construction permits and commenced operations of certain of our production facilities prior to obtaining the environmental approvals for commencing commercial operation and completing the required safety evaluation procedure. Although we have subsequently obtained all required environmental approvals covering all of our existing production capacity except a portion of our solar cell and solar module production capacity, we cannot assure you that we will not be penalized by the relevant government authorities for any prior non-compliance with the PRC environmental protection, safe production and construction regulations.
In late August 2011, our Haining facility experienced a suspected leakage of fluoride into a nearby small water channel due to extreme and unforeseen weather conditions. On September 15, 2011, residents of Hongxiao Village in proximity to the Haining facility gathered to protest the discharge. The Haining facility suspended production on September 17, 2011. We also took steps recommended by an environmental engineering firms licensed by the PRC government (“Licensed Engineers”). On September 28, 2011, a committee of experts (the “Experts Committee”) established by the Haining government approved a set of recommendations developed by the Licensed Engineers with our assistance and the Haining government to be implemented by us. On October 6, 2011, the Experts Committee, the Environmental Bureau of the Haining government and representatives of Hongxiao Village reviewed the steps taken by us based on the recommendations of the Experts Committee and provided their comments to JinkoSolar’s management. On October 9, 2011, the Experts Committee notified us that the Experts Committee was satisfied with the steps taken by us and we resumed production at the Haining facility.
On March 22, 2012, our 600 MW solar cell manufacturing line passed the Haining City environmental authority’s environmental evaluation. In May 2012, pursuant to a request from the Haining City environmental authority as a part of a program directed to all local manufacturing companies, we took additional steps intended to improve our program for handling hazardous waste, which was approved in September 2012. In November 2012, we were selected on a random basis for an audit of our energy conservation and emission-reduction management systems by the Haining City environmental authority, which we completed successfully.
Seasonality
Demand for solar power products tends to be weaker during the winter months partly due to adverse weather conditions in certain regions, which complicate the installation of solar power systems. Our operating results may fluctuate from period to period based on the seasonality of industry demand for solar power products. Our sales in the first quarter of any year may also be affected by the occurrence of the Chinese New Year holiday during which domestic industrial activity is normally lower than that at other times.
Insurance
We have insurance policies covering certain machinery such as our monocrystalline and multicrystalline furnaces. These insurance policies cover damages and losses due to fire, flood, design defects or improper installation of equipment, water stoppages or power outages and other events stipulated in the relevant policies. Insurance coverage for Jiangxi Jinko’s fixed assets other than land amounted to approximately RMB2,389.0 million (US$385.0 million) as of December 31, 2014. Insurance coverage for Zhejiang Jinko’s fixed assets and inventory amounted to approximately RMB3,217.5 million (US$518.6 million) as of December 31, 2014. As of December 31, 2014, we had product liability insurance coverage for Jiangxi Jinko, Zhejiang Jinko, Jinko Solar Import and Export Co. Ltd. (“Jinko Import and Export”) and Zhejiang Jinko Trading Co., Ltd. (“Zhejiang Trading”) of up to US$40.0 million, export credit insurance coverage for Jiangxi Jinko, Zhejiang Jinko and Jinko Import and Export of up to US$640.0 million and product transportation liability insurance coverage for Jiangxi Jinko, Zhejiang Jinko, Jinko Import and Export, Zhejiang Trading, JinkoSolar International Limited, JinkoSolar GmbH, JinkoSolar Canada Co., Ltd. and JinkoSolar (U.S.) Inc. of up to RMB10.0 billion (US$1.6 billion).
We engage PowerGuard, a firm specializing in unique insurance and risk management solutions for the wind and solar energy industries to provide insurance coverage for the product warranty services for our solar modules worldwide. The policy offers back-to-back coverage through a maximum of ten-year limited product defects warranty, as well as a 12-year and 25-year warranty against declines of more than 10.0% and 20.0%, respectively, from the initial minimum power generation capacity at the time of delivery.
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In addition, in November 2012, we also purchased a policy for environmental liabilities insurance covering our operations in Jiaxing, Zhejiang Province, as required by the Environmental Protection Bureau of Jiaxing City. We believe that our overall insurance coverage is consistent with the market practice in China. However, significant damage to any of our manufacturing facilities and buildings, whether as a result of fire or other causes, could have a material adverse effect on our results of operations. In accordance with customary practice in China, we do not carry any business interruption insurance. Moreover, we may incur losses beyond the limits, or outside the coverage, of our insurance policies. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We have limited insurance coverage and may incur losses resulting from product liability claims, business interruption or natural disasters.” We paid an aggregate of approximately RMB5.9 million, RMB29.6 million and RMB27.3 million (US$4.4 million) in insurance premiums in 2012, 2013 and 2014, respectively.
Regulation
This section sets forth a summary of the most significant regulations or requirements that affect our business activities in the PRC or our shareholders’ right to receive dividends and other distributions from us.
Renewable Energy Law and Other Government Directives
The Renewable Energy Law, which originally became effective on January 1, 2006 and was amended on December 26, 2009, sets forth policies to encourage the development and on-grid application of solar energy and other renewable energy. The law also sets forth a national policy to encourage the installation and use of solar energy water heating systems, solar energy heating and cooling systems, PV systems and other systems that use solar energy. It also provides financial incentives, such as national funding, preferential loans and tax preferential treatment for the development of renewable energy projects and authorizes the relevant pricing authorities to set favorable prices for electricity generated from solar and other renewable energy sources.
The PRC Energy Conservation Law, which was amended on October 28, 2007 and came into effect on April 1, 2008, encourages the utilization and installation of solar power facilities on buildings for energy-efficiency purposes. The law also encourages and supports the development of solar energy system in rural areas.
On September 4, 2006, the MOF and Ministry of Construction jointly promulgated the Interim Measures for Administration of Special Funds for Application of Renewable Energy in Building Construction, pursuant to which the MOF will arrange special funds to support the application of Building Integrated Photovoltaics systems, or BIPV applications, to enhance building energy efficiency, protect the environment and reduce consumption of fossil fuel energy. Under these measures, applications to provide hot water supply, refrigeration, heating and lighting are eligible for such special funds.
On March 23, 2009, the MOF promulgated the Interim Measures for Administration of Government Subsidy Funds for Application of Solar Photovoltaic Technology in Building Structures, or the Interim Measures, to support the promotion of PV applications in the PRC. Local governments are encouraged to issue and implement supporting policies for the development of PV technology. Under these Interim Measures, a subsidy of RMB20.0 per kWp covering BIPV applications installed on or after March 23, 2009 was set for 2009. On December 16, 2011, the MOF and Ministry of Housing and Urban-Rural Development jointly released a notice regarding the application of PV technology in building structures, pursuant to which the PRC government offer subsidies ranging from RMB7.5 to RMB9.0 per watt for BIPV projects. The construction of such BIPV projects must be completed in 2012.
On July 16, 2009, the MOF, Ministry of Science and Technology and Resource Bureau of the NDRC jointly published an announcement containing the guidelines for the Golden Sun Demonstration Program. Under the program, the PRC government will provide, up to 20 MW of PV projects per province, with a 50% to 70% subsidy for the capital costs of solar systems and the relevant power transmission and distribution systems. The program further provides that each PV project applying for such subsidy must have a minimum capacity of 300 kWp with an operation period of not less than 20 years. On September 21, 2010, the MOF, NEA, Ministry of Science and Technology and Ministry of Housing and Urban-Rural Development jointly released an announcement to strengthen the administration of, and provide details for, the implementation of the Golden Sun Demonstration Program and government subsidies for BIPV applications. Among other things, the announcement clarified that the PRC government will subsidize 50% of the cost of key equipment for on-grid PV projects and 70% of that for off-grid PV projects in remote regions. In addition, the government will offer subsidies of RMB4.0 per watt for on-grid PV projects, RMB6.0 per watt for BIPV projects and RMB10.0 per watt for off-grid PV projects in remote regions.
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On September 26, 2009, the State Council of the PRC approved and circulated the Opinions of National Development and Reform Commission and other Nine Governmental Authorities on Restraining the Production Capacity Surplus and Duplicate Construction in Certain Industries and Guiding the Industries for Healthy Development. These opinions concluded that polysilicon production capacity in China has exceeded demand and adopted a policy to impose more stringent requirements on the construction of new facilities for manufacturing polysilicon in China. These opinions also stated in general terms that the government should encourage polysilicon manufacturers to enhance cooperation and affiliation with downstream solar power product manufacturers to expand their product lines. However, these opinions do not provide any detailed measures for the implementation of this policy. As we are not a polysilicon manufacturer and do not expect to manufacture polysilicon in the future, we believe the issuance and circulation of these opinions will not have any material impact on our business.
On October 10, 2010, the State Council of the PRC promulgated a decision to accelerate the development of seven strategic new industries. Pursuant to this decision, the PRC government will promote the popularization and application of solar thermal technologies by increasing tax and financial policy support, encouraging investment and providing other forms of beneficial support.
In March 2011, the National People’s Congress approved the Outline of the Twelfth Five-Year Plan for National Economic and Social Development of the PRC, which includes a national commitment to promoting the development of renewable energy and enhancing the competitiveness of the renewable energy industry. Accordingly, in January 2012, the Ministry of Industry and Information Technology and the Ministry of Science and Technology respectively promulgated the Twelfth Five-Year Special Plans Regarding the New Materials Industry and the High-tech Industrialization to support the development of the PRC solar power industry.
On March 8, 2011, the MOF and the Ministry of Housing and Urban-Rural Development jointly promulgated the Notice on Further Application of Renewable Energy in Building Construction to increase the utilization of renewable energy in buildings.
On March 27, 2011, the NDRC promulgated the revised Guideline Catalogue for Industrial Restructuring which categorizes the solar power industry as an encouraged item. On February 16, 2013, the NDRC promulgated the 2013 revised Guideline Catalogue for Industrial Restructuring to be effective on May 1, 2013, the solar power industry is still categorized as an encouraged item.
On February 24, 2012, the MIIT released the Twelfth Five-Year Plan for the Solar Photovoltaic Industry. According to the industry plan, the PRC will reduce the cost of solar power to 0.8 yuan (US$0.12) per kilowatt-hour by 2015 and 0.6 yuan per kWh by 2020 and increase production of solar panels. Furthermore, the plan indicated that the government requires China’s leading polysilicon manufacturers to reach annual production capacity of 50,000 tons by 2015.
On July 7, 2012, NEA officially released the Twelfth Five-Year Plan on Solar Power Development. In the document, the NEA stated that by 2015, the total installed capacity of distributed PV generation will achieve 10 GW in Eastern and Central China by focusing on the establishment of distributed PV generation systems in such areas, and the total installed capacity of 10 GW of grid-connected PV power plants will be established to increase local electrical power supply in the regions with rich solar resources and uncultivated land resources, such as Qinghai, Xinjiang, Gansu and Inner Mongolia. The total estimated investment is RMB250 billion.
On July 9, 2012, the State Council released the Twelfth Five-Year Development Plan for National Strategic New Industries. According to this document, by 2020, the total installed capacity of PV generation will achieve 50 million kW, and the research and manufacturing technology of PV equipment will reach advanced global levels. This document also set forth the major actions to be taken and policies to be promulgated for promoting the development of solar power industry.
On January 1, 2013, the PRC State Council issued the Twelfth Five-Year Plan for Energy Development, which demonstrated a commitment to solar energy. It proposed that by the end of 2015, there should be 21 GW of installed solar power capacity, a 40% increase compared to 2012. In addition, the Plan also encouraged and promoted the merger and acquisition, restructuring and upgrading of the PV industry.
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In response to the increased pace of market development, the PRC State Council, in a statement dated July 4, 2013, announced that installed capacity for solar electricity is expected to reach more than 35 GW by 2015 at a growth rate of about 10 GW a year between now and then, and to reach more than 100 GW by 2020. The PRC State Council also described principles promoting the PV industry through (i) the exploration of the distributed PV power generation market, (ii) the improvement to the grid connection management and service, in particular for PV power generation, (iii) the improvement to pricing and subsidy policies and development of fund for renewable energy and (iv) support from the financial institutions to the PV industry, among other matters.
On January 17, 2014, the NEA issued the Notice on Targets for the Increase in PV Power Generation Capacity for 2014, and announced that the total target for the increase in PV power generation capacity for 2014 will be 14 GW, of which 8 GW will be reserved for distributed power generation and 6 GW will be reserved for power generation by solar power projects.
On March 16, 2015, the NEA promulgated the Circular on Implementing Plans of PV Generation Construction for 2015, which revised China’s 2015 solar electricity installation target upwards by 20% to 17.8 GW of capacity for ground-mounted projects and indicated that rooftop DG projects would no longer be subject to a quota.
Laws and Regulations Concerning the Electric Power Industry
The regulatory framework of the PRC power industry consists primarily of the Electric Power Law of the PRC, which became effective on April 1, 1996 (subsequently revised effective on August 27, 2009) and the Electric Power Regulatory Ordinance, which became effective on May 1, 2005. One of the stated purposes of the Electric Power Law is to protect the legitimate interests of investors, operators and users and to ensure the safety of power operations. According to the Electric Power Law, the PRC government encourages PRC and foreign investment in the power industry. The Electric Power Regulatory Ordinance sets forth regulatory requirements for many aspects of the power industry, including, among others, the issuance of electric power business permits, the regulatory inspections of power generators and grid companies and the legal liabilities for violations of the regulatory requirements.
Obtaining the Electric Power Business Permit
On January 5, 2006, the NDRC promulgated the Administrative Provisions on Renewable Energy Power Generation which set forth specific measures for setting the price of electricity generated from renewable energy sources, including solar and for allocating the costs associated with renewable power generation. The Administrative Provisions on Renewable Energy Power Generation also delegate administrative and supervisory authority among government agencies at the national and provincial levels and assign partial responsibility to electricity grid companies and power generation companies for implementing the Renewable Energy Law.
Pursuant to the Provisions on the Administration of the Electric Power Business Permit, which were issued by the SERC and became effective on December 1, 2005, unless otherwise provided by the SERC, no company or individual in the PRC may engage in any aspect of electric power business (including power generation, transmission, dispatch and sales) without first obtaining an electric power business permit from the SERC. These provisions also require that if an applicant seeks an electric power business permit to engage in power generation, it must also obtain in advance all relevant government approvals for the project including construction, generation capacity and environmental compliance.
However, there are exceptions which our certain PV Power Generation Projects may not need obtain an electric power business permit from the SERC. On July 18, 2013, the NDRC issued the Interim Measures for the Administration of Distributed PV Power Generation, which waived the previous requirement to obtain an Electric Power Business Permit for DG projects. On April 9, 2014, the NEA issued the Circular on Clarifying Issues concerning the Administration of Electric Power Business Permit, which waived requirement to obtain an Electric Power Business Permit for those solar power generation projects with installed capacity less than 6 MW and any DG projects approved by or filed with the NDRC or its local branches, and required local NEA to simplify the Electric Power Business Permit application procedure for the solar power generation companies.
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Obtaining the Construction Engineering Qualifications and Permit
Pursuant to the Construction Law which was promulgated by the Ministry of Construction on March 1, 1998 and amended on April 22, 2011 and the Regulation on Administration on Qualifications of Construction Engineering which became effective on March 1, 2015, an enterprise engaged in the design and engineering work for an electric power project must obtain a qualification certificate and must conduct its work within the strict design scope set forth in its certificate. An enterprise conducting design or engineering work without first obtaining the qualification certificate or an enterprise that has obtained the qualification certificate but exceeds the permitted design scope may be subject to action by the relevant authorities, including monetary penalties, rescission of its certification or confiscation of all illicit gains.
Pursuant to the Provisions on the Administration of Permits of Installation, Repair, and Test of Electric Power Facilities, which were promulgated by the SERC and became effective on March 1, 2010, any entity or individual engaged in installing, repairing or testing of electric power facilities in the PRC must obtain a permit unless otherwise exempted by the SERC. There are three categories of permits and each category is further subdivided into five levels. Each category represents a specific range of activity i.e., installation, repair and testing. Each level denotes the maximum voltage level of an electric facility that a permit holder may work with. To apply for a permit, an applicant must submit the application to the local branch of SERC. A permit holder may also apply to change either the permitted matter, which is the category or level of the permit, or the registered matter, which is the name, legal address, legal representative and other pertinent matters. A permit is valid for six years and can be renewed.
Grid Connection and Dispatchment
All electric power generated in China is distributed through power grids, except for electric power generated by facilities not connected to a grid. The distribution of power to each grid is administered by dispatch centers, which the administration and dispatch of planned output by power plants connected to the grid. The Regulations on the Administration of Electric Power Dispatch to Networks and Grids, promulgated by the State Council and the former Ministry of Electric Power Industry, effective on November 1, 1993, as amended on January 8, 2011, and its implementation measures, regulate the operation of dispatch centers.
FIT and Subsidies
FIT Payments
The Renewable Energy Law of the PRC, which was amended on December 26, 2009 and became effective on April 1, 2010, sets forth policies to encourage the development and utilization of solar power and other renewable energy. The Renewable Energy Law authorizes the relevant pricing authorities to set favorable prices for electricity generated from solar and other renewable energy sources.
The Circular on Improving Policies on the On-grid Tariffs of Solar Power Generation, which was issued by the NDRC and became effective on July 24, 2011, provides that the FIT (including VAT) for solar power projects approved before July 1, 2011 that began operation before December 31, 2011 would be RMB1.15 per kWh and the FIT (including VAT) for solar power projects either approved after July 1, 2011 or completed after December 31, 2011 would be RMB1.00 per kWh (excluding on-grid solar power projects located in Tibet).
The NDRC further issued the Circular on Promoting the Healthy Development of PV Industry by Price Leverage on August 26, 2013, or the 2013 Circular. Under this circular, the FIT (including VAT) for solar power projects approved or filed after September 1, 2013 or beginning operation after January 1, 2014 would be RMB0.90 per kWh, RMB0.95 per kWh or RMB1.00 per kWh, depending on the locations of the projects (excluding on-grid solar power projects located in Tibet).
In addition, the 2013 Circular sets forth special rules that entitle DG projects (excluding the projects that have received an investment subsidy from the central budget) to a national subsidy of RMB0.42 per kWh. According to the Circular on Further Implementing Polices Relating to Distributed Generation issued by the NEA on September 2, 2014 and the Circular on Implementation Plans of PV Generation Construction for 2015 issued by the NEA on March 16, 2015, rooftop DG projects that sell electricity directly to consumers or to both consumers and grid enterprises will receive a national subsidy of RMB0.42 per kWh plus the local desulphurized coal benchmark electricity price for the electricity sold to the State Grid or a negotiated electricity purchase price for electricity sold directly to consumers. Ground-mounted projects and rooftop DG projects which sell all electricity to grid enterprises are entitled to the FIT of RMB0.90 per kWh, RMB0.95 per kWh or RMB1.00 per kWh, depending on where the project is located (excluding on-grid solar power projects located in Tibet).
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The difference (in amount) between the FIT for solar power projects and the desulphurized coal benchmark electricity price, or the subsidies paid to DG projects, are funded by the renewable energy development funds. The above FIT and subsidy policies are valid for 20 years for each power generation project since its formal operation, in principle.
Subsidy Catalog
On November 29, 2011, the MOF, NDRC and NEA jointly issued the Interim Measures for the Administration of Levy and Use of Renewable Energy Development Fund, which provides that development funds for renewable energy include designated funds arranged by the public budget of national finance, and renewable energy tariff surcharge collected from electricity consumers. Solar power projects can only receive central government subsidies after completing certain administrative and perfunctory procedures with the relevant authorities of finance, price and energy to be listed in the Subsidy Catalog issued by the MOF, NDRC and NEA. These subsidies represent the difference between the FIT for solar power projects and the desulphurized coal benchmark electricity price.
In order to be listed in the Subsidy Catalog, ground-mounted projects submit applications to the relevant provincial authorities; and in accordance with the Circular on Issues Concerning Implementing Electric Quantity-based Subsidy Policy for Distributed Generation Projects issued by the MOF on July 24, 2013, rooftop DG projects submit applications to the grid enterprises in the area where the projects are located. After preliminary review of the applications, the provincial authorities will jointly report to the MOF, NDRC and NEA, and the MOF, NDRC and NEA will have final review on such applications to decide whether to list in the Subsidy Catalog.
The following flow chart illustrates the process for a utility-scale project to be listed in the Subsidy Catalog.
Development Funds of Renewable Energy
The Renewable Energy Law provides financial incentives, including national funding for the development of renewable energy projects.
Pursuant to the Interim Measures for the Administration of Designated Funds for the Development of Renewable Energy issued by the MOF and effective on May 30, 2006, the MOF sets up designated funds to support the development and utilization of renewable energy in accordance with the national fiscal budget.
According to the Implementing Measures for the Administration of Price of Renewable Energy and Cost Sharing Program and the Interim Measures for Adjustment to Additional On-grid Tariff for Renewable Energy issued by the NDRC, the gap between the FIT for solar power projects and the desulphurized coal benchmark electricity price is subsidized by collecting tariff surcharge from the electricity consumers within the service coverage of grid enterprises at or above provincial level.
Mandatory Purchase of Renewable Energy
The Renewable Energy Law imposes mandatory obligations on grid enterprises to purchase the full amount of on-grid electricity generated by approved renewable energy plants whose power generation projects meet the grid connection technical standards in the areas covered by the grid enterprises’ power grids. Grid enterprises must improve the power grid construction in order to better absorb electricity generated from renewable energy.
Pursuant to the Measures for the Supervision and the Administration of Purchase of Full Amount of Renewable Energy by Grid Companies issued by the SERC in July 2007, the SERC and its local branches supervise the purchase of the full amount of renewable energy by the grid enterprises. If the grid enterprises do not purchase the full volume of the electricity generated from the renewable energy due to the circumstances such as force majeure or any other circumstance endangering the safety and stability of the power grids, the grid enterprises must promptly notify the renewable energy power generation companies of the details in writing and also submit detailed facts to the competent local branches of the SERC.
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The Several Opinions on Promoting the Healthy Development of PV Industry also requires the grid enterprises to ensure PV power generation projects’ timely connection to the power grid and purchase the full amount of electricity generated by the PV power generation projects.
On March 20, 2015, the NDRC and NEA issued a directive opinion, which emphasizes that the competent provincial authorities must strengthen the implementation of the provisions with regard to the purchase of the full amount of electricity generated by renewable energy and avoid any curtailment of solar power projects. In addition, it also stated that electricity generated by clean energy is encouraged to be sold directly to the consumers in the regions where there is ample supply of clean energy, and the relevant parities must coordinate the trans-provincial supply of electricity and power transmission capability, in order to maximize the utilization of clean energy. Local governments also announced their intentions to efficiently implement the system regarding the purchase of the full amount of renewable energy, such as the Inner Mongolian Autonomous Government.
Clean Development Mechanism
Clean Development Mechanism, or CDM, is an arrangement under the Kyoto Protocol under the United Nations Framework Convention on Climate Change, or the UNFCCC. It allows industrialized countries with a greenhouse gas emission reduction commitment to invest in emission reducing projects in developing countries in order to earn Certified Emission Reduction, or CERs. The PRC approved and ratified the UNFCCC in 1993 and the Kyoto Protocol in 2002, but has no binding obligation to meet the emission reduction targets. On August 3, 2011, the Measures for the Administration of Operation of Clean Development Mechanism Projects promulgated by the NDRC jointly with the Ministry of Science and Technology, the Ministry of Foreign Affairs and the MOF, sets forth general rules and specific requirements for the application for, and approval of, CDM projects. Only companies wholly owned or controlled by PRC companies are qualified to apply for the PRC government’s approval for a CDM project. Some of our solar power projects are on the list of CDM projects.
Environmental Protection
The construction processes of our solar power projects generate material levels of noise, waste water, gaseous emissions and other industrial wastes. Therefore, we are subject to a variety of government regulations related to the storage, use and disposal of hazardous materials and to the protection of the environment of the community. The major environmental regulations applicable our business activities in the PRC include the Environmental Protection Law of the PRC, the Law on the Prevention and Control of Noise Pollution, the Law on the Prevention and Control of Air Pollution, the Law on the Prevention and Control of Water Pollution, the Law on the Prevention and Control of Solid Waste Pollution, the Environmental Impact Evaluation of Law, and the Regulations on the Administration of Environmental Protection In Construction Projects. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Compliance with environmentally safe production and construction regulations can be costly, while non-compliance with such regulations may result in adverse publicity and potentially significant monetary damages, fines and suspension of our business operations.”
Foreign Investment in Solar Power Business
The principal regulation governing foreign ownership of solar power businesses in the PRC is the Foreign Investment Industrial Guidance Catalog. Under the current catalog, which was amended in 2015 and became effective on April 10, 2015, the solar power industry is classified as an “encouraged foreign investment industry.” Foreign-invested enterprises in the encouraged foreign investment industry are entitled to certain preferential treatment, such as exemption from tariff on equipment imported for their operations, after obtaining approval from the PRC government authorities.
Work Safety
The Work Safety Law of the PRC, which became effective on November 1, 2002, is the principal law governing the supervision and administration of work safety for solar power projects. In accordance with the Measures for the Supervision and the Administration of Work Safety of Electricity Industry promulgated by the NDRC, which became effective on March 1, 2015, power plants are responsible for maintaining their safety operations in accordance with the relevant laws, regulations, rules and standards regarding the work safty. The NEA and its local branches supervise and administer the work safty of electricity industry at the national and local level.
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Employment
Pursuant to the Labor Law of the PRC, the Labor Contract Law of the PRC and the Implementing Regulations of the Labor Contract Law of the PRC, employers must enter into written employment contracts with full-time employees. If an employer fails to do so within one year from the date on which the employment relationship is established, the employer must rectify the situation by entering into a written employment contract with the employee and pay the employee twice the employee’s salary for the period during which the written contract is not signed. The Labor Contract Law and its implementing rules also require all employers must comply with local minimum wage standards. If the wage paid to the employee by the employer is lower than the local minimum wage standard, the competent labor authorities may order the employer to pay the difference; in the event of any failure to pay within the time limit, the employer may be ordered to pay additional compensation to the employee at the standard of more than 50% but less than 100% of the payable amount. Violations of the Labor Law, the Labor Contract Law and its implementing rules may result in the imposition of fines and other administrative liabilities.
Enterprises in the PRC are required by the PRC laws and regulations to participate in certain employee benefit plans covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are located. According to the Social Insurance Law of the PRC, which came into effect on July 1, 2011, an employer that fails to make social insurance contributions may be ordered to pay the required contributions within a stipulated deadline and be subject to a late fee at the rate of 0.05% per day from the date on which the contribution becomes due. If the employer still fails to rectify the failure to make social insurance contributions within the stipulated deadline, it may be subject to a fine ranging from one to three times the amount overdue. According to the Regulations on the Administration of Housing Fund, which came into force on March 24, 2002, an enterprise that fails to make housing fund contributions may be ordered to rectify the noncompliance and pay the required contributions within a stipulated deadline; otherwise, an application may be made to a local court for compulsory enforcement.
Taxation
PRC Corporate Income Tax
Prior to January 1, 2008, under the PRC Income Tax Law on Foreign-invested Enterprise and Foreign Enterprise, or the former Income Tax Law, and the related implementing rules, foreign-invested enterprises incorporated in the PRC were generally subject to a corporate income tax rate of 30% on taxable income and a local income tax rate of 3% on taxable income. The former Income Tax Law and the related implementing rules also provided certain favorable tax treatments to foreign-invested enterprises.
On March 16, 2007, the CIT Law was passed, which, together with the Implementation Rules of the CIT Law issued on December 6, 2007, became effective on January 1, 2008. The CIT Law applies a uniform 25% corporate income tax rate to both foreign invested enterprises and domestic enterprises and eliminates many of the preferential tax policies afforded to foreign investors. Furthermore, dividends paid by a foreign invested enterprise to a non-resident shareholder are now subject to a withholding tax rate of 10%, which may be reduced under any applicable bilateral tax treaty between the PRC and the jurisdiction where the non-resident shareholder resides.
The CIT Law provided a five-year grandfathering period, starting from its effective date, for enterprises established before the promulgation date of the CIT Law that were entitled to enjoy preferential tax policies under the former Income Tax Law or the related implementing rules. However, subject to the Circular on Implementing the Grandfathering Preferential Policies of the Enterprise Income Tax, or the Implementing Circular, promulgated by the State Council on December 26, 2007, only a certain number of the preferential policies provided under the former Income Tax Law and the related implementing rules were eligible to be grandfathered in accordance with the Implementing Circular.
According to the Circular on the Execution of the Catalog of Public Infrastructure Projects Entitled for Preferential Tax Treatment issued by the SAT and the MOF on September 23, 2008 and the Circular on the Implementation of the Catalog of the Key Public Infrastructure Projects Supported by the State and Entitled for Preferential Tax Treatment issued by the SAT on April 16, 2009, a solar power project that has obtained government approval on or after January 1, 2008 is fully exempted from PRC corporate income tax for three years starting from the year in which revenue is first generated from the sale of electricity, and is 50% exempted from PRC corporate income tax for another three years.
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With respect to our PRC operations, only the “two-year exemption” and “three-year half deduction” tax preferential policy enjoyed by Jiangxi Jinko and Zhejiang Jinko was grandfathered by the Implementation Circular. Both Jiangxi Jinko and Zhejiang Jinko were subject to a preferential tax rate of 12.5% in 2011 and 2012. Zhejiang Jinko, Jiangxi Jinko and Jiangxi Materials were designated by the relevant local authorities as “High and New Technology Enterprises” under the CIT Law. Jiangxi Jinko and Jiangxi Materials were and would be subject to a preferential tax rate of 15% for their fiscal years ended December 31, 2014 and 2015 if the relevant conditions are met. Zhejiang Jinko was subject to a preferential tax rate of 15% for the fiscal year ended December 31, 2014. Applications for the preferential tax rate of Zhejiang Jinko for the fiscal years ending December 31, 2015 to 2017 are currently under review.
According to the Administrative Measures for Non-Residents Enjoying Tax Treaty Benefits (Trial Implementation), which were issued by the SAT on August 24, 2009 and became effective on October 1, 2009, the application of the preferential withholding tax rate under a bilateral tax treaty is subject to the approval of competent PRC tax authority. According to the Circular of the State Administration of Taxation on How to Understand and Identify “Beneficial Owner” under Tax Treaties, which became effective on October 27, 2009, and the Announcement of the State Administration of Taxation on the Determination of “Beneficial Owners” in the Tax Treaties, effective on June 29, 2012, the PRC tax authorities must evaluate whether an applicant for treaty benefits in respect of dividends, interest and royalties qualifies as a “beneficial owner” on a case-by-case basis and following the “substance over form” principle. This circular sets forth the criteria to identify a “beneficial owner” and provides that an applicant that does not carry out substantial business activities, or is an agent or a conduit company may not be deemed a “beneficial owner” of the PRC subsidiary and therefore may not enjoy tax treaty benefits. According to Announcement of the State Administration of Taxation on Issues Concerning the Recognition of Beneficial Owners in Entrusted Investments, effective on June 1, 2014, non-residents may be recognized as “beneficial owners” and enjoy treaty benefits for the income derived from the PRC from certain investments.
An enterprise registered under the laws of a jurisdiction outside China may be deemed a PRC tax resident enterprise if its place of effective management is in China. If an enterprise is deemed to be a PRC tax resident enterprise, its worldwide income will be subject to the corporate income tax. According to the Implementation Rules of the CIT Law, the term “de facto management bodies” is defined as bodies that have, in substance, and overall management and control over such aspects as the production and the business, personnel, accounts and properties of the enterprise. In addition, under the CIT Law and the Implementation Rules of the CIT Law, foreign shareholders could become subject to a 10% withholding tax on any gains they realize from the transfer of their shares, if such gains are regarded as income derived from sources within China, which includes gains from transfer of shares in an enterprise considered a “tax resident enterprise” in China. Once a non-PRC company is deemed to be a PRC tax resident enterprise by following the “de facto management bodies” concept and any dividend distributions from such company are regarded as income derived from sources within China, PRC income tax withholding may be imposed and applied to dividend distributions from the deemed PRC tax resident enterprise to its foreign shareholders.
VAT
Pursuant to the Interim Regulations on Value-added Tax as amended on November 10, 2008, and the Implementing Rules of the Interim Regulations on Value-added Tax as amended on October 28, 2011, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in the PRC are required to pay VAT. The Interim Regulations on Value-added Tax and their Implementing Rules also provide that gross proceeds from sales and importation of goods and provision of services are generally subject to a VAT rate of 17% with exceptions for certain categories of goods that are taxed at a rate of 13%.
On September 23, 2013, the SAT and the MOF issued the Circular on the Value-added Tax Policy for Solar Power Generation, according to which, from October 1, 2013 to December 31, 2015, solar power producers selling electricity are entitled to a 50% immediate refund of any VAT paid.
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Foreign Currency Exchange
Foreign currency exchange regulation in the PRC is primarily governed by the Regulations on the Administration of Foreign Exchange, and the Provisions on the Administration of Settlement, Sale and Payment of Foreign Exchange. Currently, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service related foreign exchange transactions. Conversion of Renminbi for most capital account items, such as direct investment, security investment and repatriation of investment, however, is still subject to registration with the SAFE. Foreign-invested enterprises may buy, sell and remit foreign currencies at financial institutions engaged in foreign currency settlement and sale after providing valid commercial documents and, in the case of most capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign enterprises are also subject to limitations, which include approvals by the NDRC, the MOC, and registration with the SAFE.
In August 2008, the SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or the SAFE Circular No. 142, regulating the conversion by a foreign invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. Pursuant to the SAFE Circular No. 142, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC. In addition, the SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without the SAFE’s approval, and such RMB capital may not in any case be used to repay RMB-denominated loans if the proceeds of such loans have not been used. Violations may result in severe monetary or other penalties. Furthermore, on March 30, 2015, the SAFE issued the Circular on Reforming the Administration Approach Regarding the Foreign Exchange Capital Settlement of Foreign-invested Enterprises, or SAFE Circular NO.19, which will replace the SAFE Circular NO.142 when it becomes effective on June 1, 2015. SAFE Circular NO.19 provides that, among other things, the Renminbi capital converted from the foreign currency registered capital of a foreign-invested enterprise may be used for equity investments within the PRC. Since SAFE Circular NO.19 was recently issued, there are uncertainties in interpretation and implementation as to actual transactions.
In February 2012, the SAFE promulgated the Notice on the Administration of Foreign Exchange Matters for Domestic Individuals Participating in the Stock Incentive Plans of Overseas Listed Companies, or the Stock Option Notice. The Stock Option Notice replaced a prior rule issued by SAFE in 2007, the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in an Employee Stock Holding Plan or Stock Option Plan of an Overseas-Listed Company. Under the Stock Option Notice, domestic individuals who participate in equity incentive plans of an overseas listed company are required, through a PRC agent or PRC subsidiary of such listed company, to register with SAFE and complete certain other bank and reporting procedures. The Stock Option Notice simplifies the requirements and procedures for the registration of stock incentive plan participants, especially in respect of the required application documents and the absence of strict requirements on offshore and onshore custodian banks, as were stipulated in the previous rules.
In November 2012, the SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts (e.g. pre-establishment expenses account, foreign exchange capital account, guarantee account), the reinvestment of lawful incomes derived by foreign investors in the PRC (e.g. profit, proceeds of equity transfer, capital reduction, liquidation and early repatriation of investment), and purchase and remittance of foreign exchange as a result of capital reduction, liquidation, early repatriation or share transfer in a foreign-invested enterprise no longer require the SAFE’s approval, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible before. In addition, the SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by the SAFE or its local branches over direct investment by foreign investors in the PRC must be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by the SAFE and its branches.
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On July 4, 2014, the SAFE issued the Circular on the Administration of Foreign Exchange Issues Related to Overseas Investment, Financing and Roundtrip Investment by Domestic Residents through Offshore Special Purpose Vehicles, or the SAFE Circular 37, which replaced the former circular commonly known as “SAFE Circular 75” promulgated on October 21, 2005. The SAFE Circular 37 requires PRC residents to register with the competent local SAFE branch in connection with their direct establishment or indirect control of an offshore special purpose vehicle, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. The SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as any change of basic information (including change of the PRC residents, name and operation term), increase or decrease of capital contribution by the PRC residents, share transfer or exchange, merger, division or other material events. In the event that a PRC resident holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under the PRC law for evasion of foreign exchange controls.
On February 13, 2015, the SAFE promulgated the Circular on Further Simplification and Improvement of Foreign Currency Administration Policies on Direct Investment, which will be effective on June 1, 2015. This circular aims to further remove or simplify the approval requirements of SAFE upon the direct investment by foreign investors.
Dividend Distribution
The principal laws and regulations governing distribution of dividends paid by wholly foreign owned enterprises include the Company Law of the PRC as amended on December 28, 2013, the Wholly Foreign Owned Enterprise Law of the PRC as amended on October 31, 2000, and the Implementing Rules of the Wholly Foreign Owned Enterprise Law of the PRC as amended on February 19, 2014.
Under these laws and regulations, foreign-invested enterprises in the PRC may pay dividends only out of their accumulated profits, if any, as determined in accordance with the PRC accounting standards and regulations. In addition, a wholly foreign owned enterprise in the PRC is required to set aside as general reserves at least 10% of its after-tax profit, 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 not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year. A wholly foreign owned enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds and expansion funds, which may not be distributed to equity owners except in the event of liquidation.
Intellectual Property Rights
Patent
The PRC has domestic laws for the protection of rights in copyrights, patents, trademarks and trade secrets. The PRC is also a signatory to the world’s major intellectual property conventions, including:
· | Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980); |
· | Paris Convention for the Protection of Industrial Property (March 19, 1985); |
· | Patent Cooperation Treaty (January 1, 1994); and |
· | The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001). |
Patents in the PRC are governed by the China Patent Law (March 12, 1984), as amended and its Implementing Regulations (January 19, 1985), as amended.
The PRC is a signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial designs).
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The China Patent Law covers three kinds of patents, namely, patents for inventions, utility models and designs. The Chinese patent system adopts the principle of first to file, which means where multiple patent applications are filed for the same invention, a patent will be granted only to the party that filed the application first. Consistent with international practice, the PRC only allows the patenting of inventions or utility models that possess the characteristics of novelty, inventiveness and practical applicability. For a design to be patentable, it must not be identical with or similar to any design which has been publicly disclosed in publications in the country or abroad before the date of filing or has been publicly used in the country before the date of filing, and must not be in conflict with any prior right of another.
PRC law provides that anyone wishing to exploit the patent of another must enter into a written licensing contract with the patent holder and pay the patent holder a fee. One rather broad exception to this, however, is where a party possesses the means to exploit a patent for inventions or utility models under certain circumstances but cannot obtain a license from the patent holder on reasonable terms and in a reasonable period of time, the SIPO, is authorized to grant a compulsory license. A compulsory license can also be granted where a national emergency or any extraordinary state of affairs occurs or where the public interest so requires. The patent holder may appeal such a decision within three months from receiving notification by filing a suit in people’s court in the PRC.
PRC law defines patent infringement as the exploitation of a patent without the authorization of the patent holder. A patent holder who believes his patent is being infringed may file a civil suit or file a complaint with a local PRC intellectual property administrative authority, which may order the infringer to stop the infringing acts. A preliminary injunction may be issued by the people’s court upon the patentee’s or the interested parties’ request before any legal proceedings are instituted or during the proceedings. Evidence preservation and property preservation measures are also available both before and during the litigation. Damages in the case of patent infringement are determined as either the loss suffered by the patent holder arising from the infringement or the benefit gained by the infringer from the infringement. If it is difficult to ascertain damages in this manner, damages may be determined with reference to the license fee under a contractual license.
Trademark
The PRC Trademark Law, adopted in 1982 and revised in 1993, 2001 and 2013, with its implementation rules adopted in 2002 and revised in 2014, protects registered trademarks. The Trademark Office of the State Administration of Industry and Commerce handles trademark registrations and grants trademark registrations for a term of ten years which are renewable upon maturity. Trademark license agreements must be filed with the Trademark Office for record.
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C. | Organizational Structure |
The following table sets out our principal subsidiaries as of the date of this annual report:
Subsidiaries | Date of Incorporation | Place of Incorporation | Percentage of Ownership | |||
JinkoSolar Technology Limited (“Paker”) | November 10, 2006 | Hong Kong | 100% | |||
Jinko Solar Co., Ltd. (“Jiangxi Jinko”) | December 13, 2006 | PRC | 100% | |||
Zhejiang Jinko Solar Co., Ltd.("Zhejiang Jinko") | June 30, 2009 | PRC | 100% | |||
JinkoSolar International Limited (“JinkoSolar International”) | November 25, 2009 | Hong Kong | 100% | |||
Jinko Solar Import and Export Co., Ltd. ("Jinko Import and Export") | December 24, 2009 | PRC | 100% | |||
JinkoSolar GmbH (“Jinko GmbH”) | April 1, 2010 | Germany | 100% | |||
Zhejiang Jinko Trading Co., Ltd.("Zhejiang Trading") | June 13, 2010 | PRC | 100% | |||
JinkoSolar (U.S.) Inc. ("Jinko US") | August 19, 2010 | USA | 100% | |||
Jiangxi Photovoltaic Materials Co., Ltd ("Jiangxi Materials") | December 1, 2010 | PRC | 100% | |||
JinkoSolar (Switzerland) AG(“Jinko Switzerland”) | May 3, 2011 | Switzerland | 100% | |||
JinkoSolar (US) Holdings Inc.(“Jinko US Holding”) | June 7, 2011 | USA | 100% | |||
JinkoSolar Italy S.R.L. (“Jinko Italy”) | July 8, 2011 | Italy | 100% | |||
JinkoSolar SAS (“Jinko France”) | September 12, 2011 | France | 100% | |||
Jinko Solar Canada Co., Ltd (“Jinko Canada”) | November 18, 2011 | Canada | 100% | |||
Jinko Solar Australia Holdings Co. Pty Ltd (“Jinko Australia”) | December 7, 2011 | Australia | 100% | |||
Jinko Solar Pty Ltd. (“JinkoSolar South Africa”) | April 13, 2012 | South Africa | 100% | |||
Jinko Solar Japan K.K. (“JinkoSolar Japan”) | May 21, 2012 | Japan | 100% | |||
JinkoSolar Power Engineering Group Limited (“JinkoSolar Power”)* | November 12, 2013 | Cayman | 100% | |||
JinkoSolar WWG Investment Co., Ltd (“WWG Investment”) | April 8, 2014 | Cayman | 100% | |||
JinkoSolar Comércio do Brazil Ltda (“JinkoSolar Brazil”) | January 14, 2014 | Brazil | 100% | |||
Projinko Solar Portugal Unipessoal LDA. | February 20, 2014 | Portugal | 100% | |||
JinkoSolar Mexico S.DE R.L. DE C.V. (“JinkoSolar Mexico”) | February 25, 2014 | Mexico | 100% | |||
Jiangxi Jinko Domestic Photovoltaics Technology Co., Ltd | October 8, 2014 | PRC | 100% | |||
Zhejiang Jinko Financial Leasing Co., Ltd | October 10, 2014 | PRC | 100% | |||
Zhejiang Jinko Domestic Photovoltaics Technology Co., Ltd | October 15, 2014 | PRC | 100% | |||
Shanghai Jinko Photovoltaics Technology Co., Ltd | November 6, 2014 | PRC | 100% | |||
Shanghai Jinko Financial Information Service Co., Ltd | November 7, 2014 | PRC | 100% | |||
JinkoSolar Household PV Technology Holding Co., Ltd | December 30, 2014 | Hong Kong | 100% |
* JinkoSolar Power is the holding company of a number of power plant project companies established in various locations in China.
The following table sets forth information concerning the JinkoSolar Power’s major subsidiaries as of December 31, 2014:
Subsidiaries | Date of Incorporation /Acquisition | Place of Incorporation | Percentage of Ownership | |||
Canton Best Limited (“Canton Best BVI”) ** | September 16, 2013 | BVI | 100% | |||
Wide Wealth Group Holding Limited (“Wide Wealth Hong Kong”)** | June 11, 2012 | Hong Kong | 100% | |||
Jiangxi JinkoSolar Engineering Co., Ltd. (“Jinko Engineering”) (Originally named as Shangrao Jinko PV Technology Engineering Co., Ltd.) | July 28, 2011 | PRC | 100% | |||
Jinko Power Co., Ltd. (Zhejiang) (formerly Haining JinkoSolar Investment Co.,Ltd) | September 14, 2012 | PRC | 100% |
**Canton Best BVI is a wholly owned subsidiary of JinkoSolar Power, and Wide Wealth Hong Kong is a wholly owned subsidiary of Canton Best BVI. Wide Wealth Hong Kong holds solar power operating subsidiaries in PRC.
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D. | Property, Plant and Equipment |
For information regarding our material property, plant and equipment, see “—B. Business Overview—Manufacturing—Manufacturing Capacity and Facilities” in this annual report.
ITEM 4A. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
A. | Operating Results |
We are a global leader in the PV industry based in Jiangxi and Zhejiang Provinces in China. We have built a vertically integrated solar power product value chain, from recovering silicon materials to manufacturing solar modules and solar power generation. We sell most of our solar modules under our own “JinkoSolar” brand, with a small portion of solar modules on an OEM basis. We also sell silicon wafers and solar cells not used in our solar module production. Leveraging our expertise in manufacturing high quality solar modules and our experience in the PV industry, we also develop PV projects in China and provide solar system integration services. As of December 31, 2014, we had annual capacity of approximately 2.5 GW each for silicon ingots and wafers, 2.0 GW for solar cells and 3.2 GW for solar modules. As of December 31, 2014, our share of completed solar power projects amounted to 503 MW.
Our revenues were RMB4,794.8 million, RMB7,078.8 million and RMB9,978.5 million (US$1,608.2 million) in 2012, 2013 and 2014, respectively. We had net loss of RMB1,542.4 million in 2012, and net income of RMB188.0 million and RMB673.0 million (US$108.5 million) in 2013 and 2014, respectively.
Principal Factors Affecting Our Results of Operations
We believe that the following factors have had, and we expect that they will continue to have, a significant effect on the development of our business, financial condition and results of operations.
Industry Demand
Our business and revenue growth depends on the industry demand for solar power and solar power products. In the second half of 2009, demand for solar power and solar power products was significantly affected by the global financial crisis. In early 2010, as the effect of the global financial crisis started to subside, industry demand for solar power and solar power products started to revive. Access to financing continued to improve from 2010 to the first half of 2011, driven by increasing awareness of renewable energy, stronger balance sheets for financing providers and sustainable government incentives to develop solar as an alternative energy solution. However, in 2011, a decrease in payment to solar power producers, in the form of FIT and other reimbursements, and a reduction in available financing caused a decrease in the demand for solar power products, including solar modules, in the European markets. Payments to solar power producers decreased as governments in Europe, under pressure to reduce public debt levels, reduced subsidies such as FIT. Furthermore, many downstream purchasers of solar power products were unable to secure sufficient financing for the solar power projects due to the global credit crunch. Demand for solar modules in Europe fell significantly in 2013. As a result, many solar power producers that purchase solar power products from manufacturers like us were unable or unwilling to expand their operations. Compared with 2013, our business and revenue increased in Europe in 2014, partly due to the significant increase in demand for solar modules in UK.
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We believe the steady reduction in the manufacturing cost of solar power products will stimulate demand for solar power and solar power products in the long term. In particular, decreases in the price of silicon feedstock, improvements in manufacturing techniques for solar power products and economies of scale have continually reduced the unit production costs of solar power products in recent years, which in turn have increased the competitiveness of solar power on an unsubsidised basis relative to conventional power and other renewable energy sources. We expect significant market opportunities to be created as demand continues to grow and the price of solar power approaches that of conventional energy in a number of markets. In the long term, we believe that solar power will continue to have significant growth potential and that demand for our products and services will continue to grow.
Industry Trend for Credit Sales
Most of our sales are made on credit terms and we allow our customers to make payments after a certain period of time subsequent to the delivery of our products. Selling products on credit terms has increased, and may continue to increase our working capital requirements and have a negative impact on our short-term liquidity. See “Item 3. Key Information—D. Risk Factors—Selling our products on credit terms may increase our working capital requirements and expose us to the credit risk of our customers.”
In 2011, the PV industry experienced a series of adverse developments. For more detailed discussions of such adverse developments, see “—Industry Demand” and “—Government Subsidies, Policies and Economic Incentives”. The softened demand for PV products, coupled with the over-supply caused by significantly increased manufacturing capacity in the industry, led to intensified competition among PV module manufacturers.
To accommodate and retain customers in the negative market environment, many PV module manufacturers, including us, shifted from demanding advance payments towards increased use of credit sales and the provision of longer credit terms to both existing and new customers. Starting from the third quarter of 2011, we began to offer new customers credit terms of 60 to 120 days as well as extend similar credit terms to certain existing customers under new contracts.
The increased use of credit sales and the longer credit terms had led to increased accounts receivable turnover and increased the risk of bad debts. For example, our accounts receivable turnover were 156 days, 114 days and 102 days in 2012, 2013 and 2014, respectively. In particular, in 2012, 2013 and 2014, our accounts receivable turnover in the U.S. were 37 days, 45 days and 34 days, respectively; Our accounts recevable turnover in South Africa were nil, 50 days, and 81 days, respectively and our accounts receivable turnover in China were 119 days, 131 days and 146 days, respectively. Correspondingly, we recorded significantly higher provisions for accounts receivable. We recorded provisions for accounts receivable of RMB673.7 million, RMB446.0 million and RMB428.6 million (US$69.1 million) as of December 31, 2012, 2013 and 2014, respectively. We expect the use of credit sales to continue in the industry and this trend will continue to negatively affect our liquidity and our accounts receivable turnover. Based on our ongoing assessment of the recoverability of our outstanding accounts receivable, we may need to continue to provide for doubtful accounts and may need to write off overdue accounts receivable we determine as not collectible.
Pricing of Solar Power Products
The price of our solar modules is influenced by a variety of factors, including polysilicon prices, supply and demand conditions, the competitive landscape and processing technologies.
The implementation of the capacity expansion plans by major solar power product manufacturers in 2009 and 2010 resulted in significant increases in the supply of solar power products in the global market, which contributed to a general decrease in the average selling prices of solar power products in recent years, including solar modules. The slowdown in the growth of demand for solar power products in recent years has further reduced the market prices of solar power products. In addition, decreases in the price of silicon feedstock, improvements in manufacturing techniques for solar power products and economies of scale have continually reduced the unit production costs of solar power products in recent years, which in turn have increased the competitiveness of solar power on an unsubsidized basis relative to conventional power and other renewable energy.
The pricing of solar power products began to stabilize in 2013, as weaker players exited the market. Nonetheless, we expect the market prices of solar power products to continue to decline in the long term due to continued advancements in processing technologies. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—Our future growth and profitability depend on the demand for and the prices of solar power products and the development of photovoltaic technologies.”
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Government Subsidies, Policies and Economic Incentives
We believe that market demand for solar power and solar power products in the near term will continue to substantially depend on the availability of government incentives. Because the cost of solar power currently exceeds, and we believe will continue to exceed in the near term, the cost of conventional fossil fuel energy and certain non-solar renewable energy. Various governments have used policy initiatives to encourage or accelerate the development and adoption of solar power and other renewable energy sources.
Countries in Europe, notably Italy, Germany, France, Belgium and Spain, certain countries in Asia, including China, Japan, India and South Korea, as well as Australia and the United States have adopted renewable energy policies. Examples of government sponsored financial incentives to promote solar power include capital cost rebates, FIT, tax credits, net metering and other incentives to end users, distributors, project developers, system integrators and manufacturers of solar power products.
Governments may reduce or eliminate existing incentive programs for political, financial or other reasons, which will be difficult for us to predict. Reductions in FIT programs may result in a significant fall in the price of and demand for solar power products. For example, the German government has introduced legislation to reduce the FIT program since 2010 due to the strong growth of its domestic solar market. In Spain, since 2009, continued reductions in the FIT as a result of its government’s spending cut backs have resulted in a weakened solar market. In 2010, Italy also announced annual reductions to FIT beginning in 2011 in an effort to impede overheating of its solar market. In 2011 and 2012, several countries, including Germany, Italy, France, Greece, Spain and Belgium continued to reduce their FIT as well as other incentive measures.
Our revenue and operating results may be adversely impacted by unfavorable policy revisions if FIT in the United States and Chile, our two largest export markets, and certain other major markets for solar power and solar power products are further reduced. Electric utility companies or generators of electricity from fossil fuels or other renewable energy sources could also lobby for a change in the relevant legislation in their markets to protect their revenue streams. Government economic incentives could be reduced or eliminated altogether. A significant reduction in the scope or discontinuation of government incentive programs, especially those in our target markets, could cause demand for our products and solar power to decline and have a material adverse effect on our business, financial condition, results of operations and prospects. We believe that the growth of the solar power industry in the short term will continue to depend largely on the availability and effectiveness of government incentives for solar power products and the competitiveness of solar power in relation to conventional and other renewable energy resources in terms of cost. In addition, our revenue from the sale of electricity generated from our solar power projects may be adversely impacted by unfavorable policy revisions of FIT in China, as FIT constitute a substantial part of the payments made to our projects for the electricity generated and sold.
Our business may also be affected by the trade policies of government or international trade bodies, particularly in our major export markets, such as Europe. For example, during 2012, the U.S. Department of Commerce imposed a cash deposit rate of 13.94% (for dumping margin) and 15.24% (for subsidy rate) on our products for the imports of crystalline silicon PV cells, whether or not assembled into modules from the People’s Republic of China. As a result of the latest round of investigations initiated in December 2013 by the International Trade Commission and in January 2014 by the U.S. Department of Commerce against imports of certain solar PV products from China, we may be subject to new anti-dumping and countervailing duties imposed by the U.S. government. In addition, on December 5, 2013, the European Council announced its final decision imposing definitive anti-dumping and anti-subsidy duties on imports of crystalline silicon PV cells and modules originating from or consigned from China. An average duty of 47.7%, consisting of the anti-dumping and anti-subsidy duties, will be applied for a period of two years beginning on December 6, 2013 to Chinese solar panel exporters who cooperated with the European Commission’s investigations. On the same day, the European Commission announced its decision to confirm the acceptance of the price undertaking offered by Chinese export producers, including JinkoSolar, to limit their exports of solar panels to the European Union and for no less than a minimum price, which will exempt us from both anti-dumping and anti-subsidy duties. We expect our exports to both the U.S. market and European market to be adversely affected by these duties. Our direct sales to the U.S. market and European market accounted for 17.7% and 15.6 % of our total revenue in 2014, respectively.
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In particular, the revenues and profitability of our solar power generation business in China will depend to a significant extent on regulatory policies in China. We have recently expanded our solar power generation business in response to a number of favorable policy developments. These policy developments have presented new business opportunities, increased the stability of our earnings and improved our anticipated revenue and profitability. In 2013, China’s State Council described principles promoting the PV industry through (i) the exploration of the distributed PV power generation market, (ii) the improvement to the grid connection management and service, in particular for PV power generation, (iii) the improvement to pricing and subsidy policies and development of fund for renewable energy and (iv) support from the financial institutions to the PV industry, among other matters. China’s State Council also recently increased the installed capacity target for solar electricity a number of times, announcing, in 2013, that the installed capacity for solar electricity is expected to reach more than 35 GW by 2015 at a growth rate of about 10 GW a year between now and then, and to reach more than 100 GW by 2020. In addition, in 2013, the NDRC, the National Energy Commission and the MOF instituted a number of measures to standardize settlement of FIT. In 2013, the MOF also proposed to almost double the renewable surcharge for electricity end-users from RMB0.008 per kW to RMB0.015 per kW, effective September 25, 2013. In 2013, the NDRC also announced that distributed-generation-connected projects will receive new subsidies.
Our solar power generation and operations capabilities
Our financial condition and results of operations depend on our ability to successfully continue to develop new projects and operate our existing projects. We expect to build and manage a greater number of projects, which we expect to present additional challenges to our internal processes, external construction management, working capital management and financing capabilities. Our financial condition, results of operations and future success depend, to a significant extent, on our ability to continue to identify suitable sites, expand our pipeline of projects with attractive returns, obtain required regulatory approvals, arrange necessary financing, manage the construction of our projects on time and within budget, and successfully operate PV projects.
Changing Product and Service Mix
Our product mix has evolved rapidly since our inception, as we expanded our production capabilities to manufacture and sell downstream solar power products and to capture the efficiencies of our vertically-integrated production process. Before 2009, our sales consisted of silicon wafers, silicon ingots and recovered silicon materials. We commenced production and sale of solar cells and solar modules in the second half of 2009. In 2010, we successfully achieved fully vertically-integrated solar module production and made sales of solar modules our largest source of revenue. As of December 31, 2014, we had annual capacity of approximately 2.5 GW each for silicon ingots and wafers, 2.0 GW for solar cells and 3.2 GW for solar modules. By creating a fully vertically-integrated production chain, we have succeeded in continually driving down average solar modules manufacturing cost per watt.
We commenced developing solar power projects and providing solar system integration services in late 2011. As of December 31, 2014, our share of completed solar power projects amounted to 503 MW. As we expand our solar power generation and solar system integration business, we expect that the contribution of this new business to our revenue will increase, which will have a positive effect on our results of operations and gross profit margin as solar power generation and solar system integration business normally has a higher gross profit margin than sales of solar modules.
Manufacturing Technologies
Solar modules are our principal products. As solar modules are priced based on the number of watts of electricity they generate, the advancement of manufacturing technologies in increasing the conversion efficiency of solar cells and production efficiency will enable us to improve our gross profit margin. We continually make efforts to develop advanced manufacturing technologies to increase the conversion efficiency of our solar cells while striving to reduce our average production cost. In addition to our own research and development team, we collaborate with third party research institutes to improve our manufacturing technologies and the conversion efficiency of our solar cells. As a result of these efforts, in 2012, 2013 and 2014, the average conversion efficiency rate of our solar cells using our monocrystalline silicon wafers were 18.6%, 18.6% and 19.6%, respectively, and the conversion efficiency rate of our solar cells using our multicrystalline silicon wafers were 17.6%, 17.9% and 18.2%, respectively.
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Selected Statement of Operations Items
Revenues
Currently, we derive our revenues primarily from the sale of solar modules and to a lesser extent from the sales of silicon wafers and solar cells. We also derive a small portion of revenues from providing processing services and solar system integration services as well as from the sale of electricity generated by our projects. We expect the sale of solar modules to continue to be our primary revenue source. The following table presents our revenues, net of VAT, by products and services, as sales amounts and as percentages of total revenues, for the periods indicated:
2012 | 2013 | 2014 | ||||||||||||||||||||||||||
(RMB
in thousands) | (%) | (RMB
in thousands) | (%) | (RMB
in thousands) | (US$
in thousands) | (%) | ||||||||||||||||||||||
Products | ||||||||||||||||||||||||||||
Recovered silicon materials | 270.4 | 0.0 | 14,559.7 | 0.2 | 11,272.6 | 1,816.8 | 0.1 | |||||||||||||||||||||
Silicon ingots | 1,885.6 | 0.0 | 1,189.7 | 0.0 | - | - | - | |||||||||||||||||||||
Silicon wafers | 328,428.6 | 6.8 | 70,637.0 | 1.0 | 286,585.0 | 46,189.1 | 2.9 | |||||||||||||||||||||
Solar cells | 138,686.4 | 2.9 | 184,203.1 | 2.6 | 200,643.6 | 32,337.9 | 2.0 | |||||||||||||||||||||
Solar modules | 3,897,288.0 | 81.3 | 6,660,317.5 | 94.1 | 9,155,396.0 | 1,475,582.0 | 91.8 | |||||||||||||||||||||
Services | ||||||||||||||||||||||||||||
Solar system EPC | 213,174.4 | 4.5 | 201.1 | 0.0 | 11,209.6 | 1,806.7 | 0.1 | |||||||||||||||||||||
Processing services | 213,427.9 | 4.5 | 71,010.7 | 1.0 | 69,581.4 | 11,214.5 | 0.7 | |||||||||||||||||||||
Revenue from generated electricity | 1,607.1 | 0.0 | 76,719.7 | 1.1 | 243,840.4 | 39,299.9 | 2.4 | |||||||||||||||||||||
Total | 4,794,768.4 | 100.0 | 7,078,838.5 | 100.0 | 9,978,528.6 | 1,608,246.9 | 100.0 |
Our revenues are affected by sales volumes, product mix and average selling prices. The following table sets forth, by products, our sales volumes and approximate average selling prices for the periods indicated:
2012 | 2013 | 2014 | ||||||||||
Sales volume: | ||||||||||||
Recovered silicon materials (metric tons) | 0.0 | 5.0 | 3.9 | |||||||||
Silicon ingots (MW) | 1.1 | 0.3 | - | |||||||||
Silicon wafers (MW) | 197.4 | 54.8 | 229.6 | |||||||||
Solar cells (MW) | 78.5 | 113.2 | 134.2 | |||||||||
Solar modules (MW) | 912.4 | 1,765.1 | 2,423.1 | |||||||||
Average selling price (RMB): | ||||||||||||
Recovered silicon materials (per kilogram) | - | 2.9 | 2.9 | |||||||||
Silicon ingots (per watt) | 1.6 | 4.0 | - | |||||||||
Silicon wafers (per watt) | 1.7 | 1.3 | 1.2 | |||||||||
Solar cells (per watt) | 1.8 | 1.6 | 1.5 | |||||||||
Solar modules (per watt) | 4.3 | 3.8 | 3.8 |
Cost of Revenues
Cost of revenues primarily consists of: (i) raw materials, which primarily consist of both virgin polysilicon and recoverable silicon materials; (ii) consumables and components, which include crucibles for the production of monocrystalline and multicrystalline silicon ingots, steel alloy saw wires, slurry, chemicals for raw material cleaning and silicon wafer cleaning, and gases such as argon and silane, as well as silicon wafers and solar cells we procure from third parties for the production of solar modules; (iii) direct labor costs, which include salaries and benefits for employees directly involved in manufacturing activities; (iv) overhead costs, which consist of equipment maintenance costs, cost of utilities including electricity and water; (v) depreciation of property, plant, equipment and project assets; and (vi) processing fees paid to third party factories relating to the outsourced production of solar cells and solar modules; (vii) subcontractor cost and those indirect costs related to contract performance, such as indirect labor, supplies and tools. In 2012, 2013 and 2014, our cost of revenues was RMB4,562.5 million, RMB5,641.5 million and RMB7,738.5 million (US$1,247.2 million), respectively.
Operating Expenses
Our operating expenses include selling and marketing expenses, general and administrative expenses, research and development expenses, impairment of long-lived assets and provision for advance to suppliers.
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Selling and Marketing Expenses. Our selling and marketing expenses consist primarily of shipping and handling expenses, warranty cost, exhibition costs, salaries, bonuses and other benefits for our sales personnel as well as sales-related travel and entertainment expenses. In 2012, 2013 and 2014, our selling and marketing expenses were RMB343.4 million, RMB492.6 million and RMB769.0 million (US$123.9 million), respectively.
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and benefits for our administrative, finance and human resources personnel, amortization of land use rights, office expenses, entertainment expenses, business travel expenses, professional service fees as well as provision for bad debts. In 2012, 2013 and 2014, our general and administrative expenses were RMB760.8 million, RMB230.1 million and RMB423.9 million (US$68.3 million), respectively.
Research and Development Expenses. Research and development expenses consist primarily of silicon materials used in our research and development activities and, salaries, bonuses and other benefits for research and development personnel, and depreciation of equipment for research and development. In 2012, 2013 and 2014, our research and development expenses were RMB69.0 million, RMB65.5 million and RMB106.6 million (US$17.2 million), respectively.
Provision for advance to suppliers. In 2012, we made provision of RMB227.1 million for the outstanding balances of inventory purchase prepayments, primarily to two suppliers under long-term polysilicon supply contracts as a result of the continuing decline in the polysilicon purchase price and the adverse developments in those suppliers’ operations during 2012. We did not make a provision for the outstanding balances of inventory purchase prepayments in 2013 and made RMB2.7 million (US$0.4 million) provision for the outstanding balances of inventory purchase prepayments in 2014.
Impairment of long-lived assets. Impairment of long-lived assets consist primarily as a result of the obsolescence of certain equipment in our wafer and cell production line. In 2012, 2013 and 2014, we recognized impairment of long-lived assets of RMB65.5 million, RMB3.6 million and RMB6.2 million (US$1.0 million), respectively.
Interest Expenses, Net
Our interest expenses consist primarily of interest expenses with respect to the issuance of convertible senior notes, long-term bonds, short-term and long-term borrowings from banks and other lenders. In 2012, 2013 and 2014, we incurred net interest expenses of RMB221.7 million, RMB223.4 million and RMB287.7 million (US$46.4 million), respectively.
Convertible Senior Notes Issuance Costs
We incurred costs in association with the issuance of convertible senior notes in the principal amount of US$150 million in January 2014. Our convertible senior notes issuance costs consist primarily of legal fees, initial purchasers’ discount and printing fees. Since we elected to measure the convertible senior notes in their entirety, at fair value, issuance costs of RMB26.1 million (US$4.2 million) associated with the offering were expensed upon issuance of the notes.
Government Grants
From time to time we apply for and receive government incentives in the form of subsidies from local and provincial governments. Government grants which are not subject to any condition and are not related to assets are recognized as subsidy income when received. The governments grant subsidies to encourage and support large-scale enterprises and high technology enterprises based in the relevant locations to upgrade their technology and develop the overseas market. We record such subsidies as subsidy income as there are no further obligations for us. The amount of government subsidies we receive may vary from period to period and there is no assurance that we will continue to receive government subsidy in the future periods. In 2012, 2013 and 2014, our government subsidy income, which was not assets related, was RMB40.9 million, RMB7.6 million and RMB49.8 million (US$8.0 million), respectively.
Government grants related to assets are initially recorded as other payables and accruals. These grants will be deducted from the carrying amount when the assets are ready for use and approved by related government. We received government grants related to assets of RMB119.8 million, RMB63.3 million and RMB92.4 million (US$14.9 million) in 2012, 2013 and 2014, respectively.
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Exchange Loss/(Gain)
In 2012, we had foreign-exchange loss of RMB36.5 million primarily due to the depreciation of the Euro against the Renminbi. In 2013 and 2014, we incurred foreign exchange loss of RMB38.5 million and RMB147.1 million (US$23.7 million), respectively, primarily due to the depreciation of the Euro and Japanese Yen against the Renminbi.
Other Income/ (Expenses), Net
Other income/ (expenses) consists primarily of income from sales of used packaging materials, compensation from our suppliers and expenses relating to charitable donations. In 2012, we had net other income of RMB4.3 million mainly due to compensation received from one of our suppliers for breach of contact. In 2013, we had net income of RMB6.9 million in 2013 primarily due to compensation received from local government for power cut. We had net expense of RMB1.7 million (US$0.3 million) in 2014.
Change in Fair Value of Forward Contracts
In 2012, we recognized loss of RMB9.0 million as a result of a change in fair value of foreign currency forward contacts due to the depreciation of the Euro against the Renminbi. In 2013, we recognized a gain of RMB48.4 million as a change in fair value of foreign currency forward contracts due to the fluctuation of the Euro against the Renminbi in 2013. We recognized a loss of RMB0.7 million (US$0.1 million) as a change in fair value of foreign currency forward contracts due to the fluctuation of the Euro against the Renminbi in 2014.
Change in Fair Value of Convertible Senior Notes and Capped Call Options
In 2012 and 2013, we recognized loss from a change in fair value of convertible senior notes and capped call option of RMB97.2 million and RMB212.9 million, respectively. In 2014, we recognized gain from a change in fair value of convertible senior notes and capped call option of RMB64.1 million (US$10.3 million).
Change in Fair Value of Available-for-sales Investment
In 2012 and 2013, we recognized gain from a change in fair value of available-for-sales investment of nil and RMB6.0 million, respectively. In 2014, we recognized loss from a change in fair value of available-for-sales of RMB5.8 million (US$0.9 million).
Share-based Compensation
We adopted our 2009 Long Term Incentive Plan on July 10, 2009, as amended, and options for a total of 5,685,322 ordinary shares were outstanding as of December 31, 2014. We adopted our 2014 Equity Incentive Plan on August 18, 2014 and options for a total of 9,940,000 ordinary shares were outstanding as of December 31, 2014. All share-based payments to employees and directors, including grants of employee stock options, are measured based on the fair value of the stock options at the grant date. We have categorized these share-based compensation expenses in our (i) cost of revenues; (ii) selling and marketing expenses; (iii) general and administrative expenses; and (iv) research and development expenses, depending on the job functions of the grantees of our restricted shares and share options. The following table sets forth the allocation of our share-based compensation expenses both in terms of the amounts and as a percentage of total share-based compensation expenses in 2012, 2013 and 2014:
2012 | 2013 | 2014 | ||||||||||||||||||
(RMB
in thousands) | (RMB
in thousands) | (RMB
in thousands) | (US$
in thousands) | (%) | ||||||||||||||||
Cost of revenues | 947.4 | 505.0 | 203.1 | 32.7 | 0.5 | |||||||||||||||
Selling and marketing expense | 2,128.2 | 1,499.2 | 6,397.9 | 1,031.2 | 15.0 | |||||||||||||||
General and administrative expense | 14,267.5 | 15,988.0 | 34,164.5 | 5,506.3 | 80.0 | |||||||||||||||
Research and development expense | - | - | 1,924.4 | 310.2 | 4.5 | |||||||||||||||
Total share-based compensation expenses | 17,343.1 | 17,992.2 | 42,689.9 | 6,880.4 | 100.0 |
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Taxation
We derive net income primarily from Jiangxi Jinko and Zhejiang Jinko, our operating subsidiaries in China. Under the CIT Law, which became effective on January 1, 2008, domestic and foreign invested companies in China are generally subject to corporate income tax at the rate of 25%. However, according to the CIT Law and the Implementation Rules of the CIT Law, the “two-year exemption” and “three-year half deduction” tax preferential policy was grandfathered, under which a foreign invested enterprise of a production nature scheduled to operate for no less than ten years would be eligible for a corporate income tax exemption of two years followed by a three-year 50% reduction on its applicable corporate income tax rate, in each case beginning with its first year of profitability. As a result, Jiangxi Jinko and Zhejiang Jinko were exempted from corporate income tax in 2009 and subject to corporate income tax at the reduced rate of 12.5% from 2010 to 2012. Zhejiang Jinko, Jiangxi Jinko and Jiangxi Materials were designated by the relevant local authorities as “High and New Technology Enterprises” under the CIT Law. Jiangxi Jinko and Jiangxi Materials were and would be subject to a preferential tax rate of 15% for their fiscal years ended December 31, 2014 and 2015 if the relevant conditions are met. Zhejiang Jinko was subject to a preferential tax rate of 15% for the fiscal year ended December 31, 2014. Applications for the preferential tax rate of Zhejiang Jinko for the fiscal years ending December 31, 2015 to 2017 are currently under review.
In addition, under the CIT Law, an enterprise established outside China with “de facto management bodies” within China may be considered a PRC tax resident enterprise and will normally be subject to the PRC corporate income tax at the rate of 25% on its global income. Under the Implementation Rules of the CIT Law, the term “de facto management bodies” refers to management bodies which have, in substance, overall management and control over such aspects as the production and business, personnel, accounts, and properties of the enterprise. On April 22, 2009, the SAT promulgated a circular that sets out procedures and specific criteria for determining whether “de facto management bodies” for overseas incorporated, domestically controlled enterprises are located in China. However, as this circular only applies to enterprises incorporated under laws of foreign jurisdictions that are controlled by PRC enterprises or groups of PRC enterprises, it remains unclear how the tax authorities will determine the location of “de facto management bodies” for overseas incorporated enterprises that are controlled by individual PRC tax residents such as our company, JinkoSolar Technology and Wide Wealth Group Holdings Limited. As such, it is still unclear if the PRC tax authorities would subsequently determine that, notwithstanding our status as the Cayman Islands holding company of our operating business in China, we should be classified as a PRC tax resident enterprise, whereby our global income will be subject to PRC income tax at a tax rate of 25%. In any event, our company, JinkoSolar Technology and Wide Wealth Group Holdings Limited do not have substantial income from operations outside of China, and we do not expect to derive substantial earnings from operations outside of China in the foreseeable future.
Under the CIT Law and the Implementation Rules of the CIT Law, a withholding tax at the rate of 10% will normally be applicable to dividends payable to investors that are “non-resident enterprises,” to the extent such dividends have their source within China. Under the tax arrangement between Hong Kong and China, a reduced tax rate of 5% for dividends paid to a Hong Kong company will be applied provided that the beneficial owner of the dividends is a Hong Kong resident enterprise which directly owns at least a 25% equity interest in the PRC subsidiary. Both JinkoSolar Technology and Wide Wealth Group Holdings Limited are our Hong Kong subsidiaries. 100% of the equity interests in Jiangxi Jinko, 25% of the equity interests in Zhejiang Jinko and 100% of the equity interests in JinkoSolar (Shanghai) Management Co., Ltd. are owned directly by JinkoSolar Technology. 100% of the equity interests in Shangrao Jinko PV Technology Engineering Co., Ltd. are owned directly by Wide Wealth Group Holdings Limited. If neither JinkoSolar Technology nor Wide Wealth Group Holdings Limited is deemed a PRC tax resident enterprise and is treated as the beneficial owner of the dividends paid by Jiangxi Jinko, Zhejiang Jinko and JinkoSolar (Shanghai) Management Co., Ltd. to JinkoSolar Technology, or the dividends paid by Shangrao Jinko PV Technology Engineering Co., Ltd. to Wide Wealth Group Holdings Limited, as the case may be, and owns such equity for at least 12 consecutive months before receiving such dividends, such dividends could be subject to a 5% withholding tax pursuant to the tax arrangement between Hong Kong and China as discussed above. According to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements issued on February 20, 2009, a non-resident enterprise that intends to enjoy the preferential treatment under the relevant tax agreement is required to own the requisite amount of equity of a PRC enterprise specified by the relevant tax agreement for at least 12 consecutive months before obtaining the dividends. According to the Administrative Measures for Non-Residents Enjoying Tax Treaty Benefits (Trial Implementation) issued by the SAT on August 24, 2009 which became effective on October 1, 2009, the application of the preferential withholding tax rate under a bi-lateral tax treaty is subject to the approval of competent PRC tax authorities. According to the Circular of the State Administration of Taxation on How to Understand and Identify a “Beneficial Owner” under Tax Treaties which became effective on October 27, 2009, and the Announcement of the State Administration of Taxation on the Determination of “Beneficial Owners” in the Tax Treaties, effective on June 29, 2012, the PRC tax authorities must evaluate whether an applicant for treaty benefits in respect of dividends, interest and royalties qualifies as a “beneficial owner” on a case-by-case basis and following the “substance over form” principle. The circular sets forth the criteria to identify a “beneficial owner” and provides that an applicant that does not carry out substantial business activities, or is an agent or conduit company may not be deemed a “beneficial owner” of the PRC subsidiary and therefore may not enjoy tax treaty benefits. According to Announcement of the State Administration of Taxation on Issues Concerning the Recognition of Beneficial Owners in Entrusted Investments, effective on June 1, 2014, non- residents may be recognized as “beneficial owners” and enjoy the treaty benefits for the income derived from the PRC from certain investments.
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Pursuant to the Provisional Regulation of the PRC on Value Added Tax issued by the State Council of China, effective on January 1, 1994 and further amended and effective on January 1, 2009, or the Provisional Regulation, and its Implementing Rules, all entities and individuals that are engaged in the sale of goods, the provision of processing, repairs and installation services and the importation of goods in China are required to pay VAT. According to the Provisional Regulation, gross proceeds from sales and importation of goods and provision of services are generally subject to a VAT rate of 17% with exceptions for certain categories of goods that are taxed at a VAT rate of 13%. In addition, under the current Provisional Regulation, the input VAT for the purchase of fixed assets is deductible from the output VAT, except for goods or services that are used in non-VAT taxable items, VAT exempted items and welfare activities, or for personal consumption. According to former VAT levy rules, equipment imported for qualified projects is entitled to import VAT exemption and the domestic equipment purchased for qualified projects is entitled to VAT refund. However, such import VAT exemption and VAT refund were both eliminated as of January 1, 2009. On the other hand, if a foreign-invested enterprise obtained the confirmation letter of Domestic or Foreign Invested Project Encouraged by the State before November 10, 2008 and declared importation of equipment for qualified projects before June 30, 2009, it may still be qualified for the exemption of import VAT. The importation of equipment declared after July 1, 2009 will be subject to the import VAT.
Effective January 1, 2012, the PRC Ministry of Finance and the SAT launched the Pilot Program in Shanghai. On April 10, 2013, the State Council announced the nationwide implementation of the Pilot Program, which took effect from August 1, 2013. VAT payable on taxable services provided by a general VAT taxpayer for a taxable period is the net balance of the output VAT for the period after crediting the input VAT for the period. The amount of VAT payable does not result directly from output VAT generated from taxable services provided. In addition, the PRC Ministry of Finance and the SAT released a notice, which further expanded the scope of taxable services subject to VAT on December 12, 2013, effective from January 1, 2014, replacing the Business Tax to Value Added Tax Circular 37 released by the PRC Ministry of Finance and the SAT on May 24, 2013.
Under the current law of the Cayman Islands, we are not subject to any income or capital gains tax. In addition, dividend payments made by us are not subject to any withholding tax in the Cayman Islands.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of our contingent assets and liabilities at the end of each reporting period, and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these estimates and assumptions based 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. 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 the consolidated financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgments and other uncertainties affecting the application of such policies, and (iii) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of consolidated our financial statements.
Revenue recognition
We recognize revenue for product sales when persuasive evidence of an arrangement exists, delivery of the product has occurred and title and risk of loss has passed to the customer, the sales price is fixed or determinable and the collectability of the resulting receivable is reasonably assured. For all sales, we require a contract or purchase order which quantifies pricing, quantity and product specifications.
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For sales of PV products from the PRC to foreign customers, delivery of the products generally occurs at the point in time the product is delivered to the named port of shipment, which is when the risks and rewards of ownership are transferred to the customer. For sales of PV products to domestic customers in the PRC or by foreign subsidiaries, delivery of the product generally occurs at the point in time the product is received by the customer, which is when the risks and rewards of ownership have been transferred. In the case of sales that are contingent upon customer acceptance, revenue is not recognized until the deliveries are formally accepted by the customers.
We entered into certain sales contracts with retainage terms since 2012, under which customers were allowed to withhold payment of 5% to 10% of the full contract price as retainage for a specified period which generally range from one year to two years (the “Retainage Period”). Given our limited experience with respect to the collectability of the retainage, we defer recognition of the retainage as revenue until the customers pay us after the Retainage Period expires. As of December 31, 2014, the total amounts of retainage that were not recognized as revenue were RMB194.2 million (US$31.3 million).
Advance payments received from customers for the future sale of inventory are recognized as advances from third party customers in the consolidated balance sheets. Advances from third party customers are recognized as revenues when the conditions for revenue recognition described above have been satisfied. Advances from third party customers have been recognized as a current liability because the amount at each balance sheet date is expected to be recognized as revenue within 12 months.
We provide solar power product processing services to customers and the revenue of processing services is recognized upon completion, which is generally evidenced by delivery of processed products to the customers.
We recognize electricity generation revenue when persuasive evidence of a power purchase arrangement with the power grid company exists, electricity has been generated and be transmitted to the grid and the electricity generation records are reconciled with the grid companies, the price of electricity is fixed or determinable and the collectability of the resulting receivable is reasonably assured. The price of electricity generated by our utility-scale and groud-mounted DG power plants include a portion that is subsidized by the Chinese central government.
In addition, our rooftop DG power plants are entitled to additional subsidies granted by Chinese central or local government on top of the sales price stipulated in the electricity sales supply agreements.
Since July 1, 2013, we recognize these subsidies as revenue when electricity is generated and transmitted to the grid and the electricity generation records are reconciled with the grid company because there are no further conditions attached to those subsidies and the above revenue recognition criteria are satisfied at such point of time.
We recognize revenue related to solar system integration projects on the percentage-of-completion basis. We estimate our revenues using the cost-to-cost method, whereby it derives a ratio by comparing the costs incurred to date to the total costs expected to be incurred on the project. We apply the ratio computed in the cost-to-cost analysis to the contract price to determine the estimated revenues earned in each period. When we determine that total estimated costs will exceed total revenues under a contract, we record a loss accordingly. No loss provision was recorded in the years ended December 31, 2012, 2013 and 2014.
Before the third quarter of 2014, we received a government subsidy portion of electricity revenue from local grid companies without being requested to issue VAT invoices, and we recognized 100% of the government subsidy portion as revenue, which was consistent with the relevant PRC tax regulations. During the third quarter of 2014, our operating subsidiaries were requested by the State Grid Corporation of China to issue VAT invoices for the government subsidy portion as a condition for the grid companies to pay the government subsidy to us. By issuing the VAT invoice, an operating subsidiary would be subject to VAT liability on the government subsidy portion of electricity generation revenue. As a result of such change, we recorded a cumulative VAT payable and a reduction of revenue in 2014 for the amount of RMB7.7 million related to previous years. In addition, starting from 2014, we record VAT payable with a corresponding reduction to revenue at the time of recognizing the government subsidy as revenue.
In the PRC, VAT at a general rate of 17% on the invoiced amount is collected by us on behalf of tax authorities in respect of sales of product and is not recorded as revenue. VAT collected from customers, net of VAT paid for purchases is recorded as a liability until it is paid to the tax authorities.
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Segment report
We use the management approach in determining reportable operating segments. The management approach considers the internal organization and reporting used by our chief operating decision maker for making operating decisions, allocating resources and assessing performance as the source for determining our reportable segments. Management has determined that we operate our business in two segments, as that term is defined by FASB ASC Topic 280, Segment reporting.
Our first segment is the vertically integrated solar power products manufacturing business (“manufacturing segment”), under which we manufacture silicon ingots, wafers, cells and solar modules.
Our second segment is the downstream solar power projects (“solar power projects segment”), under which we develop, construct and operate the solar power projects, including (i) power generation, (ii) engineering, procurement, and construction (“EPC”), (iii) connecting solar power projects to the grid and operation and maintenance of the solar power projects.
Accounts receivable
Specific provisions are made against accounts receivable for estimated losses resulting from the inability of our customers to make payments. We periodically assess accounts receivable balances to determine whether an allowance for doubtful accounts should be made based upon historical bad debts, specific customer creditworthiness and current economic trends. Accounts receivable in the balance sheets are stated net of such provision, if any. Before approving sales to each customer, we conduct a credit assessment for each customer to evaluate the collectability of such sales. The assessment usually takes into consideration the credit worthiness of such customer and its guarantor, if any, our historical payment experience with such customer, industry-wide trends with respect to credit terms, including the terms offered by competitors, and the macro-economic conditions of the region to which sales will be made. We will execute a sales order with a customer and arrange for shipment only if its credit assessment concludes that the collectability with such customer is reasonably assured. We may also from time to time require security deposits from certain customers to minimize its credit risk. After the sales are made, we closely monitor the credit situation of each customer on an on-going basis for any subsequent change in its financial position, business development and credit rating, and evaluate whether any of such adverse change warrants further action to be taken us, including asserting claims and/or initiating legal proceedings against the customer and/or its guarantor, as well as making provisions. The receivable from insurance is only recorded when insurance claim has been submitted to the insurance company and been accepted and acknowledged by the carrier and recovery is considered reasonably assured. Upon recording the recovery, the bad debt expense is reduced.
Allowances for doubtful accounts receivable were RMB673.7 million, RMB446.0 million and RMB428.6 million (US$69.1 million) for 2012, 2013 and 2014, respectively. In 2014, the decrease of allowances for doubtful accounts receivable was primarily due to the reversal of allowance for bad debts as a result of the subsequent cash collection of long-aged accounts receivable.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the weighted average method. Provisions are made for excessive, slow moving and obsolete inventories as well as for inventories with carrying values in excess of market value. Certain factors could impact the realizable value of inventory. Therefore, we continually evaluate the recoverability based on assumptions about customer demand and market conditions. The evaluation may take into consideration historical usage, expected demand, anticipated sales price, new product development schedules, the effect new products might have on the sale of existing products, product obsolescence, customer concentrations, and other factors. The reserve or write-down is equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write-downs may be required, which could negatively impact our gross profit margin and operating results. If actual market conditions are more favorable, we may have higher gross profit margin when products that have been previously reserved or written down are eventually sold. The sale of previously reserved inventory did not have a material impact on our gross margin percentage for any of the years presented. Provisions for inventories valuation were RMB332.3 million, RMB163.7 million and RMB75.9 million (US$12.2 million) for the years ended December 31, 2012, 2013 and 2014, respectively.
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In addition, we analyze our firm purchase commitments, if any, at each period end. Provision is made in the current period if the net realizable value after considering estimated costs to convert polysilicon into saleable finished goods is higher than market selling price of finished goods as of the end of a reporting period. There was no loss provision recorded related to these long-term contracts for each of the three years ended December 31, 2012, 2013 and 2014.
Property, plant and equipment, net
Property, plant and equipment are stated at cost less accumulated depreciation. Cost includes the prices paid to acquire or construct the assets, interest capitalized during the construction period and any expenditure that substantially extends the useful life of an existing asset. We compute depreciation using the straight-line method over the following estimated useful lives:
Buildings | 20 years |
Machinery and equipment | 10 years |
Furniture, fixture and office equipment | 3~5 years |
Motor vehicles | 4~5 years |
Construction in progress primarily represents the construction of new production lines. Costs incurred in the construction are capitalized and transferred to property, plant, and equipment upon completion, at which time depreciation commences.
We record expenditures for repairs and maintenance as expenses as incurred. The gain or loss on disposal of property, plant, and equipment, if any, is the difference between the net sales proceeds and the carrying amount of the disposed assets, and is recognized in the consolidated statement of operations upon disposal.
Interest Capitalization
The interest cost associated with major development and construction projects is capitalized and included in the cost of the property, plant and equipment or project assets. Interest capitalization ceases once a project is substantially complete or no longer undergoing construction activities to prepare it for its intended use. When no debt is specifically identified as being incurred in connection with a construction project, we capitalize interest on amounts expended on the project at our weighted average cost of borrowing money. Interest expense capitalized for the years ended December 31, 2012, 2013 and 2014 were RMB7.5 million, RMB7.1 million and RMB4.1 million (US$0.7 million), respectively.
Project assets
Project assets represented the costs of solar power plants held for generation of electricity revenue and solar power plants under construction. Project assets are stated in the consolidated balance sheets at cost less accumulated depreciation and impairment provision, if any.
Costs of project assets consist primarily of costs relating to construction of solar power plants at various stages of development. These costs include costs for procurement of solar module and other equipment (including intercompany purchases), cost of land on which solar power plants are developed and other direct costs for developing and constructing solar power plants, such as costs for obtaining permits required for solar power plants and costs for designing, engineering, interest costs capitalized and installation in the course of construction. Such costs are capitalized starting from the point when it is determined that development of the solar power plant is probable. For a solar power project asset acquired from third parties, the initial cost is the acquisition cost which includes the consideration transferred and certain direct acquisition costs.
Costs capitalized in the construction of solar power plants under development will be transferred to solar power plants upon completion and when they are ready for intended use, which is at the point of time when the solar power plants are connected to the grids and begin to generate electricity. Depreciation of the completed solar power plant commences once the solar power plant is ready for the intended use. Depreciation is computed using the straight-line method over the expected life of 20 years.
As of December 31, 2012, 2013 and 2014, the balances of project assets were RMB536.4 million, RMB1,358.9 million and RMB4,353.1 million (US$701.6 million), respectively. As of December 31, 2012, 2013 and 2014, project assets with book value of RMB349.5 million, RMB1,349.7 million and RMB2,027.6 million (US$326.8 million) had been completed and connected to the grid. The revenue from connection to the grid for the years ended December 31, 2012, 2013 and 2014 is RMB1.6 million, RMB76.7 million and RMB237.6 million (US$38.3 million), respectively.
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Land use rights and land lease
a. Land use rights
Land use rights represent acquisition costs to purchase land
use rights from the PRC government, which are evidenced by property certificates. The periods of these purchased land use rights
are either 50 years or 70 years. We classify land use rights as long term assets on the balance sheet and cash outflows related
to acquisition of land use right as investing activities.
Land use rights are carried at cost less accumulated amortization and impairment losses, if any. Amortization is computed using
the straight-line method over the term specified in the land use right certificate for 50 years or 70 years, as applicable.
b. Land lease
For certain of our solar power project, we enter into land lease contracts with the owners of the land use rights. Under such lease arrangements, the owners retain the property right of the land use rights. While we can only set up the solar panels on these leased lands but does not have the right to sell, lease or dispose the land use rights. Accordingly, land leases are classified as operating leases, with the lease payments being recognised over the lease periods of 20 years to 50 years as operating expenses. Such land lease payments are classified as operating cash outflows.
Investments in affiliates
We hold equity investments in affiliates for which we do not have a controlling financial interest, but have the ability to exercise significant influence over the operating and financial policies of the investee. These investments are accounted for under equity method of accounting wherein we record our proportionate share of the investees’ income or loss in its consolidated financial statements. Cost method is used for investments over which we do not have the ability to exercise significant influence.
Investments are evaluated for impairment when facts or circumstances indicate that the fair value of the investment is less than its carrying value. An impairment is recognized when a decline in fair value is determined to be other-than-temporary. We review several factors to determine whether a loss is other-than-temporary. These factors include, but are not limited to, the: (1) nature of the investment; (2) cause and duration of the impairment; (3) extent to which fair value is less than cost; (4) financial conditions and near term prospects of the issuers; and (5) ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.
Impairment of long-lived assets
Our long-lived assets include property, plant and equipment, solar power project assets and other intangible assets with finite lives. Our business requires heavy investment in manufacturing equipment that is technologically advanced, but can quickly become significantly under-utilized or rendered obsolete by rapid changes in demand for solar power products produced with those equipment.
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Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that carrying amount of an asset may not be recoverable. Factors considered important that could result in an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets and significant negative industry or economic trends. We may recognize impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to these assets. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss, if any, is recognized for the difference between the fair value of the asset and its carrying value. The impairment of long-lived assets related to the retirement of certain equipment in the wafer and cell production line that had become obsolete were RMB65.5 million, RMB3.6 million and RMB6.2 million (US$1.0 million) in 2012, 2013 and 2014, respectively.
Warranty cost
We typically sell our solar modules with either a 2-year or 5-year warranty for product defects and a 10-year and 25-year warranty against declines of more than 10.0% and 20.0%, respectively, from the initial minimum power generation capacity at the time of delivery. Therefore, we are exposed to potential liabilities that could arise from these warranties. The potential liability is generally in the form of product replacement or repair.
Due to limited warranty claim history, we estimate warranty costs based on an assessment for our competitors’ history while incorporating estimates of failure rates through our quality review. Consequently, we accrue the equivalent of 1% of gross revenues as a warranty liability to accrue the estimated cost of our warranty obligations. Actual warranty costs incurred for warranty claims by customers are recorded in and charged against the accrued warranty liability. To the extent that actual warranty costs differ from the estimates, we will prospectively revise our accrual rate. We began the sales of solar modules in the first half of 2009 and have not experienced any material warranty claims to-date in connection with declines in the power generation capacity of our solar modules or defects. The liability for warranty cost as of December 31, 2012, 2013 and 2014 were RMB130.5 million. RMB195.2 million and RMB287.1 million (US$46.3 million), respectively.
The warranty costs were classified as current liabilities (under a balance sheet item named other payables and accruals) and non-current liabilities (under a balance sheet item named accrued warranty costs – non-current), respectively, which reflect our estimate of the timing of when the warranty expenditures will likely be made. In 2012, 2013 and 2014, warranty cost expenses were RMB40.2 million, RMB67.5 million and RMB92.3 million (US$14.9 million), respectively. The utilization of the warranty accruals for the years ended December 31, 2012, 2013 and 2014 were RMB6.2 million, RMB2.8 million and RMB0.4 million (approximately US$60,000).
We purchase warranty insurance policy which provides coverage for the product warranty services of our solar modules worldwide. Prepayment for warranty insurance premium is initially recorded as other assets and is amortized over the insurance coverage period. Prepayment for warranty insurance premium is not recorded as a reduction of estimated warranty liabilities. Once the Company receives insurance recoveries, warranty expenses will be credited.
Government grants
Government grants related to technology upgrades and development of export markets are recognized as subsidy income when received. In 2012, 2013 and 2014, we received financial subsidies of RMB40.9 million. RMB7.6 million and RMB49.8 million (US$8.0 million) from the local PRC government authorities, respectively. These subsidies were non-recurring, not refundable and with no conditions, including none related to specific use or disposition of the funds, attached. There are no defined rules and regulations to govern the criteria necessary for companies to enjoy such benefits and the amount of financial subsidy is determined at the discretion of the relevant government authority.
Government grants related to assets are initially recorded as other payables and accruals which are deducted to the carrying amount when the assets are ready for use. We received government grant for assets of RMB119.8 million, RMB63.3 million and RMB92.4 million (US$14.9 million) during 2012, 2013 and 2014, respectively.
Repurchase of share
When our shares are retired, or purchased for constructive retirement (with or without an intention to retire the stock formally in accordance with applicable laws), the excess of the purchase prices over their par value is recorded entirely to additional paid-in capital subject to the limitation of the additional paid in capital when the shares were originally issued. When our shares are acquired for purposes other than retirement, the purchase prices over their par value is shown separately as treasury stock.
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Share-based compensation
Our share-based payment transactions with employees, including share options, are measured based on the grant-date fair value of the equity instrument issued. The fair value of the award is recognized as compensation expense, net of estimated forfeitures, over the period during which an employee is required to provide service in exchange for the award, which is generally the vesting period.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of existing assets and liabilities and their respective tax bases and any tax loss and tax credit carry forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates or tax laws is recognized in the period the change in tax rates or tax laws is enacted. A valuation allowance is provided to reduce the amount of deferred income tax assets if it is considered more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred income taxes are not provided on undistributed earnings of the Company’s subsidiaries that are intended to be permanently reinvested in China. Cumulative undistributed earnings of the Company’s PRC subsidiaries intended to be permanently reinvested total RMB1,284.4 million (US$207.0 million) and the amount of the unrecognized deferred taxes liabilities on the permanently reinvested earnings was RMB64.2 million (US$10.4 million) as of December 31, 2014.
Valuation allowances are determined by assessing both positive and negative evidence and have been provided against the net deferred tax asset due to the uncertainty surrounding their realization. As of December 31, 2012, 2013 and 2014, valuation allowances of RMB402.9 million, RMB242.1 and RMB75.3 million (US$12.1 million) were provided against deferred tax assets because it was more likely than not that such portion of deferred tax would not be realized based on our estimate of the future taxable income of all our subsidiaries. If events occur in the future that allow us to realize more of our deferred tax assets than the presently recorded amount, an adjustment to the valuation allowances will result in a non-cash income statement benefit when those events occur. Certain valuation allowances were reversed in 2014 when certain subsidiaries generated sufficient taxable income to utilize the deferred tax assets. Due to the strong financial performance of certain subsidiaries, we have determined that the future taxable income of those subsidiaries is sufficient to realize the benefits of such deferred tax assets. As a result, we reversed the valuation allowance of RMB222 million in 2014.
The accounting for uncertain tax positions requires that we recognize in the consolidated financial statements the impact of an uncertain tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Our policy is to recognize, if any, tax related interest as interest expenses and penalties as general and administrative expenses. For periods presented, we did not have any interest and penalties associated with tax positions. As of December 31, 2012, 2013 and 2014, we did not record any liability for any uncertain tax positions.
Long-term payables
Long-term payable represents the amounts due to suppliers for purchase of material used in the project assets construction. As part of the payment term, we retain a portion of the purchase price, which will generally be paid by us two to three years after the related solar projects are completed. The retainages are paid upon certain specific conditions are met or passage of time. Long-term payable is initially recorded at the present value determined based on the market interest rate for long-term borrowing, and amortized over the payment terms of two to three years.
Fair value of financial instruments
We do not have any non-financial assets or liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price). A hierarchy is established for inputs used in measuring fair value that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. Valuation techniques used to measure fair value shall maximize the use of observable inputs.
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When available, we measure the fair value of financial instruments based on quoted market prices in active markets, which is a valuation technique that uses observable market-based inputs or unobservable inputs that are corroborated by market data. We internally validate pricing information obtained from third parties for reasonableness prior to use in the consolidated financial statements. When observable market prices are not readily available, we generally estimate the fair value using valuation techniques that rely on alternate market data or inputs that are generally less readily observable from objective sources and are estimated based on pertinent information available at the time of the applicable reporting periods. In certain cases, fair values are not subject to precise quantification or verification and may fluctuate as economic and market factors vary and our evaluation of those factors changes. Although we use our best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique. In these cases, a minor change in an assumption could result in a significant change in our estimate of fair value, thereby increasing or decreasing the amounts of our consolidated assets, liabilities, equity and net income.
Our financial instruments consist principally of cash and cash equivalents, restricted cash, restricted short-term investments, accounts and notes receivable, forward contract receivable, other receivables, prepayments and other current assets, capped call options, accounts and notes payable, other payables and accruals, forward contract payables, short-term borrowings, long-term borrowings and convertible senior notes. Except for long-term borrowing and convertible senior notes, the carrying values of these financial instruments approximated their fair values due to the short-term maturity of these instruments. The carrying amount of long-term borrowing approximates their fair value due to the fact that the related interest rates approximate rates currently offered by financial institutions for similar debt instruments of comparable maturities.
We classify the cash flows related to realized gain or loss on settlement of foreign exchange forward contracts as operating activities, which are based on the nature of the cash flows the derivative is economically hedging.
Available-for-sale investment
On a recurring basis, we measure available-for-sale investment at fair value. Since the available-for-sale investment does not have quoted price in active markets, we have adopted Binomial Tree option pricing model to assess their fair value. Management is responsible for determining the fair value and assessing a number of factors. The valuation involves complex and subjective judgements as well as our best estimates on the valuation date.
Inputs related to the Binomial Tree option pricing model for the valuation of the fair value of available-for-sale investment are: spot price, conversion price, time to maturity, expected dividend yield, expected share volatility, risk free interest rate, and yield-to-maturity, of which spot price is most significant to valuation determination. The following methods were adopted for each input:
a. | Spot price: quoted closing price of listed shares of Kinexia SpA(KNX IM) as of each re-measurement date; |
b. | Conversion price: according to the indenture of the subject available-for-sale investment; |
c. | Time to maturity: time period from the respective re-measurement date to maturity date. Maturity date was referred from the indenture of the subject available-for-sale investment; |
d. | Expected dividend yield: based on indicative dividend yield of the underlying company (i.e. KNX.IM) as of each re-measurement date; |
e. | Expected share volatility: based on the implied volatility of the listed shares of Kinexia (i.e. KNX.IM) with a time period equal to the time to maturity as of each re-measurement date; |
f. | Risk free interest rate: based on the yield of Italy Treasury Bonds with a maturity equal to the time to maturity as of each re-measurement date; and |
g. | Yield-to-maturity: based on the average yield-to-maturity of comparable corporate bullet bonds with similar remaining maturity period and credit risk as of each re-measurement date. |
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In 2012 and 2013, we recognized gain from a change in fair value of available-for-sales investment of nil and RMB6.0 million, respectively. In 2014, we recognized loss from a change in fair value of available-for-sales of RMB5.8 million (US$0.9 million).
The sensitivity analysis below has been determined based on the exposure to spot price at the end of the reporting period. A 10 percent increase or decrease represents management’s assessment of the reasonably possible change in the input.
· | If the spot price had been 10 percent higher and all other inputs were held constant as of December 31, 2014, the fair value of available-for-sale investment would have increased by RMB63 thousand or 0.30%. If spot price had been 10 percent lower and all other inputs were held constant as of December 31, 2014, the fair value of the available-for-sale investment would have decreased by RMB36 thousand or 0.17%. |
· | If expected share volatility had been 10 percent higher and all other inputs were held constant as of December 31, 2014, the fair value of the available-for-sale investment would have increased by RMB58 thousand or 0.28%. If expected share volatility had been 10 percent lower and all other inputs were held constant as of December 31, 2014, the fair value of the available-for-sale investment would have decreased by RMB21 thousand or 0.10%. |
Convertible Senior Notes and Capped Call Options
The Company has adopted valuation models to assess the fair value for capped call options and the Notes, as the capped call options are not publicly traded and the trading of the Notes is considered inactive. Management is responsible for determining these fair values and assessing a number of factors. Both capped call options and the Notes are valued using the Binominal Tree option pricing model. The valuation involves complex and subjective judgments as well as the Company’s best estimates on the valuation date. Inputs related to the Binomial models for convertible debt fair value are: spot price, conversion price, time to maturity, expected dividend yield, expected share volatility, risk free interest rate, yield-to-maturity and put option exercisable period, of which spot price and expected share volatility are most significant to valuation determination of convertible debt.
A summary of changes in fair value of capped call options for the year ended December 31, 2013 and 2014 were as follows:
For the year ended December 31, | ||||||||
2013 | 2014 | |||||||
RMB | RMB | |||||||
Balance at January 1, | 16,131,208 | 107,223,601 | ||||||
Foreign exchange gain/(loss) | (1,203,512 | ) | 563,725 | |||||
Change in fair value of capped call options | 92,295,905 | (86,689,063 | ) | |||||
Balance at December 31, | 107,223,601 | 21,098,263 |
A summary of the assumptions used in the valuation of convertible senior notes and Capped call options due 2016 was as follows:
As of December 31, | ||||||||
2013 | 2014 | |||||||
Fair value of ADS | US$ | 29.30 | US$ | 19.71 | ||||
Strike price | US$ | 33.75 | US$ | 33.75 | ||||
Risk free interest rate | 0.53 | % | 0.44 | % | ||||
Dividend yield | - | - | ||||||
Standard Volatility | 70.6 | % | 64.31 | % |
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The sensitivity analysis below has been determined based on the exposure to spot price and expected share volatility of the underlying shares at the end of the reporting period. A 10 percent increase or decrease represents management’s assessment of the reasonably possible change in these inputs.
· | If the spot price had been 10 percent higher and all other inputs were held constant as of December 31, 2014, the fair value of the convertible senior notes would have increased by RMB16.82 million or 2.33% and the Company’s net income for the year ended December 31, 2014 would have decreased by RMB16.82 million. If spot price had been 10 percent lower and all other inputs were held constant as of December 31, 2014, the fair value of the convertible debt would have decreased by RMB22.12 million or 3.07%, and the Company’s net income for the year ended December 31, 2014 would have increased by RMB22.12 million. |
· | If expected share volatility had been 10 percent higher and all other inputs were held constant as of December 31, 2014, the fair value of the convertible senior notes would have increased by RMB10.64 million or 1.47% and the Company’s net income for the year ended December 31, 2014 would have decreased by RMB10.64 million. If expected share volatility had been 10 percent lower and all other inputs were held constant as of December 31, 2014, the fair value of the convertible debt would have decreased by RMB18.05 million or 2.50% and the Company’s net income for the year ended December 31, 2014 would have increased by RMB18.05 million. |
The sensitivity analysis below has been determined based on the exposure to spot price and expected share volatility for capped call option at the end of the reporting period. A 10 percent increase or decrease represents management’s assessment of the reasonably possible change in these inputs.
· | If the spot price had been 10 percent higher and all other inputs were held constant as of December 31, 2014, the fair value of the capped call option would have increased by RMB7.07 million or 33.51% and the Company’s net income for the year ended December 31, 2014 would have increased by RMB7.07 million. If spot price had been 10 percent lower and all other inputs were held constant as of December 31, 2014, the fair value of the capped call option would have decreased by RMB4.69 million or 22.23%, and the Company’s net income for the year ended December 31, 2014 would have decreased by RMB4.69 million. |
· | If expected share volatility had been 10 percent higher and all other inputs were held constant as of December 31, 2014, the fair value of the capped call option would have increased by RMB1.71 million or 8.13% and the Company’s net income for the year ended December 31, 2014 would have increased by RMB1.71 million. If expected share volatility had been 10 percent lower and all other inputs were held constant as of December 31, 2014, the fair value of the capped call option would have decreased by RMB1.54 million or 7.28% and the Company’s net income for the year ended December 31, 2014 would have decreased by RMB1.54 million. |
A summary of the assumptions used in the valuation of convertible senior notes due 2019 was as follows:
As of December 31, | ||||||||
2013 | 2014 | |||||||
Fair value of ADS | - | US$19.71 | ||||||
Risk free interest rate | - | 1.51 | % | |||||
Dividend yield | - | - | ||||||
Standard Volatility | - | 66.31 | % |
The sensitivity analysis below has been determined based on the exposure to spot price and expected share volatility of the underlying shares at the end of the reporting period. A 10 percent increase or decrease represents management’s assessment of the reasonably possible change in these inputs.
· | If the spot price had been 10 percent higher and all other inputs were held constant as of December 31, 2014, the fair value of the convertible debt would have increased by RMB15.91 million or 1.94% and the Company’s net income for the year ended December 31, 2014 would have decreased by RMB15.91 million. If spot price had been 10 percent lower and all other inputs were held constant as of December 31, 2014, the fair value of the convertible debt would have decreased by RMB29.86 million or 3.65%, and the Company’s net income for the year ended December 31, 2014 would have increased by RMB29.86 million. |
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· | If expected share volatility had been 10 percent higher and all other inputs were held constant as of December 31, 2014, the fair value of the convertible debt would have increased by RMB13.67 million or 1.67% and the Company’s net income for the year ended December 31, 2014 would have decreased by RMB13.67 million. If expected share volatility had been 10 percent lower and all other inputs were held constant as of December 31, 2014, the fair value of the convertible debt would have decreased by RMB29.38 million or 3.59% and the Company’s net income for the year ended December 31, 2014 would have increased by RMB29.38 million. |
Results of Operations
The following table sets forth a summary, for the periods indicated, of our consolidated results of operations and each item expressed as a percentage of our total net revenues. Our historical results presented below are not necessarily indicative of the results that may be expected for any future period.
2012 | 2013 | 2014 | ||||||||||||||||||||||||||
(RMB) | (%) | (RMB) | (%) | (RMB) | (US$) | (%) | ||||||||||||||||||||||
(in thousands, except percentage) | ||||||||||||||||||||||||||||
Consolidated Statement of Operations Data: | ||||||||||||||||||||||||||||
Revenues | 4,794,768.4 | 100.0 | 7,078,838.5 | 100.0 |