Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 20-F

 


 

(Mark One)

 

o

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

 

 

OR

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016

 

 

OR

 

 

o

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

 

 

OR

 

 

o

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

 

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

 

For the transition period from                       to                        

 

COMMISSION FILE NUMBER 001-33290

 

JA Solar Holdings Co., Ltd.

(Exact name of Registrant as specified in its charter)

 

The Cayman Islands

(Jurisdiction of Incorporation or Organization)

 

Building No.8, Noble Center, Automobile Museum East Road

Fengtai, Beijing 100070

The People’s Republic of China

(Address of Principal Executive Offices)

 


 

Mr. Hexu Zhao

JA Solar Holdings Co., Ltd.

Building No.8, Noble Center, Automobile Museum East Road

Fengtai, Beijing 100070

The People’s Republic of China

Tel: +86-10-63611888

Fax: +86-10-63611999

(Name, Telephone, E-mail and/or Facsimile 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 five ordinary share, par value US$0.0001 per share

 

The NASDAQ Stock Market LLC

Ordinary shares, par value US$0.0001 per share*

 

 

 


* Not for trading but only in connection with the registration of American depositary shares

 


 

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

 

None

(Title of Class)

 


 



Table of Contents

 

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: 237,853,602 ordinary shares, par value US$0.0001 per share, as of December 31, 2016.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes   x No

 

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.

o Yes   x No

 

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.

x Yes   o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its 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 such shorter period that the registrant was required to submit and post such files).

x Yes   o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

 

Emerging growth company o

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. o

 

†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

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

 

US GAAP x

 

International Financial Reporting Standards as issued
by the International Accounting Standards Board
o

 

Other o

 

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

o Item 17   o 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).

o Yes   x No

 

(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.

 

o Yes   o No

 



Table of Contents

 

Table of Contents

 

 

 

 

Page

PART I

 

 

3

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

3

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

3

ITEM 3.

KEY INFORMATION

3

 

A.

SELECTED FINANCIAL DATA

3

 

B.

CAPITALIZATION AND INDEBTEDNESS

5

 

C.

REASONS FOR THE OFFER AND USE OF PROCEEDS

5

 

D.

RISK FACTORS

6

ITEM 4.

INFORMATION ON THE COMPANY

38

 

A.

HISTORY AND DEVELOPMENT OF THE COMPANY

38

 

B.

BUSINESS OVERVIEW

39

 

C.

ORGANIZATIONAL STRUCTURE

52

 

D.

PROPERTY, PLANTS AND EQUIPMENT

52

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

53

 

A.

OPERATING RESULTS

53

 

B.

LIQUIDITY AND CAPITAL RESOURCES

71

 

C.

RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

75

 

D.

TREND INFORMATION

75

 

E.

OFF-BALANCE SHEET ARRANGEMENTS

76

 

F.

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

76

 

G.

SAFE HARBOR

77

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

78

 

A.

DIRECTORS AND SENIOR MANAGEMENT

78

 

B.

COMPENSATION

80

 

C.

BOARD PRACTICES

83

 

D.

EMPLOYEES

85

 

E.

SHARE OWNERSHIP

86

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

87

 

A.

MAJOR SHAREHOLDERS

87

 

B.

RELATED PARTY TRANSACTIONS

88

 

C.

INTERESTS OF EXPERTS AND COUNSEL

89

ITEM 8.

FINANCIAL INFORMATION

89

 

A.

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

89

 

B.

SIGNIFICANT CHANGES

90

ITEM 9.

THE OFFER AND LISTING

90

 

A.

OFFER AND LISTING DETAILS

90

 

B.

PLAN OF DISTRIBUTION

91

 

C.

MARKETS

91

 

D.

SELLING SHAREHOLDERS

91

 

E.

DILUTION

91

 

F.

EXPENSES OF THE ISSUE

91

ITEM 10.

ADDITIONAL INFORMATION

92

 

A.

SHARE CAPITAL

92

 

B.

MEMORANDUM AND ARTICLES OF ASSOCIATION

92

 

C.

MATERIAL CONTRACTS

94

 

D.

EXCHANGE CONTROLS

94

 

E.

TAXATION

94

 

F.

DIVIDENDS AND PAYING AGENTS

100

 

G.

STATEMENT BY EXPERTS

100

 

H.

DOCUMENTS ON DISPLAY

100

 

I.

SUBSIDIARY INFORMATION

100

 

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Table of Contents

 

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

101

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

102

 

A.

DEBT SECURITIES

102

 

B.

WARRANTS AND RIGHTS

102

 

C.

OTHER SECURITIES

102

 

D.

AMERICAN DEPOSITARY SHARES

103

PART II

103

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

103

ITEM 14.

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

104

ITEM 15.

CONTROLS AND PROCEDURES

104

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

105

ITEM 16B.

CODE OF ETHICS

105

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

105

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

106

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

106

ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

106

ITEM 16G.

CORPORATE GOVERNANCE

106

ITEM 16H.

MINE SAFETY DISCLOSURE

107

PART III

107

ITEM 17.

FINANCIAL STATEMENTS

107

ITEM 18.

FINANCIAL STATEMENTS

107

ITEM 19.

EXHIBITS

107

 

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CERTAIN TERMS AND CONVENTIONS

 

Unless otherwise indicated, in this annual report:

 

·                  “ADS” refers to American depositary shares, each representing five ordinary share of JA Solar, par value US$0.0001 per share;

 

·                  “China” and the “PRC” refer to the People’s Republic of China, excluding, for the purposes of this annual report only, Taiwan and the special administrative regions of Hong Kong and Macau;

 

·                  “conversion efficiency” refers to the ability of solar power products to convert sunlight into electricity; “conversion efficiency rate” is commonly used in the solar power industry to measure the percentage of light energy from the sun that is actually converted into electricity;

 

·                  “price per watt” refer to the price of solar power products, respectively, relative to the number of watts of electricity a solar power product generates;

 

·                  “Hebei Jinglong” refers to Jinglong Industry and Commerce Group Co., Ltd., which is controlled by the shareholders of Jinglong BVI;

 

·                  “JA BVI” refers to JA Development Co., Ltd., our directly wholly-owned subsidiary, a British Virgin Islands company;

 

·                  “JA Fengxian” refers to Shanghai JA Solar Technology Co., Ltd., our indirectly wholly-owned subsidiary in Shanghai, China;

 

·                  “JA Hebei” refers to JingAo Solar Co., Ltd., our predecessor and indirectly wholly-owned subsidiary in Hebei, China;

 

·                  “JA Hefei Technology” refers to Hefei JA Solar Technology Co., Ltd., our indirectly wholly-owned subsidiary in Hefei, China;

 

·                  “JA Lianyungang” refers to Jing Hai Yang Semiconductor Material (Donghai) Co., Ltd., our indirectly wholly-owned subsidiary in Jiangsu, China;

 

·                  “JA Solar,” “we,” “us,” “the company,” “our company” and “our” refer to JA Solar Holdings Co., Ltd. and, unless otherwise indicated or as the context may otherwise require, its predecessor entities and its consolidated subsidiaries;

 

·                  “JA Wafer R&D” refers to Donghai JA Solar Technology Co., Ltd., our indirectly wholly-owned subsidiary in Jiangsu, China;

 

·                  “JA Yangzhou” refers to JA Solar Technology Yangzhou Co., Ltd., our indirectly wholly-owned subsidiary in Jiangsu, China;

 

·                  “Jinglong BVI” refers to Jinglong Group Co., Ltd., a British Virgin Islands company and our largest shareholder;

 

·                  “Jinglong Group” refers to Hebei Jinglong and its consolidated subsidiaries;

 

·                  “rated manufacturing capacity” refers to the total amount of solar power products that can be made by a manufacturing line per annum operating at its maximum possible rate and is measured in megawatts, or MW;

 

·                  “RMB” and “Renminbi” refer to the legal currency of the PRC;

 

·                  “Solar Silicon Valley” refers to Solar Silicon Valley Electronics Science and Technology Co., Ltd., our indirectly wholly-owned subsidiary in Hebei, China;

 

·                  “U.S.” refers to the United States.

 

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Table of Contents

 

·                  “US$” and “U.S. dollars” refer to the legal currency of the U.S.;

 

·                  “voltage” or “volts” refers to the rating of the amount of electrical pressure that causes electricity to flow in the power line; and

 

·                  “watts” refers to the measurement of total electrical power, where “kilowatts” or “KW” means one thousand watts, “megawatts” or “MW” means one million watts and “gigawatts” or “GW” means one billion watts.

 

FORWARD-LOOKING STATEMENTS

 

This annual report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this annual report that address activities, events or developments which we expect or anticipate will or may occur in the future are hereby identified as forward-looking statements for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

 

Forward-looking statements typically are identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions or the negative of these words or expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things, statements relating to:

 

·                  our expectations regarding the worldwide demand for electricity and the market for solar energy;

 

·                  our beliefs regarding the inability of traditional fossil fuel-based generation technologies to meet the demand for electricity;

 

·                  our beliefs regarding the importance of environmentally friendly electricity generation;

 

·                  our expectations regarding governmental incentives for the deployment of solar energy;

 

·                  our beliefs regarding the solar power industry revenue growth;

 

·                  our expectations with respect to advancements in our technologies;

 

·                  our beliefs regarding the low-cost advantage of solar power product production in China;

 

·                  our beliefs regarding the competitiveness of our solar power products;

 

·                  our expectations regarding the scaling of our solar power capacity;

 

·                  our expectations with respect to increased revenue growth and our ability to achieve profitability resulting from increases in our production volumes;

 

·                  our expectations with respect to our ability to secure raw materials in the future;

 

·                  our expectations regarding the price trends of solar power products;

 

·                  our expectations with respect to our ability to develop relationships with customers in our target markets;

 

·                  our expectations with respect to our ability to secure sufficient funds to meet our cash needs for our operations and to service our indebtedness;

 

·                  PRC government policies regarding foreign investments;

 

·                  our ability to maintain and strengthen our position as a low-cost vertically-integrated manufacturer of photovoltaic, or PV products;

 

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

 

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Table of Contents

 

·                  competition from other manufacturers of solar power products and conventional energy suppliers.

 

The forward-looking statements made in this annual report on Form 20-F relate only to events or information as of the date on which the statements are made in this annual report on Form 20-F. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report on Form 20-F completely and with the understanding that our actual future results may be materially different from what we expect.

 

PART I

 

ITEM 1.                                                IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2.                                                OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3.                                                KEY INFORMATION

 

A.                          SELECTED FINANCIAL DATA

 

The selected consolidated statements of operations data presented below for the years ended December 31, 2014, 2015 and 2016 and our balance sheet data as of December 31, 2015 and 2016 are derived from our audited consolidated financial statements which are included in this annual report beginning on page F-1. Our consolidated financial statements are prepared and presented in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Our selected consolidated statements of operations data for the years ended December 31, 2012 and 2013 and selected consolidated balance sheet data as of December 31, 2012, 2013 and 2014 have been derived from our audited consolidated financial statements that are not included in this annual report on Form 20-F. Historical results are not necessarily indicative of results to be expected in any future period.

 

 

 

Year ended December 31,

 

 

 

2012

 

2013

 

2014

 

2015

 

2016

 

 

 

(in millions, except for share and per share data)

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

US$

 

Consolidated Statements of Operations and Comprehensive Income/(Loss) Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Solar modules

 

4,044

 

4,388

 

9,292

 

12,689

 

14,781

 

2,129

 

Solar cells and other products

 

2,493

 

2,414

 

1,848

 

762

 

800

 

115

 

Electricity generation

 

 

 

 

64

 

156

 

23

 

Solar products processing

 

182

 

381

 

156

 

10

 

 

 

Total revenues

 

6,719

 

7,183

 

11,296

 

13,525

 

15,737

 

2,267

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Solar modules

 

(4,029

)

(3,861

)

(7,844

)

(10,521

)

(12,612

)

(1,817

)

Solar cells and other products

 

(2,561

)

(2,270

)

(1,602

)

(675

)

(743

)

(107

)

Electricity generation

 

 

 

 

(30

)

(88

)

(13

)

Solar products processing

 

(183

)

(290

)

(93

)

(7

)

 

 

Total cost of revenues

 

(6,773

)

(6,421

)

(9,539

)

(11,233

)

(13,443

)

(1,937

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross (loss)/profit

 

(54

)

762

 

1,757

 

2,292

 

2,294

 

330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

(902

)

(765

)

(954

)

(1,245

)

(1,058

)

(152

)

Research and development expenses

 

(86

)

(88

)

(140

)

(149

)

(176

)

(25

)

Loss from purchase commitments and contract termination costs

 

 

 

 

 

(149

)

(22

)

Impairment loss on property, plant and equipment

 

(398

)

 

 

 

 

 

 

 

Impairment loss on project assets

 

 

 

 

(33

)

(8

)

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

(1,386

)

(853

)

(1,094

)

(1,427

)

(1,391

)

(200

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/income from operations

 

(1,440

)

(91

)

663

 

865

 

903

 

130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives

 

9

 

(52

)

84

 

44

 

49

 

7

 

Convertible notes buy back loss

 

(8

)

 

 

 

 

 

Interest expense

 

(489

)

(285

)

(230

)

(249

)

(285

)

(41

)

Interest income

 

36

 

17

 

28

 

26

 

19

 

3

 

Foreign exchange (loss)/gain

 

(25

)

(44

)

(62

)

32

 

81

 

12

 

(Loss)/income from equity method investment

 

(43

)

(2

)

3

 

6

 

10

 

1

 

Other income, net

 

399

 

16

 

34

 

48

 

66

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/income before income taxes

 

(1,561

)

(441

)

520

 

772

 

843

 

122

 

Income tax (expense)/benefit

 

(101

)

15

 

(73

)

(157

)

(123

)

(18

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss)/income

 

(1,662

)

(426

)

447

 

615

 

720

 

104

 

Less: (earnings)/loss attributable to the noncontrolling interest

 

 

(3

)

(23

)

9

 

(36

)

(5

)

Net (loss)/income attributable to JA Solar Holdings

 

(1,662

)

(429

)

424

 

624

 

684

 

99

 

Less: fair value of warrants in excess of net proceeds of equity offering

 

 

(44

)

 

 

 

 

Less: allocation of net income to a participating warrant holder

 

 

 

(77

)

(108

)

 

 

Net (loss)/income attributable to JA Solar’s ordinary shareholders

 

(1,662

)

(473

)

347

 

516

 

684

 

99

 

Net (loss)/income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic.

 

(8.53

)

(2.35

)

1.43

 

2.12

 

2.92

 

0.42

 

Diluted

 

(8.53

)

(2.35

)

1.38

 

2.12

 

2.92

 

0.42

 

Net (loss)/income per ADS

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic.

 

(42.67

)

(11.76

)

7.17

 

10.59

 

14.59

 

2.10

 

Diluted.

 

(42.67

)

(11.76

)

6.88

 

10.58

 

14.58

 

2.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic.

 

194,788,429

 

201,317,884

 

242,192,859

 

243,506,821

 

234,290,842

 

234,290,842

 

Diluted.

 

194,788,429

 

201,317,884

 

242,863,084

 

243,744,921

 

234,402,452

 

234,402,452

 

 

3



Table of Contents

 

 

 

As of December 31,

 

 

 

2012

 

2013

 

2014

 

2015

 

2016

 

 

 

(in millions)

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

US$

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

3,031

 

2,120

 

2,155

 

2,883

 

2,569

 

370

 

Total current assets

 

7,150

 

6,352

 

8,601

 

10,025

 

10,265

 

1,478

 

Total assets

 

13,132

 

11,882

 

14,484

 

16,306

 

19,031

 

2,741

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

5,889

 

5,041

 

6,580

 

7,175

 

8,651

 

1,246

 

Total long-term liabilities

 

2,350

 

2,137

 

2,437

 

3,214

 

3,919

 

564

 

Total liabilities

 

8,239

 

7,178

 

9,017

 

10,389

 

12,570

 

1,810

 

Total Shareholders’ equity

 

4,893

 

4,704

 

5,467

 

5,917

 

6,461

 

931

 

 

 

 

Year ended December 31,

 

 

 

2012

 

2013

 

2014

 

2015

 

2016

 

Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Products sold (in MW)

 

1,702.1

 

2,072.0

 

3,057.9

 

3,937.9

 

4,920.4

 

 

Average PV cells selling price per watt (in RMB)

 

2.8

 

2.4

 

2.3

 

1.9

 

1.8

 

0.26

 

Average PV modules selling price per watt (in RMB )

 

4.5

 

4.0

 

3.9

 

3.5

 

3.2

 

0.46

 

 

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Exchange Rate Information

 

Our functional currency is Renminbi. The conversion of RMB into U.S. dollars in this annual report is based on the noon buying rate in New York City for cable transfers in RMB as certified for customs purposes by the Federal Reserve Board. Except as otherwise stated in this annual report, all amounts in this annual report have been translated from RMB to U.S. dollars and from U.S. dollars to RMB at a rate of RMB6.9430 to US$1.00, the noon buying rate in effect as of December 30, 2016. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Fluctuation in exchange rates could have a material adverse effect on our results of operations and the value of your investment.” The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On April 21, 2017, the noon buying rate was RMB6.8845 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.

 

 

 

Exchange Rate

 

Period

 

Period End

 

Average(l)

 

Low

 

High

 

 

 

(RMB per US$1.00)

 

2012

 

6.2301

 

6.2990

 

6.2221

 

6.3879

 

2013

 

6.0537

 

6.1412

 

6.0537

 

6.2438

 

2014

 

6.2046

 

6.1704

 

6.0402

 

6.2591

 

2015

 

6.4778

 

6.2827

 

6.1870

 

6.4896

 

2016

 

6.9430

 

6.6563

 

6.4480

 

6.9580

 

October

 

6.7735

 

6.7303

 

6.6685

 

6.7819

 

November

 

6.8837

 

6.8402

 

6.7534

 

6.9195

 

December

 

6.9430

 

6.9198

 

6.8771

 

6.9580

 

2017

 

 

 

 

 

 

 

 

 

January

 

6.8768

 

6.8907

 

6.8360

 

6.9579

 

February

 

6.8645

 

6.8697

 

6.8517

 

6.8821

 

March

 

6.8832

 

6.8940

 

6.8687

 

6.9132

 

April (through April 21, 2017)

 

6.8845

 

6.8871

 

6.8778

 

6.8988

 


Source:  Federal Reserve Statistical Release

 

(1)         Annual averages are calculated by averaging the noon buying rates on the last business day of each month. Monthly averages are calculated using the average of the daily rates during the relevant period.

 

B.                          CAPITALIZATION AND INDEBTEDNESS

 

Not applicable.

 

C.                          REASONS FOR THE OFFER AND USE OF PROCEEDS

 

Not applicable.

 

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D.                          RISK FACTORS

 

Risks Related to Our Business and Industry

 

Our business is sensitive to domestic and global economic conditions. A severe or prolonged downturn in the global or Chinese economy could materially and adversely affect our business and our financial condition.

 

Our business is sensitive to domestic and global economic conditions. The global macroeconomic environment is facing new challenges, including the end of quantitative easing by the U.S. Federal Reserve and the economic slowdown in the Eurozone since 2014. The growth of the Chinese economy has slowed down since 2012 and such slowdown may continue. According to the National Bureau of Statistics of China, China’s gross domestic product (GDP) growth slowed to 6.7% in 2016. The Chinese economy was on a bumpy road over the past few years, demonstrated by various factors such as the stock market volatility and RMB depreciation. There is considerable uncertainty over the long-term effects of the monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the U.S. and China. Continued concerns about the systemic impact of potential long-term and wide-spread recession, energy costs, geopolitical issues, and the availability and cost of credit have contributed to increased market volatility and diminished expectations for economic growth around the world. The difficult economic outlook has negatively affected business and consumer confidence and contributed to high volatility.

 

There have been concerns over unrest and terrorist threats in Europe, the Middle East and Africa, which have resulted in volatility in oil and other markets, and over the conflicts involving Ukraine and Syria. There have also been concerns about the relationship among China and other countries, including surrounding Asian countries, which may potentially lead to foreign investors closing down their businesses or withdrawing their investments in China and thus exiting the China market, and other economic effects. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global and/or Chinese economy may have a negative impact on our business, results of operations and financial condition, and continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.

 

Changes in international trade policies and trade barriers have adversely affected, and may continue to adversely affect, our ability to export our products to customers in certain countries, or import raw materials from certain countries.

 

We generate a significant portion of our revenues from sales to customers located outside of China and our customer mix varies geographically from period to period. Trade barriers, such as tariffs, taxes, duties, restrictions and expenses, have adversely affected, and may continue to adversely affect, our ability to export our products to customers in certain countries, especially the European Union and the U.S. For the years ended December 31, 2014, 2015 and 2016, we generated 12.5%, 10.1% and 4.0%, respectively, of our revenue from sales to customers located in the European Union, and during the same periods, we generated 4.5%, 4.0% and 10.0%, respectively, of our revenue from sales to customers located in the U.S.

 

On September 6, 2012 and November 8, 2012, respectively, the European Commission announced the initiations of anti-dumping and anti-subsidy investigations regarding crystalline silicon PV modules and key components (i.e., cells and wafers) originating from China into the European Union. On June 4, 2013, the European Commission announced that it would, from June 6, 2013, impose a provisional anti-dumping duty, or AD, of 11.8% to all solar panels, cells and wafers imported from China into the European Union. This provisional AD at 11.8% lasted until August 6, 2013, at which point it could be increased to the proposed 47.6% unless a settlement was otherwise achieved between the PRC government and the European Commission. The European Commission made its decision after forming the opinion that Chinese solar companies in general were selling solar panels to European customers at prices that were far below their normal market value. The PRC Ministry of Commerce, or MOFCOM, refuted the finding by the European Commission. On August 2, 2013, the European Commission accepted a price undertaking offered by Chinese companies exporting solar panels, represented by China Chamber of Commerce for Import and Export of Machinery and Electronic Products, or CCCME. Under such undertaking, crystalline silicon PV modules and key components (i.e., cells) originated in or consigned from China are sold to the European Union above fixed floor prices and subject to quota limitation. Companies that accept such fixed floor prices and quota limitation will not be subject to any anti-dumping and anti-subsidy tariffs. We previously accepted such undertaking and were subject to fixed floor prices and quota limitation. Such fixed floor prices have increased our selling price and had an adverse effect on our ability to secure orders from customers in the European Union. In September 2016, we decided to withdraw from the undertaking and are no longer subject to the fixed floor prices or quota limitation, as we believe the average selling prices in the European Union are already considerably below the fixed floor prices currently in place and the fixed floor prices no longer accurately reflect the market environment. We have since then served and will continue to serve the European market through our manufacturing facilities outside of China. However, if we fail to maintain our ability to serve the European market through our manufacturing facilities outside of China, the competitiveness of our products to customers located in the European Union would be materially and adversely affected.

 

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On May 29, 2015, the European Commission opened two investigations into claims that the duties in force for crystalline silicon PV modules or panels from China are being circumvented by transshipment via Taiwan and Malaysia. Circumvention has been found and the European Commission extended the duties in force against China to solar panels and solar cells consigned from Taiwan and Malaysia. On February 11, 2016, the European Commission reached definitive conclusion of this investigation. According to the definitive conclusion, AD of 53.4% and CVD of 11.5% which are applicable to the imports of crystalline silicon PV modules or panels and cells of the type used in crystalline silicon PV modules or panels from China also extended to imports of crystalline silicon PV modules or panels and cells of the type used in crystalline silicon PV modules or panels consigned from Malaysia and Taiwan whether declared as originating in Malaysia and Taiwan or not.

 

Furthermore, in December 2012, the U.S. Department of Commerce, or DOC, issued its final determination to impose AD and countervailing duties, or CVD, on crystalline silicon PV cells, whether or not assembled into modules from the PRC, as well as modules assembled from those cells that are exported to the U.S. The combined AD/CVD rate applicable to us was 29.18% when the final order was issued in December 2012. The DOC conducts annual administrative review of the AD/CVD rate that is applicable during the previous year, and based on the updated rate, the U.S. customs adjusts the tariffs paid by the affected companies by refunding the overpayment and requesting payment of the deficiency. In February 2014, DOC initiated its first annual administrative review of the anti-dumping tariff applicable from May 25, 2012 to November 30, 2013 and the anti-subsidy tariff applicable from March 26, 2012 to December 31, 2012. The AD/CVD rate applicable to us remained 29.18% after the first annual review. On August 4, 2015, the U.S. Trade Representative instructed the DOC to implement its determinations under section 129 of the Uruguay Round Agreements Act, which lowered the AD/CVD rate from 29.18% to 28.42%. In February 2015, DOC initiated its second annual administrative review of the anti-dumping tariff applicable from December 1, 2013 to November 30, 2014 and the anti-subsidy tariff applicable from January 1, 2013 to December 31, 2013. We were the mandatory respondent in the second administrative review of anti-subsidy tariff. The AD/CVD rate applicable to us is currently 27.72% until the release of final determination of the third annual administrative review. In February 2016, DOC initiated its third annual administrative review of the anti-dumping tariff applicable from December 1, 2014 to November 30, 2015 and the anti-subsidy tariff applicable from January 1, 2014 to December 31, 2014. The final determination is expected to be released in June 2017. If the final determination resulted in a rate higher than 27.72%, we will be obligated to pay for the difference between the final rate and 27.72% for products exported during the review period. In February 2017, DOC initiated its fourth annual administrative review of anti-dumping tariff applicable from December 1, 2015 to November 11, 2016 and the anti-subsidy tariff applicable from January 1, 2015 to December 31, 2015. We are participating in the fourth annual review process.

 

In January 2014, DOC initiated a parallel anti-dumping investigation on imports of certain crystalline silicon PV products from China and Taiwan and a parallel anti-subsidy investigation on imports of certain crystalline silicon PV products from China. On December 23, 2014, DOC announced its final affirmative determinations that (i) imports of certain crystalline silicon PV products from China have been sold in the U.S. at dumping margins ranging from 26.71% to 165.04%; (ii) imports of certain crystalline silicon PV products from Taiwan have been sold in the U.S. at dumping margins ranging from 11.45% to 27.55%; and (iii) imports of certain crystalline silicon PV products from China have received subsidies ranging from 27.64% to 49.79%. The combined AD/CVD rate applicable to us is 68.49%, which came into effect on February 18, 2015 and exists in parallel with the already existing AD/CVD rate of 27.72% as mentioned above. Subject merchandise in China includes modules, laminates and/or panels assembled in China using crystalline silicon PV cells produced in a customs territory other than China; and subject merchandise in Taiwan includes modules, laminates, and/or panels produced in a third country from cells produced in Taiwan. The AD/CVD rate is also subject to annual administrative review. In February 2016, DOC initiated its first annual administrative review of the anti-dumping tariff applicable from July 31, 2014 to January 31, 2016 and the anti-subsidy tariff applicable from June 10, 2014 to December 31, 2015. If the final determination resulted in a rate higher than 68.49%, we will be obligated to pay for the difference between the final rate and 68.49% for products exported during the review period. In addition, certain of our PV modules exported to the U.S. were assembled from PV cells supplied by a Taiwan-based supplier. The AD rate applicable to such Taiwan-based supplier is 11.45%. If the final determination resulted in a rate higher than 11.45%, we will be obligated to pay for the difference between the final rate and 11.45% for products using such  supplier’s PV cells. The final determination of the first review is expected to be released in the middle of 2017.

 

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The parallel AD/CVD rate applicable to us has had and will continue to have an adverse effect on our sales to the U.S., and our ability to continue sourcing cells from suppliers overseas (including Taiwan) for our modules to be sold to the U.S. is also limited. The annual administrative review process has created great uncertainty on the amount of tariffs paid by us, thus continuing to have an impact on our sales to the U.S.

 

We are actively taking measures to alleviate the negative effects caused by the tariffs, including exploring new markets and securing additional order from customers located outside of the U.S. and the European Union. However, if our efforts to develop new markets fail and we are not able to gain additional orders from other customers to replace orders from those in the European Union and the U.S., our revenue could be materially and adversely affected.

 

Australia has also initiated anti-dumping investigations against crystalline silicon solar panels imported from China. On October 6, 2015, the Australian Anti-dumping Commission decided to terminate this investigation and did not impose any anti-dumping tariffs on imported solar panels. The final determination was revoked by Australia Anti-Dumping Review Panel on January 8, 2016 and the investigation was resumed in 2016. After re-investigation, the Australian Anti-dumpling Commission announced on October 18, 2016 to terminate such investigation on the ground that the damages caused by PV products imported from China are negligible.

 

On December 5, 2014, Canada initiated anti-dumping and countervailing investigations on imports of crystalline silicon PV modules from China. Based on the final determination issued by Canada Border Services Agency on June 3, 2015. JA Hefei Technology was determined to be subject to an AD rate of 48.4% and a CVD rate of RMB0.011 per watt.

 

On July 1, 2016, Turkey’s Ministry of Economy initiated an anti-dumpling investigation on imports of crystalline silicon PV modules from China. The final result was announced on April 1, 2017. Turkey’s Ministry of Economy decided to impose anti-dumping tariffs on solar panel (PV module) products exported from China for a period of five years. The tax rates applicable to Chinese exporters of solar panel range from US$20 per square meter to US$ 25 per square meter.

 

Furthermore, we import some of our raw materials, including polysilicon, from suppliers located outside of China, such as the European Union, the U.S. and South Korea. MOFCOM initiated investigations on solar grade polysilicon imported from the U.S. and the European Union in July 2012 and November 2012, respectively. In July 2013, MOFCOM announced a preliminary ruling that it found exporters in the U.S. and South Korea dumped their products on the PRC market and caused material harm to China’s domestic solar industry and decided that it planned to impose provisional AD on solar-grade polysilicon imported from the U.S. and South Korea. In January 2014, MOFCOM upheld its previous ruling that investigated products from South Korea and the U.S. are subject to import tariffs at different rates with the highest rate being 48.7% and 57%, respectively. South Korean polysilicon producer OCI Company Ltd., or OCI, is one of our main suppliers and its products are subject to a tariff of 2.4%. On March 18, 2014, MOFCOM and Wacker Chemie AG, or Wacker, one of our main suppliers, reached an understanding concerning the export of polysilicon by Wacker to China. Pursuant to such understanding, Wacker undertook not to sell polysilicon produced at its European plants to China below a specific minimum price, in return, Wacker was exempt from AD and CVD imposed by MOFCOM. Various import tariffs and limitations imposed on foreign polysilicon suppliers may lead to the increased prices of products from domestic suppliers in the future. We may not be able to pass on such cost increase to our customers, and our earnings may be negatively affected. For 2014, 2015 and 2016, we sourced 88.1%, 98.0% and 87.9%, respectively, of our polysilicon purchases from suppliers located in the U.S., the European Union and South Korea. On November 22, 2016, MOFCOM initiated a mid-term review of anti-dumping measures applicable to imported solar grade polysilicon originating in South Korea. The final result of the investigation is expected to be released by the end of 2017.

 

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Our revenues derived from Japan-based customers have continued to decrease over the past few years, and our results of operations may be adversely affected by various factors affecting Japan.

 

Due to introduction of Japan’s feed-in tariff program  in 2012, demands for PV products from our Japan-based customers increased significantly. Our revenues generated from Japan-based customers accounted for 22.2% of our total revenues in 2013 and the percentage increased to 34.1% in 2014. However, not long after Japan introduced its feed-in tariff program, it started to cut its feed-in tariff, the feed-in tariff for large-scale installation was reduced by 10% from 2012 to 2013, 11% from 2013 to 2014, 9.3% and 15.6% in two phases in 2015, which was further reduced by 11.1% in 2016. As a result, our revenues generated from our Japan-based customers as a percentage of our total revenues declined from 34.1% in 2014 to 18.0% in 2015 and further to 8.9% in 2016. The decrease in feed-in tariff has had a negative impact on customer demands in Japan as reflected by the decrease of revenues derived from our Japan-based customers. Further reduction of feed-in tariff in Japan could continue to materially and adversely affect our business and results of operations.

 

From time to time, there have been tensions and conflicts between China and Japan. Adverse changes in political and economic policies, geopolitical uncertainties, and international conflicts between China and Japan may lead to a reduced demand of solar power products from Japan-based customers. If the business activities between Japan and China decrease due to political, economic or other issues, demand for solar power products from Japan-based customers may decline and our business and results of operations may be adversely affected.

 

Furthermore, events affecting Japan in general, such as natural disasters, may also have a negative impact on our business, financial condition and results of operations. Such crisis may have a negative impact on the business operation of Japan-based customers, which may in turn discourage them from importing our solar power products, thus adversely affecting our business and results of operations.

 

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

 

We are affected by solar power market and industry trends. Industry-wide oversupply of solar power products has caused a substantial decline in prices of solar power products and industry-wide oversupply may continue to exist over the next few years. Competitiveness among conventional energy companies and renewable energy companies has adversely affected and may continue to affect the price of solar power products. We expect that cost reduction in the solar power industry will continue and prices of our products may be materially and adversely affected.

 

The demand for solar power products is also influenced by macroeconomic factors, including global economic development, credit markets, the supply and prices of other energy products, such as oil, coal and natural gas, as well as government regulations and policies concerning the electric utility industry. If negative market and industry trends continue in the future, the prices of our solar power products could further decrease and our business and results of operations may be materially and adversely affected.

 

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The reduction or elimination of government subsidies and economic incentives or change in government policies and regulations may have a material adverse effect on our business and prospects.

 

Demand for our products depends substantially on government incentives aimed to promote greater use of solar power. Countries that provided significant incentives for solar power include Germany, Spain, Italy, Greece, the U.S., Canada, Japan and China, among others. In many of the countries that constitute our major markets, solar power systems, particularly those for on-grid applications, would not be commercially viable without government incentives because the cost of generating electricity from solar power currently exceeds the cost of generating electricity from conventional or other non-solar renewable energy sources.

 

The scope of government incentives for solar power depends, to a large extent, on political and policy developments relating to environmental concerns in a given country. Policy shifts could reduce or eliminate these government economic incentives altogether. For example, the rapid growth of the German, Spanish and Italian solar power markets in 2010 was largely due to the government policies of those countries that set feed-in tariff terms at attractive rates. However, the escalation of the European sovereign debt crisis in 2011 affected the fiscal ability of several governments to offer incentives for the solar power industry. Each of Japan and Germany used to be one of our largest overseas markets. However, our sales to Japan and Germany have significantly decreased over the past years, primarily due to decline in customer demands resulted from their reduction of feed-in tariff. The current U.S. administration may create regulatory uncertainty in the renewable energy industry, including the solar industry. As a result, our business, operating and financial results could be adversely impacted. Members of the current U.S. administration have made public announcements that indicate the administration may not be supportive of various clean energy programs and initiatives designed to curb climate change and that it may be supportive of reducing the corporate tax rate and modifying policies or regulations enacted by the previous administration that placed limitations on coal and gas electricity generation, mining, and exploration. If the current U.S. administration or the U.S. Congress takes action in support of any such policies, we would be subject to significant risks.  Any further significant reduction in the scope or discontinuation of government incentive programs, especially in markets significant to our business, could cause demand for our products and our revenues to decline, and have a material and adverse effect on our business, financial condition, results of operations and prospects.

 

The market for electricity generation products is also heavily influenced by government regulations and policies concerning the electric utility industry, as well as internal policies of electric utilities companies. These regulations and policies often relate to electricity pricing, safety, utility interconnection, metering and related matters. End users’ purchases of alternative energy sources, including solar power products, could be deterred by unfavorable changes in regulations and policies, which could result in a significant reduction in the potential demand for our solar power products. For example, public utility companies commonly charge fees to larger, industrial customers for disconnecting from the electricity transmission grid or for having the capacity to use power from the electricity transmission grid for back-up purposes. These fees could increase end users’ costs of using our solar power products and make products that use our solar power products less desirable, thereby having an adverse effect on our business, financial condition, results of operations and prospects.

 

Our growth depends on the financial capabilities of our customers, third-party financing arrangements for end-users of our products, and is affected by general economic conditions.

 

We have extended credit to many new and existing customers or provided them with improved credit terms, including increasing credit limits and extending the time period before payments are due, ultimately increasing our accounts receivable and exposure to credit risks of our customers. Some of our customers are new customers with whom we have not historically had extensive business dealings. Starting from May 2011, we began to insure part of our overseas sales through China Export & Credit Insurance Corporation, or Sinosure. As of December 31, 2016, 59.9% of our total overseas accounts receivable was insured by Sinosure. The amount of insurance coverage for each transaction is based on a rating assigned by Sinosure to the customer based on such customer’s credit history. However, we cannot assure you that all our accounts receivable are sufficiently covered or that Sinosure will be able to make payments on our claims. Our balance of provision for doubtful accounts was RMB275.5 million, RMB259.8 million and RMB188.3 million (US$27.1 million) in 2014, 2015 and 2016, respectively. During the year ended December 31, 2016, for sales of solar modules, we generally provide credit terms of up to 180 days to customers with good credit-worthiness as determined by our credit assessment. The failure of any of our new or existing customers to meet their payment obligations would deteriorate our working capital and materially and adversely affect our financial position, liquidity and results of operations.

 

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Furthermore, our products are components of solar power and energy systems, which are used in both on-grid applications and off-grid applications. Government agencies and the private sector have, from time to time, provided financing on preferential terms to promote the use of solar energy in both on-grid and off-grid applications. We believe that the availability and cost of such financing programs could have a significant effect on the level of sales of solar power products. If existing financing programs for on-grid and off-grid applications are eliminated or if financing in general become inaccessible or inadequate, the growth of the market for on-grid and off-grid applications may be materially and adversely affected, which could cause sales of our solar power products to decline significantly.

 

If there is a general reduction in available credit to would-be borrowers, customers may be unable or unwilling to finance the cost of our products, or parties that have historically provided this financing may cease to do so, or only do so on terms that are substantially less favorable for us or our customers. In addition, an increase in interest rates would likely increase the cost of financing to end users of our products and could reduce their profits and expected returns on investment in our products. A prolonged disruption in the ability of our significant customers or downstream players to access sources of liquidity could cause serious disruptions to or an overall deterioration in their businesses. This could lead to a significant reduction in their future orders for our products and cause their inability or failure to meet their payment obligations to us, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

In light of our significant international operations, we face risks associated with manufacturing, marketing, distribution and sales of our products overseas, and if we are unable to effectively manage these risks, they could impair our ability to grow our business overall.

 

Historically, revenues from customers in China represented a significant portion of our overall revenues. Since 2010, in connection with our overseas marketing efforts as well as commercial manufacturing and selling of solar modules, we have substantially increased the portion of our products sold to customers outside China and our revenues from customers outside China have remained above 48% of our total revenues. We have expanded our sales network to over ninety countries over the world, including the U.S., Japan, United Kingdom and India, and established our manufacturing facilities in Malaysia and Vietnam. We also plan to continue expanding our business in the overseas market. The stability and viability of any existing, new or potential overseas markets are subject to many uncertainties and may expose us to a number of risks, including:

 

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

 

·                  fluctuations in currency exchange rates and potential loss in foreign currency conversion;

 

·                  difficulty in engaging distributors and other appropriate partners who are knowledgeable about, and can function effectively in, overseas markets, and maintaining good cooperative relationship with them;

 

·                  increased costs associated with maintaining the ability to understand local markets and follow their trends, as well as develop and maintain effective marketing and distribution presence in various countries;

 

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·                  increased costs associated with providing customer service and support in these markets;

 

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

 

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

 

·                  failure to complete construction of our overseas facilities as planned;

 

·                  failure to obtain or maintain certifications for our products in these markets;

 

·                  failure to obtain, maintain or enforce intellectual property rights; and

 

·                  increased costs associated with doing business in foreign jurisdictions.

 

If we are unable to effectively manage these risks, we may not be able to successfully grow our business as we have planned. Furthermore, we have implemented policies and procedures designed to facilitate compliance with laws and regulations in foreign jurisdictions applicable to us, but there can be no assurance that our employees, contractors, or agents will not violate such laws and regulations or our policies. Any such violations could individually or in the aggregate materially and adversely affect our financial condition or operating results.

 

Increases in electricity costs or a shortage or disruption in electricity supply may adversely affect our business.

 

We consume a significant amount of electricity in our operations. Electricity prices in China are expected to increase in the long term. As a result, our electricity costs may become substantially higher than our overseas 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 any 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 and shortages or disruptions in electricity supply may significantly disrupt our normal operations, cause us to incur additional costs and adversely affect our profitability.

 

Decrease of oil price may reduce demand for investment in alternative energy, which may have a negative impact on the deployment of renewable energy and in turn have a negative impact on companies in the renewable energy industry, including us.

 

Crude oil price has dropped significantly since June 2014, which may reduce demand for investment in alternative energy. Historically, high oil price is one of the key drivers for renewable energy, with the decline of oil prices, the deployment of renewable energy may be affected and projects in the renewable energy may be delayed or even derailed. There are different voices on whether renewable energy will be affected and the extent of such impact, although companies in the renewable energy sector, including us, have not been materially and adversely affected by the decline of oil price, we cannot assure you that the renewable energy will not be adversely affected, and if affected, the impact will be minimal. If the renewable energy sector is adversely affected in general, our business and results of operations will also be adversely affected to some extent.

 

Difficulties in identifying, consummating and integrating acquisitions and alliances and potential write-offs in connection with our investment or acquisitions may have a material and adverse effect on our business and results of operations.

 

As part of our growth strategy, we have acquired, and may in the future acquire, companies that are complementary to our business. From time to time, we may also make alternative investments and enter into strategic partnerships or alliances as we see fit. Past and future acquisitions, partnerships or alliances may expose us to potential risks, including risks related to:

 

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·                  the integration of new operations and the retention of customers and personnel;

 

·                  the potential write-offs in connection with acquisitions;

 

·                  unforeseen or hidden liabilities;

 

·                  the diversion of resources from our existing business and technology;

 

·                  failure to achieve synergies with our existing business as anticipated and generate revenues as anticipated;

 

·                  failure of the newly acquired business, technologies, services and products to perform as anticipated;

 

·                  inability to generate sufficient revenue to offset additional costs and expenses;

 

·                  breach or termination of key agreements by the counterparties;

 

·                  the costs of acquisitions; or

 

·                  the potential loss of or harm to relationships with our employees, customers or suppliers resulting from our integration of new businesses.

 

Any of the potential risks listed above could have a material and adverse effect on our ability to manage our business and our results of operations.

 

We may encounter various risks and uncertainties in our project development business, all of which could increase our costs, delay or cancel a project, and have a material adverse effect on our results of operations and business prospects.

 

The project development business involves various risks and uncertainties. We may be required to invest significant amounts of capital for land and interconnection rights, preliminary engineering, licenses and permits, legal and other expenses before we can determine whether a project is feasible. Developing and completing a particular project face various risks and uncertainties, including without limitation to the following:

 

·                  failure to identify suitable sites in a timely manner;

 

·                  failure to win in a competitive bidding for new projects;

 

·                  failure to secure and receive required governmental permits, licenses and approvals, such as land use rights, construction permits and approvals, as well as satisfactory environmental assessments;

 

·                  potential challenges from local residents, environmental organizations, and others who may not support the project;

 

·                  failure to obtain construction financing, including debt, equity and tax credits;

 

·                  failure to receive rights to interconnect to the electric grid;

 

·                  curtailment by utilities or grid operating companies;

 

·                  unable to pay interconnection and other deposits (some of which are non-refundable);

 

·                  failure to negotiate satisfactory EPC agreements;

 

·                  unforeseen engineering problems, construction delays, subsurface land conditions, cost over-runs, shortage of labor, equipment and materials supply;

 

·                  disruptions (including labor strikes);

 

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·                  additional complexities when conducting project development or construction activities in foreign jurisdictions, including operating in accordance with the U.S. Foreign Corrupt Practices Act and applicable local laws and customs; and

 

·                  force majeure events, including adverse weather conditions and other events out of our control.

 

If we fail to address the above risks and uncertainties, our costs may be increased and construction of our projects may be delayed or even cancelled; therefore, our financial condition, results of operations and growth prospects may be materially and adversely affected.

 

We rely on local grid companies for grid connection and grid companies may not have adequate transmission capacity or may be unwilling to purchase and transmit electricity generated by our solar power plants.

 

In order to deliver electricity, the solar power plants need to connect to the transmission grid. We must obtain consents from local grid companies to connect our solar power plants to their power grids before constructing an on-grid integrated solar system.  Such consent depends on a number of external factors, including the availability of existing grids with adequate transmission capacity, progress of grid construction or system upgrades, the distance between our preferred sites and the local grids, availability of large systems such as transformers and switch gear, and the costs of additional interconnection facilities. Many of these factors are beyond our control. We may not be able to obtain all necessary consents for our new solar power system integration projects in a timely manner, or at all. These factors could significantly impact our ability to build solar power plants, connect them to the grid, successfully complete customer acceptance testing, and receive payment for such solar power plants. In addition, even if we are able to get the consents from local grid companies and connect our solar power plants to their power grids, we may experience delays in receiving payments and applicable subsidies, which are not directly paid to us.

 

Further, under the current regulatory framework in the PRC, grid companies generally must purchase and dispatch all electricity generated by renewable energy producers within the coverage of their grids. Solar power stations with grid connection voltage of not more than 10 Kilovolts and installation capacity of not more than 6 MW are all allowed to apply for connection to large grid, with State Grid Corporation of China offering free connection service throughout the entire process. In case of PV power generation projects connected to public grids, grid companies are responsible for investment and construction of the connection projects and related modification of public grids, and for PV power generation projects connected to users’ end through the public grid, grid companies are responsible for investment and construction of public grids’ modification related to the connection. However, we cannot assure you that local grid companies will comply with these obligations at all times or at all. In addition, solar power plants and other renewable energy facilities of our competitors located near our solar power system integration projects may compete with us to secure grid connections. Grid companies may not have adequate transmission capacity or may be unwilling to purchase and transmit electricity generated by our solar power plants. We may not be able to dispatch electricity when our solar power system integration projects commence operations, which could have a material adverse effect on our revenue and results of operations.

 

Curtailment of power purchases by the grid could significantly impact our project sales price and our ability to generate revenues from electricity generation.

 

Due to various reasons, such as mismatch between output and demand of power and the grid’s dispatch among different sources of energy within its network, the electricity generated by our solar power plants may be prevented from feeding into the grid even if our solar power plants are connected to the transmission grid. Grid curtailment exists in both China and foreign countries, such as Japan. Grid curtailment also varies among different regions in China, but mainly occurring in China’s northwest regions, such as Gansu and Qinghai provinces. As a result, our project sales price could be materially and adversely effected, the electricity that has already been generated will be wasted and we will not generate revenue from electricity generation, we may also be forced to reduce our output, all of which will significantly affect our results of operations.

 

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Solar power plants can only receive government subsidies after they are listed in the Subsidy Catalog.

 

With respect to our solar power projects in China, our rights to receive central governmental subsidies can only be realized when the solar power projects are listed in the Renewable Energy Electricity Subsidy Catalog, or the Subsidy Catalog, issued by the Ministry of Finance, or MOF, the National Development and Reform Commission, or NDRC, and the National Energy Administration, or NEA, from time to time. In order to be included in the Subsidy Catalog, applications should be made with the local counterparts of MOF, NDRC and NEA, which will conduct a preliminary review of the solar power projects and then report to the MOF, NDRC and NEA through their respective internal reporting channel. The MOF, NDRC and NEA will then conduct their review and determine whether to list the projects in the Subsidy Catalog.

 

On August 24, 2016, the MOF, NDRC and NEA published the 6th Subsidy Catalog. One of our solar power plants is included in the 6th Subsidy Catalog. As of December 31, 2016, we had RMB155.8 million (US$22.4 million) in accounts receivable, representing unpaid subsidies to be paid. If we cannot receive subsidies for our projects as expected, our financial condition may be materially adversely affected.

 

We may be required to make significant upfront investment prior to commencing construction of solar power projects, which could adversely affect our business and results of operations.

 

It may take many months or years before our solar power plant development cycles can mature. As a result, we may be required to invest significant amounts of capital for land and interconnection rights, preliminary engineering, licenses and permits, legal and other expenses in advance of commencing construction, and the receipt of any revenue, much of which is not recognized for several additional months following contract signing.

 

Furthermore, we may not be able to simultaneously fund our other business operations and these system investments through our long project development cycles. Our liquidity may be adversely affected to the extent the project sales market weakens or we are not able to successfully complete the customer acceptance testing due to various reasons, such as technical difficulties, equipment failure, or adverse weather, and we are unable to sell our solar projects at prices and on terms and timing that are acceptable to us. Accordingly, our business and results of operations may be materially and adversely affected.

 

Prepayment arrangements for procurement of silicon wafers and/or polysilicon from our major suppliers expose us to the credit risks of such suppliers and may also significantly increase our costs and expenses, either of which could in turn have a material adverse effect on our financial condition, results of operations and liquidity.

 

We face significant specific counterparty risk under long-term supply contracts when dealing with suppliers without a long, stable production and financial history. We make prepayments to these suppliers for procurement of polysilicon, ingots or wafers without receiving collateral to secure such payments. In the event any such supplier experiences financial difficulties, or even bankruptcy, it may be difficult or impossible, or may require substantial time and expenses, for us to recover any or all of our prepayments.

 

For example, in 2011, one of our long-term suppliers failed to deliver silicon wafers pursuant to the applicable contracts, and we recorded a provision of prepayment and other payment due totaling RMB42.2 million. We reached a settlement with such supplier in August 2013, under which such supplier agreed to pay us RMB21 million and we finally recovered RMB6,351,200 in September 2014 pursuant to a court allocation plan.

 

These efforts incurred legal expenses and distracted our management. In addition, legal actions are required to recover our prepayments. Our claims for prepayments would rank as unsecured claims, which expose us to the credit risks of our suppliers in the case of an insolvency or bankruptcy of such suppliers. Under such circumstances, our claims against the suppliers would rank below those of secured creditors, which would undermine our chances of obtaining the return of the prepayments. Accordingly, if a supplier to which we make prepayment defaults on its obligations under a supply contract, we may not be able to recover all or a portion of our outstanding prepayment, which may have a material adverse effect on our financial condition, results of operations and liquidity.

 

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Our ability to adjust our raw materials costs may be limited as a result of our entering into long-term supply agreements with some of our polysilicon and silicon wafer suppliers, and it may be difficult for us to respond in a timely manner to rapidly changing market conditions, which could materially and adversely affect our cost of revenues and profitability.

 

In order to secure adequate and timely supply of polysilicon and silicon wafers, we entered into a number of long-term supply agreements for polysilicon, ingots and wafers with a limited number of suppliers. Some agreements provide for fixed pricing or pricing adjustable within a relatively small range of plus or minus 5% to 10%, substantial prepayment obligations, and/or firm purchase commitments that require us to pay for the supply whether or not we accept delivery. Since the second half of 2008, the prices of polysilicon and silicon wafers have fluctuated significantly due to overall volatile market condition. In this regard, we have renegotiated the unit price and volume terms of many of our long-term supply agreements and have entered into amendments for many of them, but cannot always adjust terms to fully take advantage of market changes. In view of the significant volatility of the polysilicon prices during the past few years, we plan to continue to renegotiate the unit price and volume terms of our long-term supply agreements, but if prices of polysilicon or silicon wafers we pay to our suppliers continue to be higher than the market prices after such re-negotiations, we may be placed at a competitive disadvantage versus our competitors, and our cost of revenues as well as profitability would be materially and adversely affected. In addition, if demand for our solar power products decreases and such agreements require us to purchase more raw materials than required to meet our demand, we may incur costs associated with carrying excess inventory, which may have a material adverse effect on our cash flow; or if we fail to resell the raw materials at a price higher than our purchase price, our results of operations may be materially and adversely affected. To the extent we are not able to pass these increased costs to our customers, our business and results of operations may also be materially and adversely affected.

 

In order to settle the lawsuit brought by Hemlock Semiconductor Pte. Ltd., or Hemlock, against JA Yangzhou with respect to a long-term supply agreement, or the Original Supply Agreement, dated as of May 4, 2011, as amended, by and between Hemlock and JA Yangzhou, JA BVI, JA Yangzhou and Hemlock Semiconductor Operations LLC, or Hemlock Operations, entered into a new long-term supply agreement, or the New Supply Agreement, on October 31, 2016, under which we agreed to purchase a certain amount of solar grade polycrystalline silicon products from Hemlock Operations on a quarterly basis until October 31, 2026. If we breach any of our obligations under the New Supply Agreement, we may be subject to claims brought by Hemlock. As a result, our ability to renegotiate the unit price and volume may be limited and our business and results of operations may be materially and adversely affected if we breach any of our obligations under the New Supply Agreement.  After detailed assessment, we expect to fulfil the obligation under the New Supply Agreement and did not record any contingency liabilities as of December 31, 2016.

 

Disposal of outdated production lines can result in an increased impairment on property, plant and equipment, which may have a negative impact on our results of operations.

 

In the fourth quarter of 2012, we retired some outdated production lines of solar cells and solar modules in each of our facilities in Ningjin, Hebei and Fengxian, Shanghai. We recorded impairment loss on property, plant and equipment of RMB147.1 million related to the retirement of such production lines in 2012, accounting for 2.2% of our total revenues in 2012. With our business development, we may introduce new manufacturing equipment with higher production efficiency rates to replace old manufacturing equipment or we may eliminate outdated production capacity from time to time. If we continue to retire outdated production lines or replace outdated manufacturing equipment with new manufacturing equipment in the future, we may incur increased impairment loss on property, plant and equipment, which may have a negative impact on our results of operations.

 

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

 

We expect that we will need a significant amount of cash to fund our future capital expenditures. Besides capital expenditures, we have significant working capital commitments because suppliers of silicon wafers and polysilicon usually require us to make prepayments in advance of shipments. Future acquisitions, market changes or other developments may also cause us to require additional funds. Historically, we have relied on equity and debt offerings, borrowings and operating cash flow to finance our capital expenditure and working capital requirements. If we cannot generate sufficient operating cash flow to fund our capital expenditure and working capital needs, we may seek to sell additional equity or debt securities or borrow from lending institutions, which may not be available when needed. Our existing borrowings may decrease if our existing loans are cancelled or not renewed. Since the end of 2015, approximately RMB610.5 million (US$87.9 million) of our borrowings matured and were not extended or renewed. See “Risk Factors—Risks Related to Our Business and Industry—We have substantial indebtedness and may incur substantial additional indebtedness in the future, which could adversely affect our financial health and our ability to generate sufficient cash to satisfy our outstanding and future debt obligations.”

 

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In addition, we require our customers to make prepayments to us to help us reduce the amount of funds that we need to finance our working capital requirements. The balance of prepayments we received from our customers increased from RMB244.0 million as of December 31, 2014 to RMB691.9 million as of December 31, 2015 and decreased to RMB610.7 million (US$88.0 million) as of December 31, 2016.

 

We expect that we may need to obtain additional financing to meet our working capital requirements. Our ability to obtain external financing is subject to a number of uncertainties, including:

 

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

 

·                  the state of global credit markets;

 

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

 

·                  economic, political and other conditions in China and elsewhere.

 

If we are unable to obtain funding in a timely manner or on commercially acceptable terms, or at all, our growth prospects and future profitability may be materially and adversely affected. In addition, the sale of additional equity securities, including convertible debt securities, would dilute our existing shareholders. The incurrence of debt would result in increased interest rate risk, divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders, if any. A shortage of such funds could in turn impose limitations on our ability to plan for, or react effectively to, changing market conditions or to expand through organic and acquisitive growth, thereby reducing our competitiveness.

 

We have substantial indebtedness and may incur substantial additional indebtedness in the future, which could adversely affect our financial health and our ability to generate sufficient cash to satisfy our outstanding and future debt obligations.

 

As of December 31, 2016, our short-term borrowings and current portion of long-term borrowings were RMB2.9 billion (US$419.5 million) and RMB525.3 million (US$75.7 million), respectively, and our long-term borrowings (excluding current portions) were RMB2.7 billion (US$389.1 million).

 

Our substantial indebtedness could have important consequences to you. For example, it could:

 

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

 

·                  increase our vulnerability to adverse general economic and industry conditions;

 

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

 

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

 

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·                  place us at a competitive disadvantage compared to our competitors that have less debt;

 

·                  limit, along with the financial and other restrictive covenants of our indebtedness, among other things, our ability to borrow additional funds; and

 

·                  increase the cost of additional financing.

 

In the future, we may from time to time incur substantial additional indebtedness and contingent liabilities. If we incur additional debt, the risks that we face as a result of our already substantial indebtedness and leverage could intensify.

 

Our ability to generate sufficient cash to satisfy our outstanding and future debt obligations will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond our control. Banks may lower our credit lines or reject our loan applications, and we cannot assure you that our existing credit facilities will not be cancelled, or will be renewed in the future on reasonable commercial terms or at all. As a result, we may not generate or obtain sufficient cash flow to meet our anticipated operating expenses and to service our debt obligation as they become due. If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy that may include actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking equity capital. These strategies may not be instituted on satisfactory terms, if at all.

 

Our efforts to further develop our technology and know-how through increased research and development of crystalline silicon technology may not yield satisfactory results, if any.

 

The solar power industry is rapidly evolving and becoming more competitive. We will need to invest significant financial resources in research and development to keep pace with technological advances in the solar power industry and to effectively compete in the future. We have expended and may continue to expend significant financial resources in research and development of crystalline silicon and commercialization of new technologies to effectively compete with other market players in the future. However, research and development activities are inherently uncertain, and we might encounter practical difficulties in commercializing our research results. A variety of competing PV technologies that other companies may develop could prove to be more cost-effective and have better performance than solar power products that we develop. Therefore, our development efforts may be rendered obsolete by the technological advances of others.

 

Breakthroughs in PV technologies that do not use crystalline silicon could mean that companies such as us that rely entirely on crystalline silicon would encounter a sudden, sharp drop in sales. One of the alternative technologies in the production of solar cells is thin film technology. The use of thin film technology in the production of solar cells would significantly reduce the consumption of silicon materials and manufacturing costs while some thin film technology may not use silicon materials at all. New developments in commercialization of thin film technology, e.g. Perovskite solar cells, may render our existing technologies obsolete and our products uncompetitive, which would result in loss in our profitability and market share and could materially and adversely affect our business, financial condition and results of operations.

 

A small number of our customers account for a significant portion of our revenues.

 

A significant portion of our revenues is derived from a small number of customers. Our three largest customers for the three years ended December 31, 2014, 2015 and 2016 accounted for 39.1%, 23.3% and 14.6%, respectively, of our total revenues. For the years ended December 31, 2014, 2015 and 2016, there is one customer located in Japan accounting for 28.8%, 12.5% and 4.0% of our total revenues, respectively.

 

Our results of operations and financial condition will continue to depend on, among others, the following:

 

·                  our ability to continue to obtain orders from these customers;

 

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·                  the financial condition and success of these customers; and

 

·                  the commercial success of our customers’ products which incorporate our solar power products.

 

Our ability to maintain close relationships with these key customers is essential to our strategies and to the ongoing growth of our business. We cannot guarantee that we will be able to retain any of our largest customers or any other customers. We have in the past been, and may in the future be, requested to reduce prices, and in an industry downturn, order cancellations may be expected. Any material delay, cancellation or reduction of orders from our major customers could cause our net sales to decline significantly and, in any such event, our results of operations may be materially and adversely affected.

 

Our results of operations and financial condition also depend on the financial condition and commercial success of these customers. If one or more of our customers were to become insolvent or otherwise were unable to pay for the services provided or products supplied by us, this could have a material adverse effect on our business, financial condition, results of operations and future prospects.

 

Cancellation of customer orders could cause our operating results to fluctuate.

 

We have signed long-term sales arrangements with certain customers and required them to make prepayments. However, even though we charge a prepayment under many contracts, our customers may still cancel or reschedule purchase orders with us on relatively short notice. Cancellations or rescheduling of customer orders could result in delay or loss of anticipated sales without allowing us sufficient time to reduce, or delay the incurrence of, our corresponding inventory and operating expenses. In addition, changes in forecasts or the timing of orders from these or other customers expose us to the risks of inventory shortages or excess inventory. These circumstances, in addition to variations in average selling prices, and the fact that our supply agreements are generally long-term in nature and many of our other operating costs are fixed, in turn could cause our operating results to fluctuate and may result in a material adverse effect in our business.

 

We compete in a highly competitive market and many of our competitors have greater resources.

 

The solar power market is intensely competitive and rapidly evolving. We expect to face increased competition, which may result in price reductions, reduced margins or loss of market share. Although we have expanded into silicon wafer manufacturing and solar module business since the fourth quarter of 2009, some of our competitors have become vertically integrated for a longer period of time than us. We expect to compete with future entrants to the PV market that offer new technological solutions. Furthermore, many of our competitors are developing or currently producing products based on new PV technologies, including thin film, ribbon, sheet and nano technologies, which they believe will ultimately cost the same as or less than crystalline silicon technologies used by us. In addition, the entire PV industry also faces competition from conventional and non-solar renewable energy technologies. Due to the relatively high manufacturing costs compared to many other energy sources, solar energy is generally not competitive without government incentive programs.

 

Many of our existing and potential competitors have substantially greater financial, technical, manufacturing and other resources than we do. Our competitors’ greater size and longer operating history in some cases provide them with a competitive advantage with respect to manufacturing costs because of their economies of scale and their ability to purchase raw materials at lower prices. Many of our competitors also have greater brand name recognition, more established distribution networks and larger customer bases. In addition, many of our competitors have well-established relationships with our existing and potential customers and have extensive knowledge of our target markets. As a result, they may be able to devote greater resources to the research, development, promotion and sale of their products and respond more quickly to evolving industry standards and changes in market conditions. Our failure to adapt to changing market conditions and to compete successfully with existing or new competitors may materially and adversely affect our financial condition, results of operations and business prospects.

 

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

 

Our solar power products may contain defects that are not detected until after they are shipped or installed. These defects could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from product development efforts, lead to returns of, or requests to return our products and significantly affect our customer relations and business reputation. If we deliver solar power products with errors or defects, or if there is a perception that our solar power products contain errors or defects, our credibility and the market acceptance and sales of our products could be harmed.

 

With respect to our solar module business, in 2017, we extended our product warranty period from ten years to twelve years, warranting that the modules will be free from defects in materials and workmanship from the time of delivery. As of the date of this annual report, we have not encountered any material guaranty claims since we first started manufacture and sell solar modules in the fourth quarter of 2009. Starting from the third quarter of 2012, we began to provide a 25-year linear performance warranty against declines of electricity generation capacity from the time of delivery. Starting from August 2015, we began to provide a 30-year performance warranty for our newly launched double-glass module, which guarantees no greater than 2.5% power degradation for multicrystalline module or 3% power degradation for monocrystalline module in the first year, followed by a linear annual degradation rate of less than 0.5% for both multicrystalline and monocrystalline module. As a result of these warranties, we bear the risk of extensive warranty claims long after we have sold our products and recognized revenues. We therefore, in accordance with our own history, industry data and industry practices, accrue 1% of our net revenues from sales of solar modules as general warranty costs and also separately accrue specific warranty costs to cover potential liabilities that could arise from customer claims base on an individual assessment. However, such warranty cost accruals may not be adequate. Starting from 2012, we also began to work with PowerGuard Specialty Insurance Services to provide a range of long-term insurance and warranty-related coverage for our products. Because we only started to manufacture and sell double-glass module in August 2015, which have been in use for only a relatively short period, we cannot assure you that our assumptions regarding the durability and reliability of our products are reasonable. Our warranty provisions and insurance coverage may be inadequate, and we may have to incur substantial expense to repair or replace defective products in the future.

 

Our failure to maintain sufficient collateral under certain mortgage contracts for our loans may materially and adversely affect our financial condition and results of operations.

 

From time to time, we may enter into bank loans secured by our real property or other assets. For example, our long-term borrowing of RMB70.0 million (US$10.1 million) with Agricultural Bank of China was secured by certain of our buildings and land use right in Shanghai Jinglong Solar Technology Co., Ltd., or Shanghai Jinglong. Our entrustment loan with Hefei High-Tech Industrial Development Zone Management Co., Ltd. in the total amount of RMB1,440.0 million (US$207.4 million) was secured by buildings, machinery and equipment, construction in progress and land use rights owned by JA Hefei Technology and all our equity interests in JA Hefei Technology. Our long-term borrowing of RMB546.0 million (US$78.6 million) with Industrial and Commercial Bank of China was secured by project assets of Dunhuang JA Solar Power Development Co., Ltd., or JA Dunhuang. Our long-term borrowing of RMB250.5 million (US$36.1 million) from Industrial and Commercial Bank of China was secured by our project assets. Our long-term borrowing of RMB13.5 million (US$1.9 million) from 77 Bank was secured by our project assets. Our short-term loan of RMB90.8 million (US$13.1 million) with China Construction Bank was secured by buildings and land use right in JA Lianyungang. Our short-term borrowing of RMB200.0 million (US$28.8 million) with the Industrial and Commerce Bank of China was secured by certain of our buildings in Shanghai JA Solar PV Technology Co., Ltd., Our short-term bank borrowing of RMB80.0 million (US$11.5 million) from Huaxia Bank was secured by Yangzhou JA Property Co., Ltd., Our short-term bank borrowing of RMB39.0 million (US$5.6 million) from China Construction Bank was secured by the building of JA Yangzhou. Our short-term bank borrowing of RMB34.7 million (US$5.0 million) from Industrial and Commercial Bank of China was secured by the building of Shanghai Jinglong. Our short-term bank borrowing of RMB50.0 million (US$7.2 million) from Shanghai Pudong Development Bank was secured by Donghai District Longhai Property Co., Ltd. Our short-term bank borrowing of RMB292.6 million (US$42.1 million) from Ping An Bank was secured by all of the equity interests in JA Yangzhou. Our short-term bank borrowing of RMB0.7 million (US$0.1 million) from 77 Bank was secured by our project assets. Our short-term bank borrowing of RMB10.0 million (US$1.4 million) from China Construction Bank was secured by the building of JA Yangzhou. We cannot assure you that we will not be requested by the mortgagees to provide additional collateral to bring the value of the collateral to the level required by the mortgagees. If we fail to provide additional collateral, the mortgagees will be entitled to require the immediate repayment by us of the outstanding loans, otherwise, the mortgagees may auction or sell our mortgaged assets and negotiate with us to apply the proceeds from the auction or sale to the repayment of the underlying borrowings. Furthermore, we may be subject to liquidated damages pursuant to relevant mortgage contracts. If any of the foregoing occurs, our financial condition and results of operations may be materially and adversely affected.

 

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If we fail to adequately protect our intellectual property rights, our business and results of operations could be materially and adversely affected.

 

Given the importance of intellectual property to our business, we rely primarily on a combination of patent, trademark, trade secret and copyright, as well as employee and third party confidentiality agreements to safeguard our intellectual property. As of the date of this annual report, we had a total of 314 issued patents and 64 pending patent applications in China. However, we cannot assure you that the steps which we have taken will be sufficient to protect our intellectual property rights or that third parties would not infringe upon or misappropriate any such rights. Moreover, it is costly to litigate in order to protect any of our intellectual property rights. If we are unable to prevent third parties from infringing or misappropriating these rights in our self-owned products, the future financial condition and the ability to develop our business could be materially adversely affected.

 

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

 

Our success also depends largely on our ability to use and develop our technology and know-how without infringing the intellectual property rights of third parties. See “Item 4. Information on the Company—B. Business Overview—Intellectual Property.” In the ordinary of business, we have received claims from various third parties alleging intellectual property infringement by us and we cannot assure you that we will not be subject to more claims in the future. We have defended and intend to continue defending vigorously against these claims and as of the date of this annual report, these claims have not had any material adverse effect on our business, results of operations or financial condition. Also, because patent applications in many jurisdictions are kept confidential for 18 months before they are published, we may be unaware of other persons’ pending patent applications that relate to our products or processes. Our suppliers may also become subject to infringement claims, which in turn could negatively impact our business as they may no longer be able to fulfill their delivery obligations under their contracts with us or refund our outstanding prepayments in a timely manner or at all. The defense and prosecution of intellectual property suits, patent opposition proceedings and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties, to pay ongoing royalties, or to redesign our products or subject us to injunctions prohibiting the manufacture and sale of our products or the use of our technologies. Protracted litigation could also result in our customers deferring or limiting their purchase or use of our products until resolution of such litigation. The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

 

Our quarterly revenues and operating results may be difficult to predict and could fall below investor expectations, which could cause the market price of our ADSs to decline.

 

Our quarterly revenues and operating results have fluctuated in the past and may continue to fluctuate significantly depending upon numerous factors, including seasonality of demand for solar power products, changes in market conditions and industry environment, and changes in government policies or regulations. For example, purchases of solar power products tend to decrease due to severe weather conditions in winter months, which complicate the installation of solar power systems. Many of these factors are beyond our control, making our quarterly results difficult to predict, which could cause the trading price of our ADSs and the rule of our other securities to decline if our operating results for any particular quarter fall below investor expectations.

 

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The success of our business depends on the continuing efforts of our key personnel and our business may be severely disrupted if we lose their services.

 

Our future success depends, to a significant extent, on our ability to attract, train and retain qualified technical personnel, particularly those with expertise in the solar power industry. There is substantial competition for qualified technical personnel, and there can be no assurance that we will be able to attract or retain our qualified technical personnel. If we are unable to attract and retain qualified technical personnel, our business may be materially and adversely affected.

 

We rely heavily on the continued services of our executive officers. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all. As a result, our business may be severely disrupted and we may incur additional expenses to recruit and retain new officers. In addition, if any of our executive officers joins a competitor or forms a competing company, we may lose some or all of our customers. We believe our future success will depend upon our ability to retain these key employees and our ability to attract and retain other skilled managerial, engineering and sales and marketing personnel. Each of our executive officers and other key personnel has entered into an employment agreement with us, which contains confidentiality and non-competition provisions. However, if any disputes arise between our employees and us, we cannot assure you, in light of uncertainties associated with the PRC legal system, the extent to which any of these agreements could be enforced in China, where some of our executive officers reside and hold some of their assets.

 

As we have awarded and will continue to award employee share options and other share-based compensation to certain of our directors, officers, employees and consultants, our net income will be adversely affected.

 

As of March 31, 2017, we have granted options to purchase 23,299,000 ordinary shares and awarded 4,912,000 restricted share units to a number of our directors, employees and consultants, pursuant to our 2006 stock incentive plan, or 2006 Plan, and the 2014 stock incentive plan, or 2014 Plan. See “Item 6. Directors, Senior Management and Employees—B. Compensation—Stock Option Plans.” As a result of these grants and potential future grants, we have incurred, and will incur in future periods, significant share-based compensation expenses. In accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 718, Compensation-Stock Compensation, which requires all companies to recognize, as an expense, the fair value of share options and other share-based compensation to employees, we are required to account for compensation costs for all restricted share units and share options granted to our directors, employees and consultants using a fair-value based method and recognize expenses in our consolidated statement of operations and comprehensive income/(loss) in accordance with the relevant rules under U.S. GAAP, which may have a material adverse effect on our net income. Moreover, the additional expenses associated with administrating share-based compensation may reduce the attractiveness of such incentive plan to us. However, if we stop granting options, or reduce the number of options granted, under our stock incentive plan, we may not be able to attract and retain key personnel, as share options are an important employee recruitment and retention tool. In addition, the decline in the price of our ADSs representing our ordinary shares below the exercise price of many of the previously granted options has lessened the effectiveness of the options as a means to retain the services of the option holders. As a result, we have granted more stock options to certain individuals and will continue to grant employee share options or other share-based compensation in the future that may adversely affect our net income/(loss).

 

There are potential conflicts of interest between us and our largest shareholder, Jinglong BVI.

 

Jinglong BVI, which is controlled by the shareholders of Hebei Jinglong, is our largest shareholder. In addition, Mr. Baofang Jin, the executive chairman of our board of directors and our chief executive officer, is a shareholder of Jinglong BVI and is also the chairman and largest shareholder of Hebei Jinglong. We currently lease properties from Hebei Jinglong and its affiliate, and also received guarantees from Hebei Jinglong for certain long-term and short-term bank borrowings. Our transactions with Hebei Jinglong are governed by a number of contracts, the terms of which were negotiated at what we believe are on an arm’s length basis. However, the interest of Jinglong BVI may conflict with our own interest with respect to our transactions with Hebei Jinglong. As a result, we may have limited ability to negotiate with Hebei Jinglong over the terms of the agreements because Jinglong BVI may exert significant influence on our affairs through our board of directors. In addition, Jinglong BVI may be able to prevent us from taking actions to enforce or exercise our rights under the agreements we entered into with Hebei Jinglong. Furthermore, we cannot assure you that our transactions with Hebei Jinglong will always be concluded on terms favorable to us or maintained at the current level or at all in the future. As a result, when these situations arise, our financial condition, results of operations and implementation of strategy may be materially and adversely affected.

 

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

 

As with other solar power product manufacturers, our operations involve the use, handling, generation, processing, storage, transportation and disposal of hazardous materials, which may result in fires, explosions, spills and other unexpected or dangerous accidents causing personal injuries or death, property damages, environmental damages and business interruptions. Although we currently carry third-party liability insurance against property damages, these insurance policies are limited in scope and may not cover all claims relating to personal injury, property or environmental damage arising from accidents on our properties or relating to our operations. Any occurrence of these or other accidents in our operations that are not insured under our existing insurance policies could have a material adverse effect on our business, financial condition or results of operations.

 

In addition, the normal operation of our manufacturing facilities may be interrupted by accidents caused by operating hazards, power supply disruptions, equipment failures, as well as natural disasters. As the insurance industry in China is still in an early stage of development, business interruption insurance available in China offers limited coverage compared to that offered in many other countries, and we do not carry any business interruption insurance. Any business disruption or natural disaster could result in substantial costs and diversion of resources, and our business and results of operations may be materially and adversely affected.

 

We are also exposed to risks associated with product liability claims in the event that the use of the solar power products we sell results in injury. Because our solar products are generally incorporated into solar power devices to generate electricity, it is possible that users could be injured or even killed by the solar power devices incorporating our solar products, whether by product malfunctions, defects, improper installation or other causes. While we have not experienced any product liability claims brought against us, we are unable to predict whether such claims will be brought against us in the future or the effect of any resulting adverse publicity on our business. Although we began purchasing product liability insurances in 2010, there is no assurance that our insurance policies will provide adequate coverage in the event of a successful product liability claim against us. If our product liability insurances are not adequate, the successful assertion of product liability claims against us could result in potentially significant monetary damages and require us to make significant payments.

 

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

 

We are required to comply with all national and local environmental protection regulations in the jurisdictions we have operations, including China, Malaysia and Vietnam. Compliance with environmental regulations is expensive. The governments in the jurisdictions we have operations are adopting more stringent environmental protection regulations and the costs of complying with these regulations are expected to increase.

 

Each of our solar product manufacturing facilities is required to conduct an environmental impact assessment, obtain approval of the assessment before commencing construction and complete an examination and obtain an environmental acceptance approval before it is able to begin production. We cannot assure you that we will be able to comply with all applicable environmental protection requirements, obtain the requisite approvals and permits upon completion of construction or commencement of commercial production on a timely basis or at all. Governmental authorities may impose fines or deadlines on us as a result of any non-compliance, and these authorities may also order us to delay or cease construction or production if we fail to comply with applicable requirements.

 

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In addition, we are subject to licensing requirements, regulations and periodic monitoring by local environmental protection authorities.  If we fail to obtain the required permits and licenses, we will not be able to obtain an environmental acceptance approval and may not be allowed to produce. We may also be subject to substantial fines or damages or suspension of our production operations, and our reputation may be harmed, which could negatively affect our results of operations and financial position.

 

We may incur significant legal expenses in connection with, and allocate management time and attention to, legal actions involving us that may take place from time to time and it is possible that we will not be able to prevail in our legal actions.

 

We were previously involved in two putative securities class actions and were able to reach an agreement to settle the lawsuits. We were also previously named as a defendant in a lawsuit brought by Hemlock and we were able to settle the lawsuit with Hemlock by entering into the New Supply Agreement. See the description in “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings”. During the process, we incurred significant legal expenses and allocated management time and attention to the litigations. If we breach any of our obligations under the New Supply Agreement, we may again be subject to claims brought by Hemlock. We may also face other legal actions that may take place from time to time in the future, and we may continue to incur significant legal expenses and allocate management time and attention to the legal actions, all of which could harm our business.

 

Risks Related to Doing Business in China

 

Our independent registered public accounting firm, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by the Public Company Accounting Oversight Board and, as such, investors may be deprived of the benefits of such inspection.

 

Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the U.S. Securities and Exchange Commission, or SEC, as an auditor of companies that are traded publicly in the U.S. and a firm registered with the U.S. Public Company Accounting Oversight Board, or PCAOB, is required by the laws of the U.S. to undergo regular inspections by the PCAOB to assess its compliance with the laws of the U.S. and professional standards. Because our auditor is located in China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected by PCAOB.

 

Inspections of other firms that PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to regularly evaluate the effectiveness of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

 

If additional remedial measures are imposed on the PRC-based Big Four 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 could be unable to timely file future financial statements in compliance with the requirements of the Securities Exchange Act of 1934.

 

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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 U.S.

 

On January 22, 2014, the administrative law judge, or ALJ, 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 workpapers to the SEC. The initial decision further determined that each of the firms should be censured and barred from practicing before the SEC for a period of six months. The Big Four PRC-based accounting firms appealed the ALJ’s initial decision to the SEC. The ALJ’s decision does not take effect unless and until it is endorsed by the SEC.

 

In February 2015, the Big Four PRC-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 Chinese firms’ audit documents via the China Securities Regulatory Commission, or the CSRC. If future document productions fail to follow the procedures or meet specified criteria, the SEC retains 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 the Nasdaq Global Select Market 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 U.S.

 

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

 

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

 

·                  the level of government involvement;

 

·                  the level of development;

 

·                  the growth rate;

 

·                  the control of foreign exchange; and

 

·                  the allocation of resources.

 

While the Chinese economy has grown significantly in the past 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. We cannot assure you that the PRC economy will continue to grow, or that if there is growth, such growth will be steady and uniform, or that if there is a slowdown, such a slowdown will not have a negative effect on our business.

 

The PRC government exercises significant control over China’s economic growth through various measures, such as allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by governmental control over capital investments or changes in tax regulations that are applicable to us. In addition, it is unclear whether PRC economic policies will be effective in maintaining stable economic growth in the future. Any slowdown in China’s economic growth could lead to reduced demand for our solutions, which could in turn materially and adversely affect our business, financial condition and results of operations.

 

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Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.

 

More than half of our revenues are derived from sales to customers outside China and denominated in foreign currencies. Therefore, we have entered into, and may continue to enter into, foreign currency forward contracts with commercial banks to hedge part of our exposure to foreign currency exchange risk for our overseas sales. As with all hedging instruments, there are risks associated with the use of foreign currency forward contracts. While the use of such foreign currency forward contracts provides us with protection from certain fluctuations in foreign currency exchange, we potentially forgo the benefits that might result from favorable fluctuations in foreign currency exchange. Any default by the counterparties to these transactions could adversely affect our financial condition and results of operations. Furthermore, these financial hedging transactions may not provide adequate protection against future foreign currency exchange rate fluctuations and, consequently, such fluctuations could result in foreign exchange losses and adversely affect our financial condition and results of operations.

 

The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The PRC government allowed the Renminbi to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation was halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. As a consequence, the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.

 

To the extent that we need to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs, strategic acquisitions or investments or other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, appreciation or depreciation in the value of RMB relative to U.S. dollars would affect our financial results reported in U.S. dollar terms regardless of any underlying change in our business or results of operations.

 

Natural disasters, acts of war, political unrest and epidemics, which are beyond our control, may cause damage, loss or disruption to our business.

 

Natural disasters, acts of war, political unrest and epidemics, which are beyond our control, may adversely affect the economy, infrastructure and livelihood of the people of the PRC. Some cities in the PRC are particularly susceptible to floods, earthquakes, sandstorms and droughts. In 2016, massive flood hit Xingtai, Hebei where one of our manufacturing facilities was located. Although our operations were not adversely affected by such massive flood, we cannot assure you that our business, financial condition and results of operations would not be materially and adversely affected if such natural disasters were to reoccur in the future. Political unrest, acts of war and terrorists attacks may cause damage or disruption to us, our employees, our facilities, the sales channels operated by authorized third-party retailers of us and our markets, any of which could materially and adversely affect our sales, overall operating results and financial condition. The potential for war or terrorists attacks may also cause uncertainty and cause our business to suffer in ways that we cannot currently predict. In addition, certain Asian countries, including the PRC, have encountered epidemics such as SARS, incidents of the avian flu, the H1N1 flu or the H7N9 flu. Past occurrences of epidemics have caused different degrees of damage to the national and local economies in the PRC. A recurrence of an outbreak of SARS, avian flu, the H1N1 flu, the H7N9 flu or any other similar epidemic, could cause a slowdown in the levels of economic activity generally, which could in turn adversely affect our results of operations.

 

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Price inflation in China could erode some of the advantages of operating in a relatively low-cost jurisdiction such as China, which could negatively affect our competitive advantages and our results of operations.

 

In the last three years, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the annual average percent changes in the consumer price index in China for 2014, 2015 and 2016 were 2.0%, 1.4% and 2.0%, respectively. The year-over-year percent changes in the consumer price index for December 2014, 2015 and 2016 were increases of 1.5%, 1.6% and 2.1%, respectively. Although we have not been materially affected by inflation in the past, we cannot assure you that we will not be affected in the future by higher rates of inflation in China. Because we conduct manufacturing and purchase raw materials primarily from suppliers in China, price inflation increases the costs of labor and raw materials for manufacturing and risks counteracting the competitive advantage we enjoy as a result of the relatively lower manufacturing costs we incur from operating in China. If inflationary trends continue in China, China could lose its competitive advantage as a low-cost manufacturing venue, which could in turn lessen any competitive and reputational advantages we gain through China-based manufacturing. Although we have started the process and will continue to gradually automate our production lines in order to reduce the impact of increases in labor cost in the long run, inflation in China may still weaken our competitiveness in our markets and have a material adverse effect on our business, financial condition, results of operations and prospects.

 

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

 

We conduct a significant portion of our business inside China through our various wholly-owned subsidiaries. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are foreign-invested enterprises, or FIE, or enterprises invested by FIE and are therefore subject to laws and regulations applicable to foreign investment in China. The PRC legal system is based on written statutes. Unlike in the common law system, prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. Furthermore, 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. In addition, the PRC legal system is based in part on government policies and internal rules, some of which may not be published on a timely basis or at all, and some of which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may also impede our ability to enforce the contracts we have entered into. As a result, these uncertainties could materially and adversely affect our business and results of operations.

 

Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

 

MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. Substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects.

 

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Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company is considered an FIE. The draft Foreign Investment Law specifically provides that entities established in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity set up in a foreign jurisdiction would nonetheless be, upon market entry clearance by the MOFCOM, treated as a PRC domestic investor provided that the entity is “controlled” by PRC entities and/or citizens.  In this connection, “control” is broadly defined in the draft law to cover the following summarized categories: (i) holding 50% of more of the voting rights of the subject entity; (ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the voting power to exert material influence on the board, the shareholders’ meeting or other equivalent decision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s operations, financial matters or other key aspects of business operations.  Once an entity is determined to be an FIE, it will be subject to the foreign investment restrictions or prohibitions set forth in a “negative list,” to be separately issued by the State Counsel in the future, if the FIE is engaged in the industry listed in the negative list. Unless the underlying business of the FIE falls within the negative list, which calls for market entry clearance by the MOFCOM, prior approval from the government authorities as mandated by the existing foreign investment legal regime would no longer be required for establishment of the FIE.

 

We do not operate in a restricted or prohibited industry that will be covered under the negative list, so the effect on us of the draft law will be limited. Nonetheless, the draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs. Aside from investment implementation report and investment amendment report that are required at each investment and alteration of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject to criminal liabilities.

 

Rapid urbanization and changes in zoning and urban planning in China may cause our properties to be demolished, removed or otherwise affected.

 

China is undergoing a rapid urbanization process, and zoning requirements and other governmental mandates with respect to urban planning of a particular area may change from time to time. When there is a change in zoning requirements or other governmental mandates with respect to the areas where our operating facilities are located, the affected facilities may need to be demolished and removed. As a result, we may have to relocate our facilities to other locations. We have not experienced such demolition and relocation in the past, but we cannot assure you that we will not experience demolitions or interruptions of our operating facilities due to zoning or other local regulations. Any such demolition and relocation could cause us to lose primary locations for our operating facilities and we may not be able to achieve comparable operation results following the relocations. While we may be reimbursed for such demolition and relocation, we cannot assure you that the reimbursement, as determined by the relevant government authorities, will be sufficient to cover our direct and indirect losses. Accordingly, our business, results of operations and financial condition may be materially and adversely affected.

 

Our operating subsidiaries in China are subject to legal limitations in paying dividends to us, which may restrict our ability to satisfy our liquidity requirement.

 

As a holding company, we depend on receipt of dividends and the interest and principal payments on intercompany loans or advances from our subsidiaries to satisfy our obligations. The ability of our subsidiaries to pay dividends and make payments on intercompany loans or advances to us is subject to, among other things, distributable earnings, cash flow conditions, restrictions contained in the articles of association of our subsidiaries, applicable laws and restrictions contained in the debt instruments or certain PRC project loan agreements. Pursuant to such PRC project loan agreements, some of our PRC subsidiaries are restricted from distributing dividends or making other distributions to us unless such loans are paid off, certain financial requirement is met, if any, or otherwise consent is obtained from the relevant lenders entering into such project loan agreements. These restrictions could limit the ability of our subsidiaries to pay dividends.

 

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Further, PRC Corporation Law permits payment of dividends by our PRC subsidiaries only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Our subsidiaries are also required to set aside at least 10% of their after-tax profits based on PRC accounting standards each year to their general reserves until the accumulative amount of such reserves reach 50% of their respective registered capital. These reserves are not distributable as cash dividends. In addition, at the discretion of their respective board of directors, our PRC subsidiaries may allocate a portion of their after-tax profits to their respective staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Furthermore, if our PRC subsidiaries incur debt on their own behalves in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us, which may restrict our ability to satisfy our liquidity requirement. In addition, dividends paid by our PRC subsidiaries to their non-PRC parent companies will be subject to a 10% withholding tax, unless there is a tax treaty between the PRC and the jurisdiction in which the overseas parent company is incorporated, which specifically exempts or reduces such withholding tax. Limitations on the ability of our PRC subsidiaries to pay dividends to us could materially and 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.

 

PRC regulations on currency exchange and foreign investment may limit our ability to receive and use our revenues effectively and may delay or prevent us from using the proceeds from our fundraising activities to make loans or additional capital contributions to our PRC operating subsidiaries.

 

A certain portion of our revenues and expenses are also denominated in Renminbi. If our revenues denominated in Renminbi increase or expenses denominated in Renminbi decrease in the future, we may need to convert a portion of our revenues into other currencies to meet our foreign currency obligations, including, among others, payment of dividends declared, if any, in respect of our ordinary shares. Under PRC regulations the Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans without the prior approval of the State Administration of Foreign Exchange, or SAFE. Currently, our PRC subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without prior approval from SAFE, by complying with certain procedural requirements. However, we cannot assure you that the PRC government will not take further measures in the future to restrict access to foreign currencies for current account transactions.

 

Foreign exchange transactions by our PRC subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to be registered with PRC governmental authorities, including SAFE. To utilize the proceeds of any equity or debt offering as an offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries. Any loan from offshore companies to our PRC subsidiaries is subject to PRC regulations. For example, loans by us to our subsidiaries in China, which are foreign-invested enterprises, or FIEs, to finance their activities cannot exceed the difference between the total investment and the registered capital of that subsidiary and must be registered with SAFE.

 

We may also finance our subsidiaries by means of capital contributions. These capital contributions must be approved by certain government authorities, including the NDRC, MOFCOM, or their local counterparts. We may not be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our subsidiaries. If we fail to receive such approvals, our ability to use the proceeds we have received, or may receive, from our equity or debt offerings and to capitalize our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and grow our business.

 

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

 

The Corporate Income Tax Law, or the CIT Law, which became effective on January 1, 2008, imposes a unified enterprise income tax rate of 25% on all domestic enterprises and FIEs unless they qualify under certain limited exceptions.  Among others, certain enterprises may enjoy a preferential tax rate of 15% under the CIT Law if they qualify as an advanced and new technology enterprise, or an ANTE, subject to certain general factors described therein. A number of our PRC subsidiaries, such as JA Hebei, JA Yangzhou, JA Lianyungang, JA Fengxian, JA Hefei Technology and JA Wafer R&D are entitled to enjoy a preferential tax rate of 15% due to their qualification as ANTE. The preferential tax rate, once being approved by the relevant government authorities, is subject to renewal every three years.

 

In November 2010, JA Hebei was recognized as an ANTE and has since then continued to qualify as an ANTE and been entitled to a preferential income tax of 15%. In August 2014, JA Yangzhou was recognized as an ANTE and is entitled to a preferential income tax of 15% from 2014 to 2016. In October 2014, JA Lianyungang was recognized as an ANTE and is entitled to a preferential income tax of 15% from 2014 to 2016. In September 2014, JA Fengxian was recognized as an ANTE and is entitled to a preferential income tax of 15% from 2014 to 2016. JA Wafer R&D was recognized as an ANTE and enjoyed a preferential income tax of 15% from 2012 to 2014 and in 2015, JA Wafer R&D ceased being recognized as an ANTE. In November 2016, JA Wafer R&D was recognized as an ANTE again and is entitled to a preferential income tax of 15% from 2016 to 2018. In October 2016, JA Hefei Technology was recognized as an ANTE and is entitled to a preferential income tax of 15% from 2016 to 2018. JA Hebei, JA Yangzhou, JA Lianyungang, JA Fengxian, JA Hefei Technology and JA Wafer R&D are collectively referred to as ANTE Entities.

 

Furthermore, under the CIT Law, certain entities that operate solar power plants, or Solar Power Plant Entities, may be entitled to a three-year CIT exemption starting from the first year when the revenues are generated from sales of electricity and a 50% CIT reduction, effectively 12.5%, for the succeeding three years thereafter for the revenues generated from investing and operating in the qualified public basic infrastructure projects as specified therein, or three-year CIT exemption and three-year 50% CIT reduction. A number of our PRC subsidiaries, including JA Dunhuang, Jiuzhou Fangyuan New Energy (Xinjiang) Co., Ltd., or Jiuzhou Xinjiang, Jingneng New Energy Development (Lincheng) Co., Ltd., or Lincheng Jingneng, JA Solar PV Electric (Linzhou) Co., Ltd., or JA Linzhou, JA Solar PV Electric (Datong) Co., Ltd., or JA Datong, JA Solar PV Electric (Hefei) Co., Ltd., or JA Hefei Electric, JA Solar PV Electric (Yanchi) Co,. Ltd., or JA Yanchi, JA Solar PV Electric (Jarud) Co., Ltd., or JA Jarud, and JA Solar New Energy Electric (Chifeng) Co., Ltd., or JA Chifeng, are entitled to such preferential tax treatment.

 

JA Dunhuang started generating revenues from sales of electricity since 2015 and is entitled to the three-year tax exemption and three-year 50% CIT reduction from 2015 to 2020. Jiuzhou Xinjiang, Lincheng Jingneng, JA Linzhou, JA Datong, JA Hefei Electric, JA Yanchi, JA Jarud and JA Chifeng started generating revenues from sales of electricity since 2016 and are entitled to the three-year CIT exemption and three-year 50% CIT reduction from 2016 to 2021.

 

However, we cannot assure that the current tax benefits enjoyed by the ANTE Entities or our Solar Power Plant Entities will be extended upon expiration. If these tax benefits cannot be extended or otherwise become unavailable, the effective income tax rate of the ANTE Entities or Solar Power Plant Entities will increase significantly, and any such increase in the future could have a material adverse effect on our financial condition and results of operations. In addition, we cannot assure you that the relevant tax authorities will not have different interpretations of the existing laws in the future. Any discontinuation or revocation of preferential tax treatment or any increase of the CIT rate applicable to us could have a material adverse effect on our financial condition and results of operations.

 

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We may be deemed a PRC resident enterprise under the CIT Law and be subject to the PRC taxation on our worldwide income.

 

Pursuant to the CIT Law, and its implementation rules, which became effective on January 1, 2008, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for EIT purposes. Under the implementation rules of the CIT Law, the term “de facto management body” is defined as the management body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. On April 22, 2009, the State Administration of Taxation issued 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 Circular 82, which is amended and supplemented by the Announcement Regarding the Determination of PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies issued by the State Administration of Taxation on January 29, 2014. Circular 82 and its amendments sets out certain specific criteria and process for determining whether the “de facto management body” of a Chinese-controlled offshore incorporated enterprise is located in China. Given that the CIT Law and its implementation rules are relatively new and ambiguous in terms of some definitions, requirements and detailed procedures, it is unclear how tax authorities will determine tax residency based on the facts of each case.

 

If the PRC tax authorities determine that we are a “resident enterprise” for PRC EIT purposes, a number of unfavorable PRC tax consequences could follow: (i) we may be subject to EIT at a rate of 25% on our worldwide taxable income as well as PRC EIT reporting obligations; (ii) a 10% (or a lower rate under an applicable tax treaty, if any) withholding tax may be imposed on dividends we pay to non-PRC enterprise holders (20% for non-PRC individual holders) of our shares and ADSs; and (iii) a 10% PRC tax may apply to gains realized by non-PRC enterprise holders (20% for non-PRC individual holders) of our shares and ADSs from transferring our shares or ADSs, if such income is considered PRC-source income.

 

Similarly, such unfavorable tax consequences could apply to our Hong Kong subsidiaries, if either of them is deemed to be a “resident enterprise” by the PRC tax authorities. Notwithstanding the foregoing provisions, the CIT Law also provides that the dividends paid between “qualified resident enterprises” are exempt from EIT. If our Hong Kong subsidiaries are deemed “resident enterprises” for PRC EIT purposes, the dividends they receive from their PRC subsidiaries may constitute dividends between “qualified resident enterprises” and therefore qualify for tax exemption. However, the definition of “qualified resident enterprise” is unclear and the relevant PRC government authorities have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC EIT purposes. Even if such dividends qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to any withholding tax.

 

Dividends payable by us to our non-PRC holders of our ordinary shares and ADSs and gain on the sale of our ADSs or ordinary shares may become subject to PRC taxes.

 

Under the CIT Law and its implementation regulations, PRC income tax at the rate of 10% is applicable to PRC sourced dividends payable to investors that are “non-resident enterprises” and that do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their sources within the PRC. The implementation regulations for the CIT Law further sets forth that dividend income is viewed as PRC-sourced income if the enterprise that pays dividend is a “resident enterprise.” Similarly, any gain realized on the transfer of ADSs or shares by such investors is also subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC. It is unclear whether we may be considered as a “resident enterprise” under the CIT law. If we are deemed as a PRC “resident enterprise” for PRC tax purposes, dividends we pay with respect to our ordinary shares or ADSs, or the gain our shareholders may realize from the transfer of our ordinary shares or ADSs, would be treated as income derived from sources within the PRC and be subject to PRC tax. If we are required under the CIT Law to withhold PRC income tax on dividends payable to our non-PRC holders of ordinary shares and ADSs who are “non-resident enterprises,” or if our non-PRC holders of ordinary shares and ADSs are required to pay PRC income tax on the transfer of our ordinary shares or ADSs, the value of their investment in our ordinary shares or ADSs may be materially and adversely affected.

 

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We and our non-resident investors face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

 

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation, which became effective retroactively as of January 1, 2008, where a non-resident enterprise investor transfers equity interests in a PRC resident enterprise indirectly by way of disposing of equity interests in an overseas holding company, the non-resident enterprise investor, being the transferor, may be subject to PRC EIT, if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject to PRC withholding tax at the rate of up to 10%.  In addition, the PRC resident enterprise may be required to provide necessary assistance to support the enforcement of Circular 698.

 

On February 3, 2015, the State Administration of Tax issued the Notice on Certain Corporate Income Tax Matters on Indirect Transfers of Properties by Non-Resident Enterprises, or Circular 7. Circular 7 has introduced a new tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may re-characterize such indirect transfer as a direct transfer of the equity interests in the PRC tax resident enterprise and other properties in China. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of up to 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

 

However, as these rules and notices are relatively new and there is a lack of clear statutory interpretation, we face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises, or sale or purchase of shares in other non-PRC resident companies or other taxable assets by us. Our Cayman Islands holding company and other non-PRC resident enterprises in our group may be subject to filing obligations or may be taxed if our Cayman Islands holding company and other non-PRC resident enterprises in our group are transferors in such transactions, and may be subject to withholding obligations if our Cayman Islands holding company and other non-PRC resident enterprises in our group are transferees in such transactions. For the transfer of shares in our Cayman Islands holding company by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under Circular 698 and Circular 7. As a result, we may be required to expend valuable resources to comply with these rules and notices or to request the relevant transferors from whom we purchase taxable assets to comply, or to establish that our Cayman Islands holding company and other non-resident enterprises in our group should not be taxed under Circular 698 and Circular 7, which may have a material adverse effect on our financial condition and results of operations. There is no assurance that the tax authorities will not apply Circular 698 and Circular 7 to our offshore restructuring transactions where non-PRC resident investors were involved if any of such transactions were determined by the tax authorities to lack reasonable commercial purpose. As a result, we and our non-PRC resident investors may be at risk of being taxed under Circular 698 and Circular 7 and may be required to comply with or to establish that we should not be taxed under Circular 698 and Circular 7, which may have a material adverse effect on our financial condition and results of operations or such non-PRC resident investors’ investments in us. We have conducted acquisition transactions in the past and may conduct additional acquisition transactions in the future. We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing obligations on us or require us to provide assistance for the investigation of PRC tax authorities with respect thereto. Heightened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.

 

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Labor laws in the PRC may adversely affect our results of operations.

 

In June 2007, the PRC government promulgated a new labor law, the Labor Contract Law of the PRC, or the Labor Contract Law, which became effective on January 1, 2008. The Labor Contract Law was further amended on December 28, 2012 which became effective on July 1, 2013. Labor Contract Law and its amendment impose greater liabilities on employers and significantly increase the cost of an employer’s decision to reduce its workforce. Furthermore, it requires certain terminations to be based upon duration of employment and not the merits of employees. In the event we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost effective manner, thus materially and adversely affecting our financial condition and results of operations.

 

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

 

In October 2005, SAFE issued the Circular on the Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, or Circular 75, which is now replaced by the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or Circular 37, issued by SAFE on July 4, 2014. According to Circular 37, PRC residents are required to register with local SAFE branches in connection with their direct establishment or indirect control of an offshore entity for the purposes of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in Circular 37 as a “special purpose vehicle.” The term “control” under Circular 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by the PRC residents in the offshore special purpose vehicles or PRC companies by such means as acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. Circular 37 further requires amendment to the registration in the event of any changes with respect to the basic information of the special purpose vehicle, such as changes in a PRC resident individual shareholder, name or operation period; or any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. If the shareholders of the offshore holding company who are PRC residents do not complete their registration with the local SAFE branches, the PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to the offshore company, and the offshore company may be restricted in its ability to contribute additional capital to its PRC subsidiaries. Moreover, failure to comply with SAFE registration and amendment requirements described above could result in liability under PRC law for evasion of applicable foreign exchange restrictions. On February 13, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which took effect on June 1, 2015.  SAFE Notice 13 has delegated to the qualified banks the authority to register all PRC residents’ investment in “special purpose vehicle” pursuant to the Circular 37, except that those PRC residents who have failed to comply with Circular 37 will remain to fall into the jurisdiction of the local SAFE branches and must make their supplementary registration application with the local SAFE branches.

 

We have, up to the present, completed SAFE registration for all current beneficial shareholders of our company who are, to our knowledge, PRC residents. However, we may not be fully informed of the identities of the beneficial owners of our company and we cannot assure you that all of our PRC resident beneficial owners will comply with SAFE regulations. The failure of our beneficial owners who are PRC residents to make any required registrations may subject us to fines and legal sanctions, and prevent us from making distributions or paying dividends, as a result of which our business operations and our ability to distribute profits to you could be materially and adversely affected.

 

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PRC rules on mergers and acquisitions may subject us to sanctions, fines and other penalties and affect our future business growth through acquisition of complementary business.

 

On August 8, 2006, six PRC government and regulatory authorities, including MOFCOM, promulgated a rule entitled Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and was subsequently revised on June 22, 2009. The M&A Rules provide procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. In the future, we may grow our business in part by acquiring complementary businesses. Complying with the requirements of the M&A Rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from MOFCOM, may delay or inhibit the completion of such transactions, which could affect our ability to grow our business or maintain our market share. If any of our acquisitions were subject to the M&A Rules and were found not to be in compliance with the requirements of the M&A Rules in the future, relevant PRC regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects.

 

Failure to comply with PRC regulations regarding the registration requirements for stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

 

Since 2007, SAFE has implemented rules requiring PRC residents who participate in employee stock option plans of overseas publicly listed companies to register with SAFE or its local office and complete certain other procedures. Effective on February 15, 2012, SAFE promulgated the Circular on the Relevant Issues Concerning Foreign Exchange Administration for Domestic Individuals Participating in an Employees Share Incentive Plan of an Overseas-Listed Company, or SAFE Notice 7. Under SAFE Notice 7, PRC residents who participate in a share incentive plan of an overseas publicly listed company are required to register with SAFE and complete certain other procedures. PRC residents include directors, supervisors, management and employees of PRC domestic companies specified in the Administrative Regulations of the People’s Republic of China on Foreign Exchange, regardless of nationality. SAFE Notice 7 further requires that an agent should also be designated to handle matters in connection with the exercise or sale of share options granted under the share incentive plan to participants. We and the PRC residents to whom we have granted stock options are subject to SAFE Notice 7. We have completed registration for options and restricted share units granted under the 2006 Plan and have submitted application to Hebei branch of SAFE with respect to the 2014 Plan on January 20, 2015. However, we cannot assure you that we can always successfully register with SAFE in full compliance with SAFE Notice 7. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and other legal or administrative sanctions.

 

Risks Related to Our Ordinary Shares and ADSs

 

Potential uncertainty involving the going private transaction may adversely affect our business and the market price of our ADSs.

 

On June 5, 2015, our board of directors received a preliminary non-binding proposal letter from Mr. Baofang Jin, our chairman and chief executive officer, and Jinglong BVI, of which Mr. Baofang Jin is the sole director (collectively, the “Buyer Group”), to acquire all of our outstanding shares not already owned by the Buyer Group in a going private transaction for US$9.69 in cash per ADS. On June 15, 2015, our board of directors formed a special committee of independent directors, or the Special Committee, to review and evaluate the proposal.

 

The going-private transaction, whether or not consummated, presents a risk of diverting management focus, employee attention and resources from other strategic opportunities and from operational matters. The development of the transaction, such as the entry into or the termination of any definitive agreement, may increase volatility of the trading price of our ADSs.

 

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The market price for our ADSs has been volatile and may continue to be volatile.

 

The trading prices of our ADSs have been and may continue to be highly volatile and could fluctuate widely due to factors beyond our control. From the initial listing of our ADSs on the NASDAQ Global Select Market on February 7, 2007 to February 7, 2008, the closing prices of our ADSs ranged from US$16.30 to US$75.43 per ADS. Then from the day after the date of our 3-for-1 ADS split (February 7, 2008) to December 7, 2012, the closing process of our ADSs ranged from US$0.6 to US$25.75. On October 11, 2012, NASDAQ notified us that, based upon the closing bid price of our ADSs for 30 consecutive business days, we failed to meet the US$1.00 per ADS minimum bid price requirement set forth in the listing rule. In order to regain compliance with NASDAQ listing rule, we changed the ratio of our ADSs to ordinary shares from one ADS representing one ordinary share to one ADS representing five ordinary shares, effective on December 10, 2012. The trading price of our ADSs from December 10, 2012 through April 25, 2017 has ranged from US$3.21 to US$13.14 per ADS. This is due to broad market and industry factors, such as the anti-dumping and countervailing duty investigation in the U.S., the escalation of the European sovereign debt crisis in 2011, the economic slowdown in the Eurozone in 2014, significant government subsidy reduction, the performance and fluctuation in the market prices or the underperformance or declining financial results of other companies based in China that have listed their securities in the U.S. in recent years. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of other Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the U.S., which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. In addition, the market price of our ADSs may continue to fluctuate in response to factors including the following:

 

·                  changes in international trade policies;

 

·                  announcements of technological or competitive developments;

 

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

 

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

 

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

 

·                  actual or anticipated fluctuations in our quarterly operating results;

 

·                  changes in financial estimates by securities research analysts;

 

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

 

·                  addition or departure of our executive officers;

 

·                  fluctuations in the exchange rate between the U.S. dollar and Renminbi;

 

·                  detrimental negative publicity about us, our competitors or our industry;

 

·                  general economic or political conditions; and

 

·                  sales or perceived sales of additional ordinary shares or ADSs.

 

Our most current memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

 

Our most current memorandum and articles of association limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the 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 ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.

 

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Holders of our ADSs have fewer rights than holders of our ordinary shares, and you may not receive voting materials in time to be able to exercise your right to vote.

 

Holders of our ADSs do not have the same rights of holders of our ordinary shares and may only exercise the voting rights attaching to the ordinary shares evidenced by our ADSs in accordance with the provisions of the deposit agreement. Under our most current memorandum and articles of association, the minimum notice period required to convene a general meeting will be ten days. When a general meeting is convened, holders of our ADSs may not receive sufficient notice of a shareholders’ meeting to permit them to withdraw their ordinary shares to cast vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to holders of our ADSs or carry out their voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to holders of our ADSs in a timely manner, but we cannot assure you that holders of our ADSs will receive the voting materials in time to ensure that they can instruct the depositary to vote their 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, holders of our ADSs may not be able to exercise their right to vote and they may lack recourse if their ADSs are not voted as requested. In addition, an ADS holder, under such capacity, will not be able to call a shareholder meeting.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

You may have difficulty enforcing judgments obtained against us.

 

We are a Cayman Islands company and substantially all of our assets are located outside of the U.S. A significant portion of our current operations are conducted in China. In addition, most of our directors and officers are nationals and residents of countries other than the U.S. A substantial portion of the assets of these persons are located outside the U.S. As a result, it may be difficult for you to effect service of process within the U.S. upon these persons. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the U.S. and the substantial majority of whose assets are located outside of the U.S. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the U.S. or any state. In addition, it is uncertain whether such Cayman Islands or PRC courts would be competent to hear original actions brought in the Cayman Islands or the PRC against us or such persons predicated upon the securities laws of the U.S. or any state.

 

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

 

Although it is likely that we were a Passive Foreign Investment Company (“PFIC”) in the past, based on market price of our ADSs and ordinary shares, the value of our assets, and the composition of our assets and income, we believe that we were not a PFIC for our taxable year ended December 31, 2016 and we do not expect to be a PFIC for our current taxable year ending December 31, 2017 or in the foreseeable future. We can give no assurances in this regard, however, as PFIC determination is inherently factual and, in addition, depends upon certain questions of law for which there is inadequate or uncertain authority. Accordingly, we cannot assure you that we will not be a PFIC for our current or any future taxable year.

 

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A non-U.S. corporation, such as our company, will be classified as a PFIC for U.S. federal income tax purposes for any taxable year, if either (1) 75% or more of its gross income for such year consists of certain types of “passive” income, or (2) 50% or more of its average quarterly assets as determined on the basis of fair market value during such year produce or are held for the production of passive income. Because there are uncertainties in the application of the relevant rules and PFIC status is a fact-intensive determination made on an annual basis, no assurance may be given with respect to our PFIC status for any taxable year.

 

If we are classified as a PFIC for any year during which a U.S. Holder (as defined below) holds the ADSs or ordinary shares, a U.S. Holder may incur significantly increased U.S. income tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the U.S. federal income tax rules. Furthermore, a U.S. Holder will generally be treated as holding an equity interest in a PFIC in the first taxable year of the U.S. Holder’s holding period in which we become a PFIC and subsequent taxable years even if we, in fact, cease to be a PFIC in subsequent taxable years. Accordingly, a U.S. Holder should, to the extent an election is available, consider making a “deemed sale” election. See the discussion under “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation Considerations—Passive Foreign Investment Company Considerations” concerning the U.S. federal income tax consequences of an investment in the ADSs or ordinary shares if we are or become classified as a PFIC, including the possibility of making a “deemed sale” election.

 

ITEM 4.                                                INFORMATION ON THE COMPANY

 

A.                          HISTORY AND DEVELOPMENT OF THE COMPANY

 

Our ultimate holding company, JA Solar, was incorporated on July 6, 2006 as an exempted company with limited liability. JA Solar is governed by the Companies Law of the Cayman Islands.

 

We commenced our business in May 2005 through JA Hebei, a limited liability company established in China. To enable us to raise equity capital from investors outside of China, we incorporated JA BVI in the British Virgin Islands in July 2006, and established a holding company structure by restructuring JA Hebei as a wholly-owned subsidiary of JA BVI.

 

In August 2006, we undertook a further restructuring by issuing shares of JA Solar to all existing shareholders of JA BVI in exchange for all of the shares that these shareholders held in JA BVI. As a result, JA BVI became a wholly-owned subsidiary of JA Solar. We completed our initial public offering in February 2007 and had our ADSs listed on the NASDAQ Stock Market.

 

Historically, we have primarily been engaged in the manufacturing and sales of solar cells. Since the fourth quarter of 2009, we have expanded our business to silicon wafers manufacturing and manufacturing and sales of solar modules. We further expanded our business to engage in project development activities in 2013. We mainly operate our business through the following significant subsidiaries:

 

Name

 

Jurisdiction of
Incorporation

 

Relationship with us

 

 

 

 

 

JA Development Co., Ltd.

 

British Virgin Islands

 

Wholly-owned subsidiary

JA Solar Malaysia Sdn. Bhd.

 

Malaysia

 

Wholly-owned subsidiary

JA Solar Vietnam Company Limited

 

Vietnam

 

Wholly-owned subsidiary

JA Solar USA Inc.

 

U.S.

 

Wholly-owned subsidiary

JA Solar Hong Kong Limited

 

Hong Kong

 

Wholly-owned subsidiary

JA Solar Investment (Hong Kong) Limited

 

Hong Kong

 

Wholly-owned subsidiary

Dunhuang JA Solar Power Development Co., Ltd.

 

China

 

Wholly-owned subsidiary

JingAo Solar Co., Ltd.

 

China

 

Wholly-owned subsidiary

Shanghai JA Solar Technology Co., Ltd.

 

China

 

Wholly-owned subsidiary

Shanghai JA Solar PV Technology Co., Ltd.

 

China

 

Wholly-owned subsidiary

JA Solar Technology Yangzhou Co., Ltd.

 

China

 

Wholly-owned subsidiary

Yangzhou JA Solar PV Engineering Co., Ltd.

 

China

 

Wholly-owned subsidiary

Jing Hai Yang Semiconductor Material (Donghai) Co., Ltd.

 

China

 

Wholly-owned subsidiary

Hefei JA Solar Technology Co., Ltd.

 

China

 

Wholly-owned subsidiary

JA Solar (Xingtai) Co., Ltd.

 

China

 

Wholly-owned subsidiary

Solar Silicon Valley Electronic Science and Technology Co., Ltd.

 

China

 

Wholly-owned subsidiary

 

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Our principal executive offices are located at Building No.8, Noble Center, Automobile Museum East Road, Fengtai, Beijing, the People’s Republic of China. Our telephone number at this address is (86) 10- 6361 1888 and our fax number is (86) 10-6361 1999.

 

Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is www.jasolar.com. The information contained on our website is not part of this annual report. Our agent for service of process in the U.S. is JA Solar USA Inc., located at 2570 North First Street, Suite 360, San Jose, CA 95131.

 

B.                          BUSINESS OVERVIEW

 

Overview

 

Our primary business is to design, develop, manufacture and sell solar power products that convert sunlight into electricity for a variety of uses. We are a vertically integrated manufacturer of PV products, and our principal products consist of both monocrystalline and multicrystalline solar modules and solar cells in a variety of standards and specialties. We sell our products mainly under our “JA Solar” brand name, and also produce original equipment for manufacturers or customers, known as OEMs, under their brand names. We are also engaged in project development activities.

 

We began commercial production of solar cells in April 2006 and have since grown rapidly to become one of the world’s largest manufacturers of solar power products. As of December 31, 2016, we had a solar cell manufacturing capacity of 5,500 MW per annum. We manufacture solar cells from silicon wafers utilizing crystalline silicon technology, which converts sunlight into electricity through a process known as PV effect. Performance of solar cells is primarily measured by their conversion efficiency rate, the percentage that sunlight energy is converted into electricity. As of December 31, 2016, the average conversion efficiency rates of our mainstream monocrystalline and multicrystalline solar cells were 21.0% and 18.6%, respectively.

 

We expanded our business to the manufacturing and sales of solar module products in the fourth quarter of 2009. We now produce and sell a wide variety of module types that fulfill different requirements of our customers, from on-grid systems to off-grid systems, from commercial use to industrial use, and from residential to public utility use. We also manufacture customized module products according to our customers’ and end-users’ specifications. As of December 31, 2016, we had a solar module manufacturing capacity of 5,500 MW per annum.

 

We began manufacturing silicon wafers in the fourth quarter of 2009 to achieve more vertical integration. Our silicon wafer manufacturing capability helps us secure wafer supplies and reduce costs of silicon wafers for our solar cell manufacturing. Currently, we manufacture silicon wafers primarily to meet our internal demand. As of December 31, 2016, we had a silicon wafer manufacturing capacity of 2,500 MW per annum.

 

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We sell our solar power products to module manufacturers, system integrators, project developers and distributors. Through our marketing efforts, we have developed a diverse customer base in over ninety countries worldwide, including China, the U.S., Japan, United Kingdom, India, Thailand, the Netherlands, Australia, Switzerland and Guatemala. In 2016, 48.6% of our total revenues were generated from sales to customers outside China. We have also developed cooperative relationships with a number of leading Chinese independent power producers and leading Chinese utility companies, such as China Power Investment Corporation and China Electric Power Construction Group Co., Ltd.

 

In 2014, 2015 and 2016, we sold 3.06 GW, 3.94 GW and 4.92 GW of solar power products, respectively. Our total revenues increased from RMB11.3 billion in 2014 to RMB13.5 billion in 2015 and to RMB15.7 billion (US$2.3 billion) in 2016 as a result of improved worldwide solar market condition, increased shipment, and increased proportion of our module sales.

 

The average selling price per watt of our PV modules decreased from RMB3.9 in 2014 to RMB3.5 in 2015 and to RMB3.2 (US$0.5) in 2016. The average selling price per watt of our PV cells decreased from RMB2.3 in 2014 to RMB1.9 in 2015 and to RMB1.8 (US$0.3) in 2016. We expect the prices of solar power products will continue to decline in the long run due to reduced manufacturing costs from improving technology and economies of scale, and industry pursuit to grid cost parity with traditional forms of electricity.

 

In an effort to deepen our downstream reach in the solar market value chain, we began to engage in project development activities in 2013 and started to generate revenues from electricity sales in 2015.

 

Our Products and Services

 

We are primarily engaged in the design, development, manufacturing and sales of solar power products based on crystalline silicon technologies. We also derive a portion of our revenues through the provision of solar product processing services and project development services.

 

Solar Modules

 

A solar module is an assembly of solar cells that have been electrically interconnected and encapsulated via a lamination process into a durable and weather-proof package. We produce multicrystalline and monocrystalline solar modules in 48-cell, 60-cell, and 72-cell formats. The power output of our mainstream multicrystalline and monocrystalline 60-cell modules ranges from 265W to 275W and from 275W to 285W, respectively. The power output of PERC monocrystalline 60-cell and 72-cell modules ranges from 290W to 300 W and 345W to 355W, respectively. The power output of our multicrystalline and monocrystalline 72-cell modules ranges from 315W to 325W and from 325W to 335W, respectively. In 2016, solar modules and solar modules tolling constituted nearly 93.6% of our total shipments.

 

Solar Cells

 

Solar cells are semiconductor devices that directly convert sunlight into electricity and are the most elementary component of a solar power system. Solar cells consist of a light-absorbing layer mounted on a substrate, together with top and back electrical contact points, much like a household battery.

 

We currently produce and sell a variety of monocrystalline and multicrystalline solar cells. In addition to conventional solar cells, we introduced a monocrystalline solar cells named “SECIUM” in 2010 and “MAPLE” in 2011. In 2012, we introduced the new Cypress series, which have higher conversion efficiency, to replace the SECIUM and the MAPLE cell. The Cypress series cells feature excellent solderability and lower encapsulation power loss resulting from high-voltage, low-current electrical performance parameters, elaborated current rating, and positive tolerance for cell power compensation. In 2016, improving upon the Cypress series, we introduced a new generation of cell technology named Cypress5, featuring even better conversion efficiency and reliability performance. We also introduced monocrystalline PERCIUM series utilizing PERC (Passivated Emitter Rear Cell) technology with an average conversion efficiency of over 21.0%, and multicrystalline RIECIUM series utilizing RIE (Reactive Ion Etching) technology with a conversion efficiency of over 19.2%.

 

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Silicon Wafers

 

Silicon wafers are the most important raw materials for producing solar cells, with monocrystalline and multicrystalline silicon wafers as the most commonly used materials. Currently, we produce multicrystalline silicon wafers with dimensions of 156.75*156.75 mm and an average thickness of 185 microns and monocrystalline silicon wafers with dimension of 156.75*156.75 mm and an average thickness of 185 microns.

 

Solar Product Processing

 

In order to maximize the effective utilization of our manufacturing capacity, we also provide solar product processing services to some of our customers. Depending on the arrangements with our customers, we may charge a fee for the processing services provided, or alternatively, we may purchase raw materials from our customers, such as polysilicon or silicon wafers, process these raw materials into solar cells or solar modules, and then sell these products back to our customers.

 

Solar Power Plant Project Development and Electricity Generation

 

Project development involves securing land use rights, obtaining and maintaining necessary regulatory approvals and permits, arranging project financing, project construction, and eventually selling the project assets in a lump sum or retaining them to generate revenues from electricity sales. We began to engage in solar project development both domestically and abroad in 2013 and we started to generate revenues from electricity sales in 2015.

 

Raw Materials and Utilities

 

The raw materials used in our manufacturing process consist primarily of silicon materials, including polysilicon, silicon wafers and, from time to time, ingots, as well as other materials such as metallic pastes, ethylene vinyl acetate, tempered glass, aluminum frames and related consumables.

 

Polysilicon and Silicon Wafers

 

The basic raw material for producing solar cell and module products is silicon wafers, which are sliced from crystalline ingots developed from melted polysilicon. As such, polysilicon is an essential raw material in the manufacturing of silicon wafers, including our own wafer production.

 

The prices of polysilicon have seen significant fluctuation over the years due to various factors. Historically, through the first half of 2008, an industry-wide shortage of polysilicon coupled with rapidly growing demand from the solar power industry, caused rapid escalation of polysilicon prices and an industry-wide silicon shortage. However, during the second half of 2008 and the first half of 2009, polysilicon prices fell substantially as a result of significant new manufacturing capacity coming on line and falling demand for solar power products resulting from the global economic crisis and credit market contraction. As the demand for solar power products significantly recovered in response to a series of factors, including the recovery of the global economy, the implementation of incentive policies for renewable energy including solar power and increasing availability of financing for solar power projects, the price of polysilicon went up in the second half of 2010. However, polysilicon prices substantially fell again during 2011 and 2012 due to an industry-wide oversupply. Starting from 2013, polysilicon prices began to stabilize as market conditions improved. From 2013 to 2016, the price of polysilicon slightly fluctuated. We expect prices of polysilicon continue to fluctuate in the near future.

 

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We procure silicon raw materials through a combination of long-term supply contracts and spot market purchases. We anticipate to obtain silicon raw materials from the spot market to supplement supplies under our existing long-term supply contracts. The unit prices of silicon wafers and polysilicon under our long-term supply contracts were either fixed or fixed during an initial period of several months, after which, the prices would be determined by further negotiations. We have completed re-negotiations on various terms of our supply agreements with certain of our suppliers and are continuing to engage in discussions with our other various suppliers to re-adjust the pricing, prepayment, quantity, delivery and other terms of our existing supply agreements to better reflect current market conditions.

 

Other Raw 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. In addition, we use ethylene vinyl acetate, tempered glass, aluminum frames and other raw materials in our solar module production process. We seek to maintain active relationships with multiple suppliers for each of these auxiliary raw materials, and we believe we can readily find alternative sources of supply on terms acceptable to us if any of our current suppliers cannot meet our requirements.

 

Utilities

 

We consume a significant amount of electrical power and water in our production of solar power products. We have obtained the necessary approvals and/or permits from the relevant PRC governmental authorities for our water and electricity usage in our existing manufacturing and research and development centers.

 

Manufacturing Process

 

Solar Cells

 

We use a semi-automated manufacturing process to lower our production costs and capital expenditures. We intend to optimize the balance between automation and manual operations in our manufacturing process to take advantage of our location in China, where the costs of skilled labor and engineering and technical resources tend to be lower than those in developed countries. The following provides a brief overview of the most important steps in our solar cell manufacturing process:

 

·                  Texturing and cleaning.  The solar cell manufacturing process begins with texturing of the surface of wafers which reduces the solar cell’s reflection of sunlight, followed by surface cleaning of the cells. The texturing process for multicrystalline wafers is slightly different from that for monocrystalline wafers.

 

·                  Diffusion.  Next, through a thermal process, a negatively charged coating is applied to the positively charged raw wafers in a diffusion furnace. At the high furnace temperature, the phosphorous atoms diffuse into the wafer surface. As a result, the wafer now has two separate layers—a negatively charged layer on the surface and a positively charged layer below it.

 

·                  Isolation.  To achieve a clean separation of the negative and positive layers, the edges of the wafers are isolated through etching, a process that removes a very thin layer of silicon around the edges of the solar cell resulting from the diffusion process.

 

·                  Anti-reflection coating.  We then apply an anti-reflection coating to the front surface of the solar cell to enhance its absorption of sunlight.

 

·                  Printing.  In a screen printing process, we print silver paste and aluminum paste to the front and back surfaces of the solar cell, respectively, to act as contacts, with the front contact in a grid pattern to allow sunlight to be absorbed.

 

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·                  Co-firing.  Subsequently, contacts are connected through an electrode firing process in a conveyor belt furnace at high temperature. The high temperature causes the silver paste to become embedded in the surface of the silicon layer forming a reliable electrical contact. The aluminum paste on the back of the cell serves as a mirror for particles, further enhancing the efficiency level.

 

·                  Testing and sorting.  Finally, we complete the manufacturing of solar cells by testing and sorting. The finished cells are sorted according to efficiency levels and optical criteria. Each cell is tested and subsequently assigned to a performance and quality class depending on the testing results.

 

Solar Modules

 

Our solar modules are formed by interconnecting multiple solar cells in the desired electrical configuration through taping and stringing. The interconnected cells are laid out and laminated in a vacuum and then go through a curing process, or a heating process. Through these processes, our solar modules are sealed and become weatherproof and are able to withstand high levels of ultraviolet radiation and moisture. Assembled solar modules are packaged in a protective aluminum frame prior to testing.

 

Silicon Wafers

 

Currently we produce both multicrystalline and monocrystalline silicon wafers. Our production process with multicrystalline silicon wafers starts with producing multicrystalline ingots from polysilicon in multicrystalline furnaces through a casting process. The multicrystalline ingots are then cut into pre-determined sizes. After a testing process, multicrystalline ingots are cropped and the usable parts of the ingots are sliced into wafers by wire saws by high-precision cutting techniques. After being inserted into frames, the wafers go through a cleansing process to remove debris from the previous processes, and are then dried. Wafers are inspected for contaminants and then packed and transferred to our solar cell production facilities.

 

Our production process with monocrystalline silicon wafers starts from producing monocrystalline ingots from polysilicon. After the ingots are inspected, monocrystalline ingots are squared by squaring machine. Through high-precision cutting techniques, the squared ingots are then sliced into wafers using diamond sawing wire technology. After inserting into frames, the wafers are cleaned to remove debris from the previous processes and then dried. Finally, the wafers are inspected for contaminants and then packed and transferred to our solar cell production facilities.

 

Diamond sawing wire technology was widely introduced into the production of silicon wafers in recent years, as such technology has various advantages over slurry cutting technology, including higher productivity, lower need of wire length and spool size, less disposal issue, lower energy consumption and less space occupation. Furthermore, as the price of diamond wires decreased while the endurance of diamond wires enhanced, the cost of utilizing diamond sawing wires technology is lower than the slurry cutting technology in many fields. Currently, diamond sawing wire technology has been used in production of all of our monocrystalline silicon wafers, and we are in the process of upgrading the technology used in our multicrystalline silicon wafer production to diamond sawing wire technology.

 

Production Equipment

 

The major manufacturing equipment for the production of our solar power products includes ingot furnaces, stringer, laminator, texturing machines, diffusion furnaces, edge isolators, wafer cleaning machines, coating systems, contact printers, co-firing machines and sorting machines. We purchase our equipment from various recognized equipment manufacturers in China, the U.S., Europe and Japan. We have developed relationships with the world’s leading equipment manufacturers in the solar power industry and work closely with selected equipment manufacturers to develop and build our manufacturing lines. In addition, we have developed technical specifications for the design of certain equipment and engaged manufacturers to construct the equipment in accordance with our specifications. This custom-made equipment is manufactured in China and used to substitute for certain equipment that we would otherwise be required to import from overseas at a higher cost. Our technical team is responsible for overseeing the installation of the manufacturing lines to ensure that the interaction between the various individual components and the entire production process is optimized.

 

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Manufacturing Capacity and Facilities

 

As of December 31, 2016, our manufacturing capacities for silicon wafers, solar cells and solar modules were 2,500 MW, 5,500 MW and 5,500 MW per annum, respectively.

 

Of our manufacturing facilities, one is located in Malaysia, one is located in Vietnam and under construction, and all others are located in China. They are all owned by us through our wholly-owned subsidiaries. Our solar cell manufacturing facilities are located in Ningjin, Hebei Province, Yangzhou, Jiangsu Province and Penang, Malaysia. Our solar module manufacturing facilities are located in Fengxian, Shanghai, Hefei, Anhui Province, Ningjin, Hebei Province and Xingtai, Hebei Province and our silicon wafer manufacturing facilities are located in Lianyungang, Jiangsu Province, Sanhe, Hebei Province and Hanoi, Vietnam. The table below sets forth certain information regarding our current and planned manufacturing capacity in our various manufacturing facilities:

 

Product

 

Facilities
location

 

Rated manufacturing
capacity per annum
in 2016 (in MW)

 

Rated manufacturing
capacity per annum
expected in 2017
(in MW)

 

Solar cell

 

Ningjin, Hebei

 

2,000

 

2,500

 

 

 

Yangzhou, Jiangsu

 

2,700

 

3,500

 

 

 

Penang, Malaysia

 

800

 

1,000

 

 

 

Total Rated Capacity

 

5,500

 

7,000

 

 

 

 

 

 

 

 

 

Solar module

 

Fengxian, Shanghai

 

1,200

 

1,500

 

 

 

Hefei, Anhui

 

2,300

 

2,300

 

 

 

Ningjin, Hebei

 

500

 

600

 

 

 

Xingtai, Hebei

 

1,500

 

1,600

 

 

 

Total Rated Capacity

 

5,500

 

6,000

 

 

 

 

 

 

 

 

 

Silicon wafer

 

Lianyungang, Jiangsu

 

1,500

 

1,000

 

 

 

Sanhe, Hebei

 

1,000

 

1,700

 

 

 

Viet Yen, Vietnam

 

0

 

300

 

 

 

Total Rated Capacity

 

2,500

 

3,000

 

 

As our business develops, we may introduce new manufacturing equipment with higher conversion efficiency rates to replace old manufacturing equipment or we may eliminate outdated production capacity from time to time. We expect to finance the above capital requirements through our cash flows from operations and borrowing from lending institutions.

 

Quality Assurance and Certifications

 

We employ strict quality control procedures at each stage of the manufacturing process in accordance with ISO 9001 quality management standards to ensure the consistency of product quality and compliance with our internal production benchmarks. We have also received CE and TÜV certifications for all of our solar modules sold in Europe and UL certifications for all solar modules sold in the U.S. As part of our effort to be a technology leader in the solar power industry, in December 2011, we entered into a strategic cooperative agreement with TÜV SÜD. With TÜV SÜD’s support, we have established at our Fengxian facility a world-class testing center, which are qualified to conduct IEC61215/61730 testing. TÜV SÜD has also awarded TMP (Testing at Manufacturers’ Premises) certification to our in-house laboratories in Fengxian and Hefei. The TMP qualification has enabled us to complete our product certification more quickly and has improved our cost efficiencies. In February 2012, we jointed Intertek’s “Satellite Program” to strengthen cooperation in the fields of quality, safety and ecology, the designation by Intertek as a “Satellite Program” certified laboratory is a professional recognition of our quality management system, and enables us to become more independent in controlling our product testing and certification processes, thereby significantly improving the product operating cycle and helping us further strengthen our leadership in product quality. Our Hefei laboratory also received the Satellite Program certification in 2013. In August 2012, JA Fengxian also obtained the accreditation of ISO/IEC 17025:2005 General Requirements for the Competence of Testing and Calibration Laboratories from China National Accreditation Service for Conformity Assessment.

 

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The following table sets forth the certifications we have received over the past three years and major test standards our products and manufacturing processes have met:

 

Date

 

Certification and Test Standard

 

Relevant Product or Process

September 4, 2014

 

ISO 9001: 2008

 

JA Hebei’s quality management system in designing, manufacturing and sale of solar modules

September 4, 2014

 

ISO 14001: 2004

 

JA Hebei’s environmental management system in designing, manufacturing and sale of solar modules

September 4, 2014

 

OHSAS 18001: 2007

 

JA Hebei’s safety management system in designing, manufacturing and sale of solar modules

November 28, 2016

 

ISO 9001: 2015

 

JA Malaysia’s quality management system in manufacturing and sale of solar cells

November 28, 2016

 

ISO 14001: 2015

 

JA Malaysia’s environmental management system in manufacturing and sale of solar cells

November 28, 2016

 

ISO 18001: 2007

 

JA Malaysia’s safety management system in manufacturing and sale of solar cells

 

Our senior management team is actively involved in setting quality assurance policies and managing quality assurance performance to ensure the high quality of our solar power products. During the manufacturing process, we continuously monitor the quality of our products in process by following procedures including: (i) automatic monitoring and sorting system based on measurement of the efficiency level, breakage rate, and purity level of solar products and (ii) manual inspection of the surface outlook of solar cells. If any solar power product is damaged, defective, or does not meet other quality standards, it will be removed during the monitoring process.

 

We have a strong equipment maintenance team with well-trained personnel to oversee the operation of our manufacturing lines to avoid any unintended interruption, and to minimize the regular down time, of such manufacturing lines. To ensure that our quality assurance procedures are effectively applied, manufacturing line employees are provided with regular job training.

 

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Markets and Customers

 

We sell our solar cell and module products primarily to module manufacturers, system integrators, project developers and distributors. We have developed a diverse customer base in various markets worldwide, including China, Japan, Philippines, United Kingdom, India, the U.S., Thailand, the Netherlands, Australia, Switzerland and Guatemala. We perform ongoing credit evaluations of our customers’ financial condition whenever deemed necessary and generally does not require collateral. We maintain an allowance for doubtful accounts based upon the expected collectability of all accounts receivable, which takes into consideration an analysis of historical bad debts, specific customer credit worthiness and current economic trends. We plan to continue to expand our direct sales both internationally and domestically as well as to establish long-term relationships with existing customers to develop a loyal customer base.

 

Historically, we sold a significant portion of our products to customers in China. Since 2010, in connection with our overseas marketing efforts as well as commercial manufacturing and selling of solar modules, we have substantially increased the portion of our products sold to customers outside China. For the years ended December 31, 2014, 2015 and 2016, approximately 66.9%, 57.0% and 48.6% of our revenues were generated from customers outside China, respectively. For the year ended December 31, 2014, 2015 and 2016, there is one customer located in Japan accounting for 28.8%, 12.5% and 4.0% of our total revenues.

 

The following table summarizes our net revenues generated from different geographic markets:

 

 

 

Year Ended December 31,

 

 

 

2014

 

2015

 

2016

 

 

 

(RMB in millions)

 

China

 

3,742

 

5,820

 

8,081

 

Outside China

 

 

 

 

 

 

 

Japan

 

3,853

 

2,438

 

1,401

 

Rest of the world

 

3,701

 

5,267

 

6,255

 

Total revenues

 

11,296

 

13,525

 

15,737

 

 

Sales and Marketing

 

We market and sell our solar power products worldwide primarily through a direct sales force and via market-focused sales agents. We have established subsidiaries in Japan, Germany, the U.S. and Mexico to conduct sales, marketing and brand development for our products in the Japanese, European, North American and Latin American markets. Our marketing activities include trade shows, conferences, sales training, product launch events, advertising and public relations campaigns. Working closely with our sales and product development teams, our marketing team is also responsible for collecting market intelligence and supporting our sales team’s lead generation efforts.

 

We sell our products primarily under two types of arrangements:

 

·             Sales contracts with module manufacturers for the sale of solar cells, and with systems integrators, project developers and distributors for the sale of solar modules. We deliver solar power products according to pre-agreed schedules set forth in purchase orders. We require prepayment prior to shipping under some of our sales contracts, we also extend credit terms under some of our sales contracts depending on the general market condition and credit worthiness of customers.

 

·             OEM/tolling manufacturing arrangements. Under these arrangements, we purchase polysilicon or silicon wafers from customers, and then sell solar cell or solar module products back to the same customers, who then sell those products under their own brands. In addition, we have been using our own solar cells to make modules for a limited number of strategic customers who brand the finished solar module products with their own labels.

 

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Seasonality

 

Our business is subject to seasonal variations in demand linked to construction cycles and weather conditions. Purchases of solar power products tend to decrease during the winter months in our key markets, such as China, due to adverse weather conditions that can complicate the installation of solar power systems. Demand from other countries, such as Japan and the U.S., may also be subject to significant seasonality.

 

Intellectual Property

 

We rely primarily on a combination of patent, trademark, trade secret and copyright, as well as employee and third party confidentiality agreements to safeguard our intellectual property. As of the date of annual report, we had a total of 314 issued patents and 64 pending patent applications in China.

 

With respect to, among other things, proprietary know-how that is not patentable and processes for which patents are difficult to enforce, we rely on trade secret protection and confidentiality agreements to safeguard our intellectual property. We believe that many elements of our solar power products and manufacturing processes involve proprietary know-how, technology or data that are not covered by patents or patent applications, including technical processes, equipment designs, algorithms and procedures. We have taken security measures to protect these elements. Our research and development personnel are required to enter into confidentiality, non-competition and proprietary information agreements with us. These agreements address intellectual property protection issues and require our employees to assign to us all of their inventions, designs and technologies they develop during their terms of employment with us. We also take other precautions, such as internal document and network assurance and using a separate dedicated server for technical data.

 

In order to protect our reputation and brand, we currently maintain 19 trademark registrations in China, including the Chinese characters “晶澳” of our name and “JA Solar.” We also maintain 16 trademarks outside China.

 

In the ordinary of business, we have received claims from various third parties alleging intellectual property infringement by us. We have defended and intend to continue defending vigorously against these claims. As of the date of this annual report, these claims have not had any material adverse effect on our business, results of operations or financial condition.

 

Competition

 

The solar power market is intensely competitive and rapidly evolving. As we build out our solar module and wafer manufacturing capacity to become more vertically integrated, we mainly compete with integrated manufacturers of solar power products such as Trina Solar Limited, Jinko Solar, and Canadian Solar. We expect to face increased competition, which may result in price reductions, reduced margins or loss of market share. Some of our competitors have become vertically integrated, from silicon wafer manufacturing to solar power system integration for a longer period than we do. We expect to compete with future entrants to the PV market that offer new technological solutions. Furthermore, many of our competitors are developing or currently producing products based on new PV technologies, including thin film, ribbon, sheet and nano technologies, which they believe will ultimately cost the same as or less than crystalline silicon technologies used by us. In addition, the entire PV industry also faces competition from conventional and non-solar renewable energy technologies. Due to the relatively high manufacturing costs compared to most other energy sources, solar energy is generally not competitive without government incentive programs.

 

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Regulations

 

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

 

Renewable Energy Law and Other Government Directives

 

Over the past few years, various PRC governmental authorities have issued various notices and interim measures to promote the development of solar power.

 

On April 1, 2008, the PRC Energy Conservation Law came into effect and was amended on July 2, 2016. The law 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 December 26, 2009, China revised its Renewable Energy Law, which originally became effective on January 1, 2006. The revised Renewable Energy Law became effective on April 1, 2010 and 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, solar 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 government has promulgated a number of directives to support energy conservation and the use of solar energy. On October 10, 2010, the PRC State Council 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.

 

On February 16, 2013, the NDRC promulgated the revised Guideline Catalogue for Industrial Restructuring which categorizes the solar power industry as an encouraged item.

 

On July 4, 2013, the PRC State Council promulgated a guideline to promote the development of PV industry, stating that new PV projects shall satisfy the following standards: 1) the conversion efficiency of single crystal silicon PV battery shall be no less than 20%; 2) the conversion efficiency of polysilicon PV battery shall be no less than 18%; 3) the conversion efficiency of thin film PV battery shall be no less than 12%; and 4) the general power consumption of polysilicon production shall be no more than 100 kwh/kg. On July 18, 2013, the NDRC issued the Interim Measures on Management of Distributed Generation to support the development of distributed generation of PV projects.

 

On August 26, 2013, the NDRC issued a feed-in tariff scheme for utility-scale and distributed generation PV projects approved after September 1, 2013, or approved before September 1, 2013 with construction completed on or after January 1, 2014. The scheme was amended by the NDRC on December 26, 2016. Under the amended scheme, utility scale PV projects are eligible for feed-in tariff ranging from RMB0.65 to RMB0.85 depending on the project location, while distributed generation projects are eligible for feed-in tariff of RMB0.42. The feed-in tariff will be adjusted on an annual basis.

 

On August 20, 2014, the NDRC issued Directory of New Western Incentive Industry. Solar energy related projects are categorized as “encouraged group” in 11 of the listed 12 western provinces.

 

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Various notices and guidelines were issued in 2015 and 2016 to promote the healthy development of the PV industry through various means, such as including renewable energy projects in China’s long-term development plan, developing measures to resolve curtailment problem and promoting smart grid. For example:

 

On July 6, 2015, the NDRC and the NEA jointly issued the Guideline of Promoting the Development of Smart Grid, reiterating the importance of developing smart grid and stating that China will build safe and effective long-distance transmission grid and reliable and flexible main transmission grid to realize the full use of various clean energy (including solar power), accelerate the construction of micro grid, promote the use of various distributed power such as distributed PV, micro turbine and residual heat and pressure to optimize the allocation of energy resources and achieve the goal of energy structure adjustment.

 

On October 8, 2015, the NDRC issued a notice announcing a pilot program of consuming renewable energy at nearby locations. The notice stated that the pilot program will be first carried out in Gansu and Inner Mongolia to gain experience in purchasing the full amount of electricity generated from renewable energy sources as a protection measure for the renewable energy companies facing curtailment issues. The program is intended to prepare for a nationwide implementation, resolve curtailment issues to the extent possible so as to promote the continuous development of renewable energy.

 

On March 3, 2016, the NEA released the Guiding Opinions on Establishing Renewable Energy Portfolio Standards, which set renewable energy consumption targets for China. China aims to rely on renewable energy for 15% of total primary energy consumption by 2020, and 20% by 2030. Non-hydro renewables should produce 9% of consumed electricity by 2020.

 

On March 28, 2016, the NEA issued the Administrative Measures for Full Protection Purchase System on Power Generated by Renewable Energy, which has become a driving force to resolve the curtailment issues, and promote the development of renewable energy (such as wind power and PV) industry.

 

On November 29, 2016, the State Council released the Thirteen Five-Year Development Plan for National Strategic New Industries, which aims to promote the diversification and large-scale development of solar power industry.

 

On December 8, 2016, the NEA officially released the Thirteen Five-Year Plan on Solar Power Development, pursuant to which, the NEA will provide market support to advanced technology and product and lead the PV technical advances and industry upgrading.

 

On December 30, 2016, the MIIT, NDRC, the Ministry of Science and Technology and MOF jointly promulgated the Development Guide Regarding the New Materials Industry to support and provide details for the development of the PRC solar power industry.

 

In 2016, the State Council issued a series of directives to reduce poverty. These directives illustrate, among others, the measures to increase the income of people in poverty. As one of these measures, local governments are encouraged to invest agriculture-related fiscal funds in developing hydroelectricity and PV industry and share the benefits with rural poor household.

 

Environmental Regulations

 

We may use, generate and discharge toxic, volatile or otherwise hazardous chemicals and wastes in our research, development and manufacturing activities. We are subject to a variety of governmental regulations related to the storage, use and disposal of hazardous materials. The major environmental regulations applicable to us include the Environmental Protection Law of the PRC, the Law of PRC on the Prevention and Control of Water Pollution, Implementation Rules of the Law of PRC on the Prevention and Control of Water Pollution, the Law of PRC on the Prevention and Control of Air Pollution, the Law of PRC on the Prevention and Control of Solid Waste Pollution, the Law of PRC on the Prevention and Control of Noise Pollution and PRC regulations regarding Administration of Construction Project Environmental Protection.

 

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Restrictions on Foreign Businesses and Investments

 

The principal regulation governing foreign ownership of solar PV businesses in China is the Catalogue of Industries for Guiding Foreign Investment, updated and effective as of April 10, 2015. Under this regulation, the solar PV business is listed as an industry where foreign investments are encouraged. Encouraged foreign investment companies are entitled to certain preferential treatment, including exemption from tariff on equipment imported for their operations, after obtaining approval from the PRC government authorities.

 

Dividend Distribution

 

The principal regulations governing distribution of dividends paid by wholly foreign-owned enterprises include:

 

·                  Wholly Foreign-Owned Enterprise Law, as amended;

 

·                  Wholly Foreign-Owned Enterprise Law Implementation Rules, as amended; and

 

·                  Company Law of China, as amended on December 28, 2013.

 

Under the current regulatory regime in China, FIEs in China may only pay dividends out of their accumulated profits, if any, determined in accordance with the PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise in China is required to set aside at least 10% of its after-tax profit calculated in accordance with the PRC accounting standards and regulations each year as its general reserves until the cumulative amount of such reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a wholly foreign-owned enterprise has the discretion to allocate a portion of its after-tax profits to its staff welfare and bonus funds, which is also not distributable to its equity owners except in the event of a liquidation of the wholly foreign-owned enterprise.

 

Regulations on Stock Incentive Plans

 

On February 15, 2012, SAFE issued the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, or the Stock Incentive Plan Rules. The purpose of the Stock Incentive Plan Rules is to regulate foreign exchange administration of PRC domestic individuals who participate in employee stock holding plans and stock option plans of overseas listed companies. According to the Stock Incentive Plan Rules, if PRC “domestic individuals” (both PRC residents and non-PRC residents who reside in China for a continuous period of not less than one year, excluding the foreign diplomatic personnel and representatives of international organizations) participate in any stock incentive plan of an overseas listed company, a PRC domestic qualified agent, which could be the PRC subsidiary of such overseas listed company, shall, among others things, file, on behalf of such individual, an application with SAFE to conduct the SAFE registration with respect to such stock incentive plan, and obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with stock holding or stock option exercises. If we or our PRC employees fail to comply with the Stock Incentive Plan Rules, we and our PRC employees may be subject to fines and other legal sanctions.  In addition, the State Administration of Taxation has issued a few circulars concerning employee stock options. Under these circulars, our employees working in China who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiary has obligations to file documents related to employee stock options with relevant tax authorities and withhold individual income taxes of those employees who exercise their stock options. If our employees fail to pay and we fail to withhold their income taxes, we may face sanctions imposed by tax authorities or other PRC government authorities.

 

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PRC VAT and Business Tax

 

Pursuant to the Interim Regulation of the People’s Republic of China on Value-Added Tax, or the VAT Regulation, which was amended on November 10, 2008, any entity or individual engaged in the sales of goods, provision of specified services and importation of goods into China is generally required to pay VAT, at the rate of 17% of the gross sales proceeds received, less any deductible VAT already paid or borne by such entity.

 

Pursuant to the PRC Provisional Regulations on Business Tax, taxpayers falling under the category of service industry in China are required to pay a business tax at a normal tax rate of 5% of their revenues.

 

In November 2011, MOF and the State Administration of Taxation jointly issued two circulars setting out the details of the VAT Pilot Program, which change business tax to VAT for certain pilot industries. The VAT Pilot Program initially applied only to pilot industries in Shanghai, and has been expanded to nationwide since August 1, 2013. On March 23, 2016, MOF and the State Administration of Taxation issued the Circular on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax. Effective from May 1, 2016, the PRC tax authorities started to collect value-added tax in lieu of business tax on a trial basis within the territory of China, and in industries such as construction industries, real estate industries, financial industries, and living service industries.

 

Foreign Currency Exchange

 

Pursuant to applicable PRC regulations on foreign currency exchange, Renminbi is freely convertible only to the extent of current account items, such as trade-related receipts and payments, interest and dividends. Capital account items, such as direct equity investments, loans and repatriation of investment, require the prior approval from SAFE or its local branch for conversion of Renminbi into a foreign currency, such as U.S. dollars. Payments for transactions that take place within the PRC must be made in Renminbi. Domestic companies or individuals can repatriate foreign currency payments received from abroad, or deposit these payments abroad subject to the requirement that such payments shall be repatriated within a certain period of time. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks. Foreign currencies received for current account items can be either retained or sold to financial institutions that have foreign exchange settlement or sales business without prior approval from SAFE, subject to certain regulations. Foreign exchange income under capital account can be retained or sold to financial institutions that have foreign exchange settlement and sales business, with prior approval from SAFE, unless otherwise provided.

 

On March 30, 2015, SAFE promulgated Circular 19, which expands a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises nationwide. Circular 19 came into force on June 1, 2015, replacing SAFE Circular 142, SAFE Circular 88 and SAFE Circular 36. Circular 19 removed certain restrictions previously provided under Circular 142 for foreign-invested enterprises. Circular 19 provides that, among other things, an FIE may convert foreign currency capital in its capital account into RMB on a “at will” basis. On June 9, 2016, SAFE promulgated Circular 16 to further expand and strengthen such “at will” conversion reform under Circular 19. Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items on an “at will” basis which applies to all enterprises registered in the PRC. Pursuant to Circular 16, in addition to foreign currency capital, enterprises registered in the PRC may also convert their foreign debts, as well as repatriated funds raised through overseas listing, from foreign currency to RMB on an “at will” basis. Circular 16 reiterates that the RMB funds so converted shall not be used for the purpose of, whether directly or indirectly, (i) paying expenditures out of the ordinary course of business or prohibited by laws or regulations; (ii) making securities investment or other investments (except for banks’ principal-secured products); (iii) extending loans to non-affiliated enterprises (except as expressly permitted in the business license); and (iv) purchasing non-self-used real properties (except for real estate enterprises). Any violation of Circular 19 or Circular 16 may result in severe penalties, including substantial fines.

 

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If we require financial support from our PRC subsidiaries or we plan to provide funds to our PRC subsidiaries through loans or capital contributions in the future, we will be subject to statutory limits and restrictions, including those described above.

 

C.                          ORGANIZATIONAL STRUCTURE

 

For a description of our organizational structure, See “Item 4. Information on the Company—A. History and Development of the Company.”

 

D.                          PROPERTY, PLANTS AND EQUIPMENT IN OPERATION

 

We rent our principal executive office building (approximately 6,577 square meters) located in Fengtai, Beijing and also own an office building (approximately 12,695 square meters) located in Zhabei, Shanghai. In addition, we own and lease factory and office space in various locations around the world in connection with our operations. We believe that our existing facilities, together with the facilities under construction and to be constructed under our current plans, are adequate for our current requirements. The following table sets forth a summary of our material properties relating to our production and research and development as of December 31, 2016:

 

Location

 

Space
(in square meters)

 

Usage of Property

 

Owned or Leased

 

Encumbrance

Ningjin, Hebei

 

441,116

 

Factory

 

Owned and Leased*

 

None

Yangzhou, Jiangsu

 

527,200

 

Factory and R&D center

 

Owned

 

None

Fengxian, Shanghai

 

204,262

 

Factory

 

Owned

 

Yes

Lianyungang, Jiangsu

 

309,890

 

Factory and R&D center

 

Owned

 

Yes

Hefei, Anhui

 

559,973

 

Factory

 

Owned

 

Yes

Sanhe, Hebei

 

41,561

 

Factory

 

Leased

 

None

Penang, Malaysia

 

19,357

 

Factory

 

Leased

 

None

Xingtai, Hebei

 

77,952

 

Factory

 

Owned

 

Yes**

Viet Yen, Vietnam

 

188,594

 

Factory

 

Owned

 

None

 


* 405,061 square meters of land and facilities are leased, and 36,055 square meters of land are owned.
** Mortgage registration is being carried out as of the date of this annual report.

 

See also “Item 4. Information on the Company—B. Business Overview—Manufacturing Capacity and Facilities.”

 

Environmental Matters

 

As we use, generate and discharge toxic, volatile and otherwise hazardous chemicals and wastes in our research and development and manufacturing activities, we are required by PRC law to obtain pollutant discharging permits and undergo government-administered safety examinations with respect to our production facilities. So far, we have not been assessed any penalties for any non-compliance with PRC environmental law and regulations. However, if we fail to comply with such laws and regulations in the future, we may be required to pay fines, suspend production or cease operation. Any failure by us to control the use of or to adequately restrict the discharge of hazardous substances could restrict our utilization of our properties and facilities, subject us to potentially significant monetary damages and fines or suspensions in our business operations.

 

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ITEM 4A.             UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 5.                                                OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion and analysis of our financial condition and results of operations are based upon and should be read in conjunction with our consolidated financial statements and the related notes included in this annual report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. We caution you that our business and financial performance are subject to substantial risks and uncertainties. Our actual results could differ materially from those projected in the forward-looking statements as a result of various factors, including those set forth in “Item 3. Key Information—D. Risk Factors” and elsewhere in this annual report.

 

A.                          OPERATING RESULTS

 

Overview

 

We are a leading manufacturer of high-performance solar power products based in China. We conduct our business primarily through our wholly-owned subsidiaries in China, and operate and manage our business as two segments, namely, solar product manufacturing and solar power projects development. We commenced our business through JA Hebei in May 2005. Pursuant to a recapitalization plan, all of the former shareholders of JA Hebei transferred their equity interests in JA Hebei to JA BVI, our wholly-owned subsidiary incorporated under the laws of the British Virgin Islands. This recapitalization is accounted for as a legal reorganization of entities under common control, in a manner similar to a pooling-of-interest. Accordingly, our consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout the periods presented.

 

We derive revenues primarily from sales of solar module and cell products to system integrator, project developers, distributors and module manufacturers. For the year ended December 31, 2016, our total revenues and net income were RMB15.7 billion (US$2.3 billion) and RMB719.6 million (US$103.6 million), respectively.

 

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.  Demand for solar power products is critical to our business and revenue growth. Our business and revenue growth were closely related to industry demand as well as our ability to retain existing customers and attract new customers. From the second half of 2008 to the third quarter of 2009, demand for solar power and solar power products was significantly affected by the global financial crisis. After a sharp increase in global industry demand in 2010 and 2011, the growth of market demand slowed down in 2012, which resulted in a severe downturn for the whole industry through 2012 and 2013. The industry demand revived in 2015 and 2016 due to the development of emerging markets, such as China and the U.S. We expect the growth rate to slow down again in 2017. The growth prospects still have a great level of uncertainty and trade policy change can occur unexpectedly, which could temporarily lead to fluctuations in industry demand for solar power products including ours.

 

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·                  Government Subsidies and Economic Incentives. The near-term growth of the market for solar power products depends largely on the availability and scale of government subsidies and economic incentives, as the current cost of solar power substantially exceeds the cost of electricity generated from conventional or non-renewable sources of energy. Various governments such as those of Germany, Spain, Italy, Greece, the U.S., Canada, Japan and China,  have used different policy initiatives, such as capital cost rebates, feed-in tariffs, tax credits, net metering, to encourage or accelerate the development and adoption of solar power and other renewable energy sources. However, governments may reduce or eliminate existing incentive programs for political, financial or other reasons, which will be difficult for us to predict. Reductions in feed-in tariff programs may result in a significant fall in the price of and demand for solar power products. For example, Japan, our largest overseas solar power products market in 2014, reduced its feed-in tariff for large-scale installation by 10% from 2012 to 2013, 11% from 2013 to 2014, which was further reduced in 2015 in different phases and by 11.1% in 2016.  Demand for and pricing of our products are highly sensitive to incentive policy decisions by governments in our major markets. Although the implementation of incentive policies for solar power significantly stimulates demand for solar power products, including our products, reductions or limitations on such policies, as have occurred in Japan and other countries, may reduce demand for such products or change price expectations, causing manufacturers of solar power products, including us, to reduce prices to adjust to demand at lower price levels. Our sales of solar power products in China are expected to benefit from the recently promulgated PRC laws, regulations and government policies regarding solar energy and other renewable energy, which are intended to provide incentives or otherwise encourage the development of the solar or other renewable energy sector in China.

 

·                  Capacity Utilization.  Our solar module manufacturing capacity increased from 2.8 GW in 2014 to 3.9 GW in 2015 and to 5.5 GW in 2016. Our solar cell manufacturing capacity increased from 2.8 GW in 2014 to 4.4 GW in 2015 and to 5.5 GW in 2016. Our silicon wafer manufacturing capacity increased from 1.0 GW in 2014 to 1.5 GW in 2015 and to 2.5 GW in 2016. As our business develops, we may introduce new manufacturing equipment with higher production efficiency rates to replace old manufacturing equipment or we may eliminate outdated production capacity from time to time. Our ability to achieve satisfactory utilization rates will depend upon a variety of factors, including our ability to attract and retain sufficient customers, the ability of our customers and suppliers to perform their obligations under our existing contracts, our ability to secure a sufficient supply of raw materials and production equipment for our production activities, the availability of working capital and the selling prices for our products.

 

·                  Pricing of Our Solar Power Products.  The prices of our products are based on a variety of factors, including our silicon raw materials costs, supply and demand conditions for solar power products, product mix, product quality and the terms of our customer contracts, including sales volumes. The average selling price of our solar module products declined from RMB3.9 per watt in 2014 to RMB3.5 per watt in 2015 and to RMB3.2 (US$0.5) per watt in 2016. The average selling price of our solar cells declined from approximately RMB2.3 per watt in 2014 to RMB1.9 per watt in 2015 and to RMB1.8 (US$0.3) per watt in 2016. We expect the prices of solar power products, including our own products, will continue to decline over time due to reduced manufacturing costs from improving technology and economies of scale, and industry pursuit to grid cost parity with traditional forms of electricity. In addition, our ability to adjust our raw materials costs may be limited as a result of our entering into long-term supply agreements with our polysilicon and silicon wafer suppliers, and it may be difficult for us to respond in a timely manner to rapidly changing market conditions, which could materially and adversely affect our cost of revenues and profitability.

 

·                  Price of Silicon Wafers and Related Raw Materials.  The success of our business and our growth strategy depends heavily on acquiring a supply of polysilicon and silicon wafers at commercially reasonable prices and terms that is consistent with our existing and planned manufacturing capacity. We have entered into prepaid long-term supply contracts with suppliers, including GCL, OCI, Wacker, Jinglong Group and Hemlock. In some instances, these agreements provide for fixed pricing, substantial prepayment obligations and/or firm purchase commitments that require us to pay for the supply whether or not we accept delivery. We also purchase silicon wafer and polysilicon from the spot market to supplement supplies under our existing long-term supply contracts. The availability and pricing of silicon wafers and polysilicon will affect results of operations.

 

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·                  Technology Improvement.  The advancement of manufacturing technologies is important in increasing the conversion efficiency of solar cells and reducing the production costs of solar power products. Higher conversion efficiency, together with low price per watt, generally leads to higher revenues from sales of solar power products. As a result, solar power products manufacturing companies, including us, are continuously developing advanced process technologies to improve the conversion efficiency of solar cells while reducing costs to maintain and improve profit margins.

 

Critical Accounting Policies

 

The discussion and analysis of our operating results and financial condition are based on our audited financial statements, which we have prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting periods. We base our estimates and assumptions on historical experience and various other factors that we believe to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our management evaluates these estimates on an ongoing basis. Actual results may differ from these estimates as facts, circumstances and conditions change or as a result of different assumptions.

 

In reviewing our financial statements, our management considers (i) the selection of critical accounting policies; and (ii) the judgments and other uncertainties affecting the application of those critical accounting policies. The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements. Our principal accounting policies are set forth in detail in Note 2 to our audited consolidated financial statements included elsewhere in this annual report. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

 

Revenue recognition

 

Revenue recognition for solar modules, solar cells and other products (hereafter “solar products”)

 

We recognize revenue from the sale of solar products when the goods are delivered and title and risk of loss transfer is passed to the customers. We sell our solar products at agreed upon prices to our customers, which reflect prevailing market prices.

 

Our considerations for recognizing revenue are based on the following:

 

·                  Persuasive evidence that an arrangement (sales contract) exists between a willing customer and us that outlines the terms of the sale (including customer information, product specification, quantity of goods, purchase price and payment terms). Customers do not have a right of return. We do provide a warranty on our solar module products.

 

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·                  For EX Works terms, which mean that a seller has the goods ready for collection at its premises (works, factory, warehouse, plant), the contract specifies that the risks are assumed by the customer when the customer picks up the goods from our warehouse, at which time revenue is recognized. For FOB shipping point terms, the contract specifies that the customer takes title to the goods and is responsible for all risks and rewards of ownership once products are over shipping rail at the named loading port from our premises, at which time revenue is recognized. For CIF terms, we pay the costs of insurance and freight necessary to bring the goods to the named port of destination, but the title to and risk/rewards of ownership of the goods is passed to the buyer according to each of the contract term, which is defined in each contract. For Delivered Duty Paid terms, we pay the costs of insurance and freight necessary to bring the goods to the named port of destination as well as the import duty, and the title to and risk/rewards of ownership of the goods is passed to the buyer once the goods are delivered and the import duty is paid. The point of delivery could be at the port of shipping, or it could also be when the goods arrive at the named port of destination. When title to the goods transfers at the port of shipping, the beneficiary of the insurance is the buyer and we have no obligations to the buyer if goods are damaged during shipping. Revenue is therefore, recognized when the title to and risk/rewards of ownership of the goods is passed to the buyer which is at port of shipping or port of destination, depending on the terms of the contract.

 

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

 

·                  For customers to whom credit terms are extended, we assess a number of factors to determine whether collection from them is reasonably assured, including past transaction history with them and their credit worthiness. All credit extended to customers is pre-approved by management. If we determine that collection is not reasonably assured, including circumstances where the customers retain a portion of the full contract price as retainage after a specific period, we defer the recognition of revenue until the aforementioned criterion is met, which is generally upon receipt of payment.

 

Revenue recognition for solar product processing

 

We provide solar product processing services to customers with their own wafer/polysilicon supplies. Under certain of these solar product processing service arrangements, we purchase raw materials from a customer and agree to sell a specified quantity of solar products produced from such materials back to the same customer. We record revenues from these processing transactions on a net basis, recording revenues based on the amount received for solar products sold less the amount paid for the raw materials purchased from the customer.

 

Revenue recognition for electricity generation

 

We recognize electricity generation revenue when persuasive evidence of a power purchase arrangement with the power grid company exists, electricity has been generated and 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 includes a portion that is subsidized by the Chinese central government. Subsidized portion of electricity generation revenue is recognized after we meet the subsidy criterion, which includes electricity sales agreement with state grid, electricity generation and government approval of our application of the subsidy.

 

Fair value of financial instruments

 

We estimated the fair value of its financial assets and liabilities in accordance with ASC 820, Fair Value Measurements and Disclosure. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price). ASC 820 establishes a hierarchy 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, valuation techniques that use observable market-based inputs or unobservable inputs that are corroborated by market data. Pricing information we obtains from third parties is internally validated for reasonableness prior to use in the consolidated financial statements. When observable market prices are not readily available, we generally estimates 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, shareholders’ equity and net income or loss.

 

Accounts receivable and allowance for doubtful accounts

 

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. We had an allowance for doubtful account balance of RMB275.5 million, RMB259.8 million and RMB188.3 million (US$27.1 million) as of December 31, 2014, 2015 and 2016. If the financial condition of our customers were to deteriorate such that their ability to make payments was impaired, additional allowances could be required.

 

We assess the credit line and credit term for each customer, given to the payment history of such customer and macro-economic conditions of the regional market. We sign the sales contract and execute the transaction with such customer after sufficient assessment. We recognize revenue from the sale of solar products when the goods are delivered and title and risk of loss transfer is passed to the customers. After the recognition of receivables as well as revenue, we monitor the collectability of receivables and does not make further transactions with such customers recorded with a significant overdue balance.

 

Short-term and long-term advances to suppliers

 

We provide short-term and long-term advances to secure our raw material needs, which are then offset against future purchases. We do not require collateral or other security against our advances to our related or third party suppliers. We continually assess the credit quality of our suppliers and the factors that affect the credit risk. If there is deterioration in the credit worthiness of our suppliers, we will seek to recover our advances from the suppliers and provide for losses on advances which are akin to receivables in selling, general and administrative expenses because of their inability to return our advances. We had a provision balance of RMB129.3 million, RMB125.8 million and RMB20.7 million (US$3.0 million) for potential losses against supplier advances as of December 31, 2014, 2015 and 2016. If the financial condition of our suppliers were to deteriorate such that their ability to deliver product or repay our advances was impaired, additional provisions could be required. Recoveries of the allowance for advances to supplier are recognized when they are received. We classified short-term and long-term advances to suppliers based on management’s best estimate of the expected purchase in the next twelve-months as of the balance sheet date and our ability to make requisite purchases under existing supply contracts. The balances expected to be utilized outside of the twelve months are recorded in long-term advances to suppliers.

 

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Inventories

 

Inventories are stated at the lower of cost or market value. Cost of inventories is determined by the weighted-average method. Cost of work-in-progress and finished goods are comprised of direct materials, direct labor and related manufacturing overhead based on normal operating capacity. Adjustments are recorded to write down the carrying amount of any obsolete and excess inventory to its estimated net realizable value. Certain factors could impact the realizable value of inventory, so 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 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 provisions may be required that could negatively impact our gross margin and operating results. If actual market conditions are more favorable, we may have higher gross margin when products that have been previously 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. As of December 31, 2014, 2015 and 2016, the provision balance for inventories was RMB59.0 million, RMB56.4  million and RMB150.4 million (US$21.7 million), respectively.

 

We assess whether losses should be accrued on long-term inventory purchase commitments in accordance with ASC 330-10-35-17 to 18, which requires that losses that are expected to arise from those firm, non-cancellable, and unhedged commitments for the future purchase of inventory items, measured in the same way as inventory losses, should be recognized unless recoverable through firm sales contacts or when there are other circumstances that reasonably assure continuing sales without price decline.

 

Under the long-term supply contracts, or LTAs, between us and certain suppliers, polysilicon and silicon wafer purchase would be made pursuant to the purchase prices and quantities set forth in the relevant LTAs. As a result of the significant declines in the market prices of polysilicon and silicon wafer due to the significant downturn in the solar industry in recent years, the purchase prices set forth in certain LTAs exceeded market prices.

 

At the end of each reporting period, we separately assess the potential losses on those firm inventory purchases for each supplier. When making the assessment, we consider whether it is able to renegotiate with its suppliers and get positive outcome by taking into account various considerations, such as stated contract price, purchase price reduction, overall amendment to LTA to eliminate fixed price arrangement, its ability to obtain concessions (i.e., reduced purchase prices and/or additional quantities at no cost) so that the actual purchase prices are less than the stated contract prices or close to the market price at the time of purchase, historical outcome of the renegotiation with the same supplier, contract period, the minimum purchase quantity, tax costs involved in the import or export of raw materials and products, status of a particular LTA at the time of assessment, and other circumstances and uncertainties that may impact such assessment.

 

If it is determined that a loss provision calculation is necessary considering the status of a LTA and all facts and circumstances impacting the evaluation, we follow the guidance of ASC 330-10-35-17 and assesses whether there should be loss on the firm purchase commitments by applying a methodology similar to that used in the lower of cost or market evaluation with respect to inventory. In assessing the potential loss provision, we use the stated contract price and volume under the relevant LTA as the major assumptions. Loss provision will be provided if the net realizable value after considering estimated costs to convert those 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 in the years ended December 31, 2014 and 2015. For the year ended December 31, 2016, the loss provision was amounted to RMB48.9 million (US$7.0 million).

 

See also “Notes to Consolidated Financial Statements—7 Inventories”.

 

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Impairment of long-lived assets

 

We evaluate our long-lived assets and finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the 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. Impairments are recognized based on the difference between the fair value of the asset and its carrying value in the event that the carrying amount exceeds the estimated future undiscounted cash flow attributed to such assets. Fair value is generally measured based on either quoted market prices, if available, or discounted cash flow analyses. Additionally, determining fair values requires probability weighting the cash flows to reflect expectations about possible variations in their amounts or timing and the selection of an appropriate discount rate. Although cash flow estimates are based on relevant information available at the time the estimates are made, estimates of future cash flows are, by nature, highly uncertain and may vary significantly from actual results. Any write-downs would be treated as permanent reductions in the carrying amounts of the assets and an operating loss would be recognized.

 

Project assets

 

We began to engage in solar project development in 2013. Project assets consist primarily of direct costs relating to solar power projects in various stages of development. A project asset is initially recorded at the actual cost. For a self-developed project asset that is initially obtained by application of feed-in-tariff , or FIT, contract and other required permits, consents, the actual cost capitalized is the amount of the expenditure incurred for the application of those contracts, permits, consents, material and labor costs, cost of lands, capitalized interest and other similar direct costs. For a project asset acquired from external parties, the initial cost is the acquisition cost which includes the consideration transferred and certain direct acquisition cost. Modules cost, equipment cost and development and others incurred in the project development process will build up the cost of project assets.

 

We review project assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In determining whether or not the project assets are recoverable, we consider a number of factors, including changes in environmental, ecological, permitting, marketing price or regulatory conditions that affect the project. Such changes may cause the cost of the project to increase or the selling price of the project to decrease. As of December 31, 2016, we impaired project assets with the amount of RMB40.6 million (US$5.9 million) as a result of our decision to suspend the construction of certain projects.

 

Costs capitalized in the construction of solar power plants under development will be transferred to completed solar power plants upon completion and when they are ready for its intended use, which is at the point when the solar power plant is connected to grids and begins to generate electricity. Depreciation of the completed solar power plant commences once the solar power plant is ready for its intended use. Depreciation is computed using the straight-line method over the expected life of about 20 years (the shorter of land use right and the estimated useful life of module used in project assets). As of December 31, 2016, RMB2,372.0 million (US$341.6 million) of project assets had been completed and connected to the grid. Depreciation expenses of project assets were RMB74.9 million (US$10.8 million) for the year ended December 31, 2016.

 

As of December 31, 2016, project assets with net book value of RMB574.0 million (US$82.7 million) were pledged as collateral for our borrowings of RMB546.0 million (US$78.6 million) from Industrial and Commercial Bank of China; project assets with net book value of RMB0.9 million (US$0.1 million) were pledged as collateral for our borrowings of RMB14.3 million (US$2.1 million) from 77 Bank; project assets with net book value of RMB194.9 million (US$28.1 million) were pledged as collateral for our borrowings of RMB250.5 million (US$36.1 million) from Industrial and Commercial Bank of China.

 

Issuance of ordinary shares and warrants

 

On August 14, 2013, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with a single institutional investor to issue 15,228,425 ordinary shares for an aggregate cash of US$24 million (RMB equivalent 147,998). In conjunction with the ordinary share offering, we also issued to the Investor Series A-1 Warrant, Series A-2 Warrant, Series A-3 Warrant, and Series B Warrant (“Warrants”) to acquire up to 12,724,164 ordinary shares (or 2,544,833 ADSs), 12,724,164 ordinary shares (or 2,544,833 ADSs), 12,724,164 ordinary shares (or 2,544,833 ADSs), and 50,896,656 ordinary shares (or 10,179,332 ADSs), respectively.

 

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In accordance with ASC 815-10, the warrants are deemed legally detachable and separately exercisable from the ordinary shares and, thus accounted for as a freestanding instrument. As the warrants are denominated in US Dollar, yet our functional currency is RMB, warrants are not considered indexed to our own stock. Accordingly, the warrants are liability derivatives which need to be fair valued on day one and mark to market subsequently at each reporting period end, with the fair value gain or loss arising from the re-measurement recognized in the consolidated statements of operations and comprehensive (Loss)/Income.

 

On the transaction date, the sales proceeds are first allocated to the warrant based on the warrants’ full fair value of RMB172.9 million (US$28.6 million), and the residual amount of the sales proceeds is allocated to the ordinary shares. The fair value of the warrants in excess of net proceeds of the equity offering of RMB44.4 million (US$7.3 million) is charged to retained earnings as a deemed dividend due to this portion is a benefit transferred from existing shareholders to the new investor. Such amount is charged as deemed dividend on the transaction date and is an adjustment to net loss available to attributable to JA Solar Holdings for basic and diluted EPS calculation, as an effective dividend from existing ordinary shareholders. For the years ended December 31, 2015 and 2016, RMB39.6 million and RMB70.9 million (US$10.2 million) of gain were recognized based on a subsequent change in fair value of the warrants in our Consolidated Statements of Operations and Comprehensive (Loss)/Income.

 

These warrants are participating securities because they had contractual rights to share our profits but not losses. For the years ended December 31, 2016, there was no impact for the computation of basic earnings per share due to the expiration of the Warrants.

 

Share-based compensation

 

In accordance with ASC 718, Compensation-Stock Compensation, we measure the costs of employee services received in exchange for share-based compensation at the grant date fair value of the award.

 

We recognize the share-based compensation costs, net of a forfeiture rate, on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards.

 

ASC 718 requires forfeitures to be estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. For the stock options granted in the years ended December 31, 2014, 2015 and 2016 we used the forfeiture rate of  10.05%, 11.12% and 12.71%, respectively.

 

Grants to Employees

 

The determination of the fair value of share-based awards and related share-based compensation expense requires input of subjective assumptions, including but not limited to the valuation model adopted, risk-free interest rate, expected life of the share-based awards, stock price volatility, and expected forfeiture rate. The selection of an appropriate valuation technique or model depends on the substantive characteristics of the instrument being valued. Risk free interest rates are decided based on the yield to maturity of U.S. government bonds as at respective dates of grant of options. Expected life of stock options granted is based on the average between the vesting period and the contractual term for each grant, taking into account assumptions used by comparable companies. Volatility is measured using a combination of historical daily price changes of comparable companies stock over the respective expected life of the option and implied volatility derived from traded options of comparable companies. Forfeiture rate is estimated based on our expectation for the future.

 

The assumptions used in calculating the fair value of share-based awards and related share-based compensation represent management’s best estimations, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change or we utilize different assumptions, our share-based compensation expense could be materially different for any period.

 

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Income taxes

 

We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax assets bases and operating loss and tax credit carry forwards. We measure deferred tax assets and liabilities 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. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date. A valuation allowance is provided to reduce the carrying amount of deferred tax assets if it is considered more likely than not that some portion, or all, of the deferred tax assets will not be realized. We recorded valuation allowances to reduce our net deferred tax assets and the balance of such valuation allowance was RMB456.9 million, RMB483.6 million and RMB373.8 million (US$53.8 million) as of December 31, 2014, 2015 and 2016, respectively. A portion of valuation allowance was utilized as our subsidiaries generated sufficient taxable income in 2016. A portion of valuation allowance was reversed based on the expected utilization of deferred tax assets of our subsidiaries in the future.

 

Uncertain tax position is accounted for in accordance with ASC 740-10-25, which clarifies the accounting for uncertain tax positions and 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 accounting policy is to accrue interest and penalties related to uncertain tax positions, if and when required, as interest expense and a component of general and administrative expenses, respectively, in the consolidated statements of operations. In the years ended December 31, 2014, 2015 and 2016, we did not record any interest and penalties associated with uncertain tax positions as there were no uncertain tax positions.

 

Product warranties

 

It is customary in our business and industry to warrant or guarantee the performance of our solar module products at certain levels of conversion efficiency for extended periods. Our standard solar modules are typically sold with a 10 years warranty for defects in materials and workmanship and a 10 to 25 years warranty against declines of more than 10% and 20%, respectively, of the initial minimum electricity generation capacity at the time of delivery. In addition, we usually provide the same warranty for solar modules assembled for third party OEM customers. We therefore maintain warranty reserves (recorded as accrued warranty costs) to cover potential liabilities that could arise from these guarantees and warranties. The potential liability is generally in the form of product replacement or repair. We accrue 1% of our net revenues from sales of solar modules as general warranty costs at the time revenues are recognized and include that amount in our cost of revenues. We also separately accrue specific warranty costs to cover potential liabilities that could arise from customer claims based on an individual assessment. Liabilities arising from special customer claims other than product replacement or repair are accrued separately and charged into cost of revenues instead of utilizing warranty reserves. Due to limited warranty claims to date, we accrue the estimated costs of warranties based on our own history, industry data and an assessment of our competitors’ accrual history. Through our relationships with, and management’s experience working at, other solar power companies and on the basis of publicly available information regarding other solar power companies’ accrued warranty costs, we believe that accruing 1% of our net revenues from sales of solar modules as general warranty costs is within the range of industry practice and is consistent with industry-standard accelerated testing, which assists us in estimating the long-term reliability of solar modules, estimates of failure rates from our quality review and other assumptions that we believe to be reasonable under the circumstances. However, although we conduct quality testing and inspection of our solar module products, our solar module products have not been and cannot be tested in an environment simulating the up to 25-year warranty periods. Actual warranty costs are accumulated and charged against the accrued warranty liability. To the extent that the actual warranty costs differ from the estimates, we will prospectively revise our accrual rate.

 

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Investments

 

Investments in entities where 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, are accounted for using the equity method of accounting. Investment in a joint venture or an affiliate is accounted for by the equity method of accounting as we have the ability to exercise significant influence but do not own a majority equity interest. Under the equity method of accounting, our share of the investee’s results of operations is included in equity gain/(loss) for the investee in our consolidated statements of operations. Unrealized gains on transactions between us and the joint venture or affiliate are eliminated to the extent of our interest in the joint venture or affiliate, if any; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When our share of losses in the joint venture or affiliate equals or exceeds our interest in the joint venture or affiliate, we do not recognize further losses, unless we have incurred obligations or made payments on behalf of the joint venture or affiliate.

 

We review our investment in the joint venture or affiliate to determine whether a decline in fair value below the carrying value is other- than-temporary. The primary factors we consider in our determination are the length of time that the fair value of the investment is below our carrying value and the financial condition, operating performance and near term prospects of the investee. In addition, we consider the reason for the decline in fair value, including general market conditions, industry-specific or investee-specific reasons, changes in valuation subsequent to the balance sheet date and our intent and ability to hold the investment for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to be other than temporary, the carrying value of the security is written down to fair value.

 

Business combination

 

We account for business combinations under the acquisition method in accordance with ASC 805, Business Combinations. We measure consideration transferred as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued. We expense the costs directly attributable to the acquisition as incurred. We measure identifiable assets, liabilities and contingent liabilities acquired or assumed separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. We record the excess of the (i) the fair value of consideration transferred fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the fair value of consideration transferred, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquire is less than the fair value of the net assets of the entity acquired, we recognize the difference, a bargain purchase, as a gain directly in the statements of operations and other comprehensive income/(loss) upon obtaining controlling interests. For business combinations in which we obtain controlling interests through several acquisitions, the acquirer shall remeasure its previously held equity interests in the acquiree at its fair value on the acquisition date and recognize the resulting gain or loss, if any, in earnings.

 

The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed, including non-controlling interests if applicable, is based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. We determine discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets and forecasted life cycle and forecasted cash flows over that period. Although we believe that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material. (See also “Notes to Consolidated Financial Statements—3. Acquisition.”)

 

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In January 2013, we completed the acquisition of 65% equity interest of Hebei Ningjin Songgong Semiconductor Co., Ltd. (“Ningjin Songgong”). As of December 31, 2016, Ningjin Songgong was liquidated and the assets and liabilities of Ningjin Songgong have been adjusted to liquidation value, with no gain or loss impact on the consolidated statements of operations and comprehensive income. The net assets attributable to the non-controlling interest party were reclassified as payables accordingly.

 

In June 2016, we completed the acquisition of 100% of shares of Jiuzhou Fangyuan New Energy (Yichang) Co., Ltd., which is engaged in solar projects business for a total consideration of RMB150.0 million.

 

Contingencies

 

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. In October 2016, we signed the Settlement Agreement and the New Supply Agreement. According to the Settlement Agreement, Hemlock agrees not to commence any civil action against us in relation to the Original Supply Agreement signed in March 2011 unless we breach the New Supply Agreement. After detailed assessment, we believe the breach of New Supply Agreement is remote. As a result, no contingent liability has been recorded as of December 31, 2016 and the total amount of accrued late payment interest of RMB 303,380 was reversed for the year ended December 31, 2016. See note 26(b) to Notes to Consolidated Financial Statements.

 

Key Components of Results of Operations

 

Revenues

 

The following table sets forth the principal components of our revenues by amounts and percentage of our total revenues for periods indicated:

 

 

 

Year ended December 31,

 

 

 

2014

 

2015

 

2016

 

 

 

(in millions, except for percentages)

 

 

 

RMB

 

%

 

RMB

 

%

 

RMB

 

%

 

Solar modules

 

9,292

 

82.3

 

12,689

 

93.8

 

14,781

 

93.9

 

Solar cells and other products

 

1,848

 

16.3

 

762

 

5.6

 

800

 

5.1

 

Electricity generation

 

 

 

64

 

0.5

 

156

 

1.0

 

Solar product processing

 

156

 

1.4

 

10

 

0.1

 

 

 

Total Revenues

 

11,296

 

100.0

 

13,525

 

100.0

 

15,737

 

100.0

 

 

We derive revenues primarily from the sales of solar modules, solar cells and other products to module manufacturers, system integrators, project developers and distributors and beginning in 2015, from electricity generation. For the years ended December 31, 2014, 2015 and 2016, approximately 66.9%, 57.0% and 48.6% of our total sales were to customers outside China, respectively. For the years ended December 31, 2014, 2015 and 2016, sales to our largest customer represented approximately 28.8%, 12.5% and 5.3% of our total revenues, respectively; and sales to our three largest customers represented approximately 39.1%, 23.3% and 14.6% of our total revenues, respectively. Our three largest customers were all unrelated third parties. Sales to our top ten customers accounted for approximately 56.4%, 41.9% and 36.9% of total revenues for the years ended December 31, 2014, 2015 and 2016, respectively.

 

For the year ended December 31, 2016, our revenues from sales of solar modules amounted to approximately RMB14.8 billion (US$2.1 billion), or 93.9% of our total revenues. We sold approximately 4,606.6 MW of solar modules in 2016, compared to 3,666.4 MW in 2015. The increase of sales of solar modules was primarily due to the shift of our product mix to solar modules and strong market demand. We accrued 1.0% of our net revenues from sales of solar modules as general warranty costs at the time revenues are recognized and separately accrued specific warranty costs to cover potential liabilities that could arise from customer claims based on an individual assessment and include that amount in our cost of revenues. Because we have limited warranty claims to date, we accrue the estimated costs of warranties based on our own history, industry data and an assessment of our competitors’ accrual history.

 

For the year ended December 31, 2016, our revenues from sales of solar cells and other products amounted to approximately RMB0.8 billion (US$0.1 million), or 5.1% of our total revenues. We sold approximately 313.8 MW of solar cells in 2016, compared to approximately 265.0 MW in 2015. The increase in sales of solar cells and other products was due to the increase in sales volume of JA Malaysia from 17.0 MW in 2015 to 188.1 MW in 2016.

 

For the year ended December 31, 2016, our revenues from electricity generation amounted to approximately RMB156.3 million (US$22.5 million), or 1.0% of our total revenues.

 

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For the year ended December 31, 2016, we did not generate any revenues from solar product processing services.

 

Cost of Revenues

 

The following table sets forth the principal components of our cost of revenues by amounts and percentage of our total revenues for periods indicated:

 

 

 

Year ended December 31,

 

 

 

2014

 

2015

 

2016

 

 

 

(in millions, except for percentages)

 

 

 

RMB

 

%

 

RMB

 

%

 

RMB

 

%

 

Cost of Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Solar modules

 

7,844

 

69.4

 

10,521

 

77.7

 

12,612

 

80.1

 

Solar cells and other products

 

1,602

 

14.2

 

675

 

5.0

 

743

 

4.7

 

Electricity generation

 

 

 

30

 

0.2

 

88

 

0.6

 

Solar products processing

 

93

 

0.8

 

7

 

0.1

 

 

 

Total cost of revenues

 

9,539

 

84.4

 

11,233

 

83.0

 

13,443

 

85.4

 

 

Solar modules.  For the years ended December 31, 2014, 2015 and 2016, our cost of revenues for solar modules accounted for 69.4%, 77.7% and 80.1% of our total revenues, respectively. The increase in costs of solar modules in absolute amounts and as a percentage of our total revenues from 2014 to 2016 is primarily due to the significant increase in sales volume of our solar modules.

 

Solar cells and other products.  For the years ended December 31, 2014, 2015 and 2016, cost of solar cells and other products accounted for 14.2%, 5.0% and 4.7% of our total revenues, respectively. The decrease in the cost of solar cell and other product in absolute amounts and as a percentage of our total revenues from 2014 to 2016 is primarily due to the shift of our product mix to solar modules.

 

Electricity generation.  We started electricity generation services in 2015. For the year ended December 31, 2015 and 2016, the cost of revenues for our electricity generation services was RMB30.0 million and RMB88.0 million (US$12.7 million), respectively. As a percentage of our total revenues, the cost of revenues for our electricity generation services accounted for 0.2% and 0.6% for the years ended December 31, 2015 and 2016, respectively, including depreciation of solar power project assets and costs associated with operation and maintenance of the power plants came into use.

 

Solar products processing.  For the years ended December 31, 2014 and 2015, cost of revenues for our solar products processing services accounted for 0.8%, 0.1% of our total cost of revenues, respectively. For the years ended December 31, 2016, we did not incur any cost of revenues for our solar products processing services. The continuous decrease in the cost of solar products processing in absolute amounts and as a percentage of our total revenues from 2014 to 2016 is primarily due to the decreased processing service rendered by us to customers, which is consistent with customer demands.

 

Operating Expenses

 

The following table sets forth the principal components of our operating expenses by amounts and percentage of our total revenues for periods indicated

 

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Year ended December 31,

 

 

 

2014

 

2015

 

2016

 

 

 

(in millions, except for percentages)

 

 

 

RMB

 

%

 

RMB

 

%

 

RMB

 

%

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

954

 

8.5

 

1,246

 

9.2

 

1,058

 

6.8

 

Research and development expenses

 

140

 

1.2

 

149

 

1.1

 

175

 

1.1

 

Loss from purchase commitment and contract termination costs

 

 

 

 

 

149

 

0.9

 

Impairment loss on project assets

 

 

 

33

 

0.2

 

8

 

0.1

 

Total operating expenses

 

1,094

 

9.7

 

1,428

 

10.5

 

1,390

 

8.8

 

 

Selling, general and administrative expenses.  Selling expenses primarily consist of promotional and other sales and marketing expenses and salaries and benefits for our sales and marketing personnel. General and administrative expenses primarily consist of leasing expenses associated with our administrative offices, salaries and benefits for our administrative, finance and human resources personnel, share-based compensation, bad debt provision, impairment provision against advance payments made to suppliers, accruals/reversals for potential interest/penalties under long term supply arrangements, freight expenses, business travel expenses and professional services expenses.

 

From 2012 to 2015, we accrued interest for late payment based on terms of the Original Supply Agreement. We recognized RMB 93.8 million and RMB 123.5 million of such interest expense in 2014 and 2015, respectively. As of December 31, 2015, the total accrued interest was RMB 303.4 million. In 2016, the total interest of RMB 303.4 million (US$43.7 million) was reversed with the settlement of our dispute with Hemlock. See note 26(b) to Notes to Consolidated Financial Statements.

 

In 2014, we granted options to purchase 3,660,000 ordinary shares to a number of our directors, employees and consultants. We did not grant any options in 2015 and 2016. See “Item 6. Directors, Senior Management and Employees—B. Compensation—Stock Option Plans.” Our share-based compensation expenses relating to our option grants and stock awards have had an adverse effect on our reported earnings for the years ended December 31, 2014, 2015 and 2016. We recognized a share-based compensation charge of RMB16.3 million, RMB9.4 million and RMB2.3 million (US$0.3 million) for the years ended December 31, 2014, 2015 and 2016, respectively. The above charges are net of forfeiture reversal amounts of RMB2.4 million, RMB0.9 million and RMB0.7 million (US$0.1 million) for the years ended December 31, 2014, 2015 and 2016, respectively. Share-based compensation expenses are amortized over the vesting period of these options ranging from two to four years starting from the grant date.

 

Loss from purchase commitment and contract termination cost.  In 2016, we incurred loss from purchase commitment of RMB48.9 million (US$7.0 million) related to our firm purchase commitments due to our commitments to purchase polysilicon prior to commencement of operation of our new facility. We evaluate these commitments and record a loss, if any, on firm purchase commitments using the same lower of cost or market approach as that used to value inventory. We also incurred loss from contract termination costs of RMB99.6 million (US$14.3 million) related to the termination of business relationship with one of our business partners.

 

Research and development expenses.  Research and development expenses primarily consist of research materials, compensation and benefits for research and development personnel. Research and development expenses are expensed when incurred. We believe that research and development is critical to the success of our business. We intend to focus on innovation of our manufacturing technology as well as imposing stringent measures to maintain a competitive cost structure.

 

Impairment loss on project assets. We incurred impairment loss on project assets of RMB32.6 million and RMB8.1 million (US$1.2 million) related to our decision to suspend the construction of certain projects for the years ended December 31, 2015 and December 31, 2016, respectively.

 

Interest (Income) Expense, net

 

We generated interest income of RMB28.2 million, RMB25.6 million and RMB18.9 million (US$2.7 million) and incurred interest expense of RMB229.7 million, RMB249.4 million and RMB284.3 million (US$41.0 million) for the years ended December 31, 2014, 2015 and 2016, respectively. Our net interest expense in 2014, 2015 and 2016 was primarily the interest related to borrowings. The increase or decrease in other interest expenses is consistent with the increase or decrease in borrowings.

 

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Foreign Exchange (Loss)/Gain

 

We incurred foreign exchange losses of RMB61.8 million in 2014. The foreign exchange losses in 2014 was primarily because a significant portion of our monetary assets and liabilities are denominated in JPY and Euros, which depreciated in 2014 relative to the RMB. We recorded a foreign exchange gain of RMB31.9 million and RMB80.8 million (US$11.6 million) in 2015 and 2016, respectively, primarily due to the appreciation of U.S. dollars against RMB. Fluctuations in currency exchange rates may continue to have a significant effect on our financial results as we continue to grow our sales to markets outside China.

 

Inflation

 

Since our inception, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, the annual average percent changes in the consumer price index in China for 2014, 2015 and 2016 were 2.0%, 1.4% and 2.0%, respectively. The year-over-year percent changes in the consumer price index for December 2014, 2015 and 2016 were increases of 1.5%, 1.6% and 2.1%, respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future.

 

Recently Pronounced Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which contains new accounting literature relating to how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for our fiscal year beginning January 1, 2018, which reflects a one year deferral approved by the FASB in July 2015, with early application permitted provided that the effective date is not earlier than the original effective date. We are currently undertaking an assessment of its revenue contracts to determine impact, if any, the adoption of ASU 2014-09 will have on our financial statements and related disclosures. We anticipate the impact of ASU 2014-09 will likely be limited to the timing of recognition of its variable consideration. This variable consideration arises from situations when certain domestic customers in mainland China settle the final portion of receivables, usually above one year, according to the revenue contract. Such amount is currently recognized as revenue when the amount is received from the certain customers. The timing of the recognition of such amounts may be earlier under the new guidance; we plan to finalize its assessment in early 2017 and plan to adopt ASU 2014-09 IN 2018. The standard permits the use of either the full retrospective or modified retrospective transition method. We have not yet selected a transition method nor determined the effect of the standard on its ongoing financial reporting. We plan to adopt ASU 2014-09 in 2018.

 

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements — Going Concern”, which requires management to evaluate for each annual and interim reporting period whether it is probable that the reporting entity will not be able to meet its obligations as they become due within one year after the date that the financial statements are issued. If the entity is in such a position, the standard provides for certain disclosures depending on whether or not the entity will be able to successfully mitigate its going concern status. This guidance is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. We have adopted ASU 2014-15 in 2016.

 

We had positive working capital as of December 31, 2016. Our management believes that the current cash position as of December 31, 2016, the cash expected to be generated from operations and funds available from borrowings under the bank credit facilities will be sufficient to meet our working capital for at least the next 12 months from the date of issuance of the fiscal 2016 financial statements.

 

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” which applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, first-out (“LIFO”). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. We have evaluated the impact of adopting this guidance and have concluded it will likely have no effect on the financial statements as our adjustments already reflect the concept of net realizable value. Inventory provisions are generally full write-downs for the affected inventory.

 

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In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”. This ASU amends existing guidance to require that deferred income tax liabilities and assets be classified as noncurrent in a classified balance sheet, and eliminates the prior guidance which required an entity to separate deferred tax liabilities and assets into a current amount and a noncurrent amount in a classified balance sheet. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual period. Additionally, the new guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We have not yet selected an adoption method. The impact of adopting this guidance is not expected to be material to the consolidated financial statements given our deferred tax amounts. As of December 31, 2016, the current portion of deferred tax assets and deferred tax liability is RMB138.1 million and RMB nil, respectively.

 

In February 2016, the FASB issued an ASU 2016-02, “Leases (Topic 842).” The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. This ASU is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. We are currently evaluating the impact the pronouncement will have on our financial statements and related disclosures.

 

In March 2016, the FASB issued an ASU 2016-07, “Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting,” which eliminates the requirement to retrospectively apply the equity method in previous periods. Instead, the investor must apply the equity method prospectively from the date the investment qualifies for the equity method. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The impact of adopting this pronouncement is not expected to be material to the consolidated financial statements given our investments.

 

In March 2016, the FASB issued an ASU 2016-09 “Improvements to Employee Share-based Payment Accounting”, which amends ASC Topic 718, Compensation — Stock Compensation. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We are currently evaluating the impact the pronouncement will have on our financial statements and related disclosures.

 

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 230).” This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. We will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As the likelihood of us experiencing one or more of the eight particular specified transactions is low, ASU 2016-15 is not expected to have a material impact on our consolidated financial statements.

 

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In November 2016, the FASB issued ASU 2016-18, “Restricted Cash (Topic 230).” The amendments in this Update are an improvement to GAAP by providing guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows, thereby reducing the diversity in practice described above. ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We do not expect that the adoption will have a material impact on its consolidated financial statements. For the year ended December 31, 2016, the increase of restricted cash with the amount of RMB173.2 million is included in investing activities of the statement of cash flow.

 

Results of Operations

 

The following table sets forth certain consolidated results of operations data in terms of amount and as a percentage of our total revenues for the periods indicated.

 

 

 

Year ended December 31,

 

 

 

2014

 

2015

 

2016

 

 

 

(in millions, except for operating data and percentages)

 

 

 

RMB

 

%

 

RMB

 

%

 

RMB

 

%

 

Income Statement and Comprehensive Loss Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

11,296

 

100.0

 

13,525

 

100.0

 

15,737

 

100.0

 

China

 

3,743

 

33.1

 

5,820

 

43.0

 

8,081

 

51.4

 

Outside China

 

7,553

 

66.9

 

7,705

 

57.0

 

7,656

 

48.6

 

Cost of revenues

 

(9,539

)

(84.4

)

(11,233

)

(83.0

)

13,443

 

85.4

 

Gross profit

 

1,757

 

15.6

 

2,292

 

17.0

 

2,294

 

14.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

(1,094

)

(9.7

)

(1,427

)

(10.6

)

(1,391

)

(8.9

)

Selling, general and administrative expenses

 

(954

)

(8.4

)

(1,245

)

(9.2

)

(1,058

)

(6.8

)

Research and development expenses

 

(140

)

(1.2

)

(149

)

(1.1

)

(176

)

(1.1

)

Loss from purchase commitments and contract termination costs

 

 

 

 

 

(149

)

(0.9

)

Impairment loss on project assets

 

 

 

(33

)

(0.2

)

(8

)

(0.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

663

 

5.9

 

865

 

6.4

 

903

 

5.7

 

Change in fair value of derivatives

 

84

 

0.7

 

44

 

0.3

 

49

 

0.3

 

Interest expense

 

(230

)

(2.0

)

(249

)

(1.8

)

(285

)

(1.8

)

Interest income.

 

28

 

0.2

 

26

 

0.2

 

19

 

0.1

 

Foreign exchange (loss)/gain

 

(62

)

(0.5

)

32

 

0.2

 

81

 

0.5

 

Income for equity investment in a joint venture

 

3

 

0.0

 

6

 

0

 

10

 

0.1

 

Other income, net

 

34

 

0.3

 

48

 

0.4

 

66

 

0.5

 

Income from continuing operations before income taxes

 

520

 

4.6

 

772

 

5.7

 

843

 

5.4

 

Income tax (expense)/benefit

 

(73

)

(0.6

)

(157

)

(1.2

)

(123

)

(0.8

)

Net income/(loss)

 

447

 

4.0

 

615

 

4.5

 

720

 

4.6

 

 

Year Ended December 31, 2016 compared to Year Ended December 31, 2015

 

Total revenues. Our total revenues increased from RMB13.5 billion in 2015 to RMB15.7 billion (US$2.3 billion) in 2016. The increase was primarily due to an increase in our output. Our total shipments increased from 3.9 GW in 2015 to 4.9 GW in 2016. Our total revenues from sales in China increased from RMB5.8 billion in 2015 to RMB8.1 billion (US$1.2 billion) in 2016, which was primarily due to strong industry demand in China for solar power products. Our total revenues from sales outside China slightly decreased from RMB7,705 million in 2015 to RMB7,656.0 million (US$1,102.7 million) in 2016, primarily due to decrease in the price of solar power products. Our revenues from sales in China, as a percentage of our total revenues, increased from 43.0% in 2015 to 51.4% in 2016, and our revenues from sales outside China, as a percentage of our total revenues, decreased from 57.0% in 2015 to 48.6% in 2016. This reflected our efforts to meet the strong demand in China in 2016.

 

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Cost of revenues. Our cost of revenues increased from RMB11.2 billion in 2015 to RMB13.4 billion (US$1.9 billion) in 2016. The increase in our cost of revenues was primarily due to increase in sales volume.

 

Gross profit. We recorded a gross profit of RMB2.3 billion (US$330.3 million) in 2016 as compared to a gross profit of RMB2.3 billion in 2015. Our gross profit as a percentage of our total revenues decreased from 17.0% in 2015 to 14.6% in 2016, primarily due to the decrease of average selling price of solar modules during 2016.

 

Total operating expenses. Our total operating expenses were RMB1.4 billion (US$200.3 million) in 2016 as compared to the total operation expenses of RMB1.4 billion in 2015.

 

·                  Selling, general and administrative expenses. Our selling, general and administrative expenses decreased from RMB1,245 million in 2015 to RMB1,058 million (US$152.4 million) in 2016, and as the percentage of our total revenues decreased from 9.2% in 2015 to 6.8% in 2016. The decrease in our selling, general and administrative expenses in absolute amounts was primarily due to a one-time reversal of RMB303.4 million (US$43.7 million) of previously recorded expenses due to the resolution of our dispute with Hemlock We accrued interest for late payment based on terms of the Original Supply Agreement. We recognized RMB 93.8 million and RMB 123.5 million of such interest expense in 2014 and 2015, respectively. As of December 31, 2015, the total accrued interest was RMB 303.4 million. In 2016, the total interest of RMB 303.4 million (US$43.7 million) was reversed with the settlement of our dispute with Hemlock. See note 26(b) to Notes to Consolidated Financial Statements.

 

·                  Loss from purchase commitments and contract termination costs. We incurred loss from purchase commitments and contract termination costs of RMB149 million (US$21.5 million) in 2016 as a percentage of our total revenues at 0.9%. We evaluate firm purchase commitments and record a loss, if any, on firm purchase commitments using the same lower of cost or market approach as that used to value inventory. Our RMB48.9 million (US$ 7.0 million) loss from purchase commitments is due to our commitments to purchase polysilicon prior to commencement of operation of our new facility. Our RMB 99.6 million (US$14.4 million) loss from contract termination costs was due to the termination of business relationship with one of our business partners.

 

·                  Research and development expenses. Our research and development expenses increased from RMB148.5 million in 2015 to RMB175.5 million (US$25.3 million) in 2016 and both as a percentage of our total revenues at 1.1% in 2015 and 2016. The increase in the absolute amount of our research and development expenses was due primarily to greater research and development activities undertaken by us.

 

·                  Impairment loss on project assets. In 2016, we incurred impairment loss of RMB8.1 million (US$1.2 million), as compared to impairment loss of RMB32.6 million in 2015, on project assets related to our decision to suspend the construction of certain projects.

 

Interest expenses. We incurred an interest expenses of RMB249.7 million and RMB284.3 million (US$40.9 million) in 2015 and 2016, respectively. The increase in our interest expense was primarily due to the increase of our borrowings. The weighted average borrowings for 2015 and 2016 are RMB 4.4 billion and RMB 6.0 billion, and the weighted average interest rates for 2015 and 2016 are 5.70% and 4.64%, respectively.

 

Interest income. Our interest income was RMB18.9 million (US$2.7 million) in 2016 and RMB25.6 million in 2015, respectively.

 

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Foreign exchange gain. We recorded a foreign exchange gain of RMB80.8 million (US$11.7 million) in 2016 as compared to a foreign exchange gain of RMB31.9 million in 2015, primarily due to appreciation of U.S. dollar against RMB.

 

Other income. Our other income increased from RMB48.5 million in 2015 to RMB65.8 million (US$9.5 million) in 2016 primarily due to the increase in government subsidies.

 

Income tax expense. Our income tax expense decreased from RMB157.3 million in 2015 to RMB123.3 million (US$17.8 million) in 2016, primarily due to the decrease of income tax rate from 20.4% in 2015 to 14.6% in 2016. Income tax rate decreased from 20.4% in 2015 to 14.6% in 2016 due to the 15% preferential income tax rate enjoyed by JA Hefei Technology and JA Wafer R&D which were recognized as ANTEs in 2016. JA Yangzhou was in a 3-year loss position by December 2015.  In 2016, with the reversal of Hemlock interest, JA Yangzhou was in a 3-year cumulative income position by December 2016 and going forward, we expect that JA Yangzhou would continue to be a profit-making entity, therefore, the valuation allowance was reversed in 2016 and resulted in a tax benefit.

 

Net Income. As a result of the above factors, we recorded a net income of RMB719.6 million (US$103.6 million) in 2016 as compared to a net income of RMB614.5 million in 2015.

 

Year Ended December 31, 2015 compared to Year Ended December 31, 2014

 

Total revenues. Our total revenues increased from RMB11.3 billion in 2014 to RMB13.5 billion in 2015. The increase was primarily due to an increase in our output. Our total shipments increased from 3.1 GW in 2014 to 3.9 GW in 2015. Our total revenues from sales in China increased from RMB3.7 billion in 2014 to RMB5.8 billion in 2015, which was primarily due to strong industry demand in China for solar power products. Our total revenues from sales outside China increased from RMB7.6 billion in 2014 to RMB7.7 billion in 2015, primarily due to strong demand across the Asia Pacific region. Our revenues from sales in China, as a percentage of our total revenues, increased from 33.1% in 2014 to 43.0% in 2015, and our revenues from sales outside China, as a percentage of our total revenues, decreased from 66.9% in 2014 to 57.0% in 2015. This reflected our efforts to meet the strong demand in China in 2015.

 

Cost of revenues. Our cost of revenues increased from RMB9.5 billion in 2014 to RMB11.2 billion in 2015. The increase in our cost of revenues was primarily due to increase in sales volume.

 

Gross profit. We recorded a gross profit of RMB2.3 billion in 2015 as compared to a gross profit of RMB1.8 billion in 2014, primarily due to increase in revenue and gross margin. Our gross profit as a percentage of our total revenues increased from 15.6% in 2014 to 17.0% in 2015, primarily due to the improvement of supply-demand situation in the solar power industry  and economies of scale.

 

Total operating expenses. Our total operating expenses increased from RMB1.1 billion in 2014 to RMB1.4 billion in 2015. The increase in our total operating expenses was in line with the increase in total revenues.

 

·                  Selling, general and administrative expenses. Our selling, general and administrative expenses increased from RMB954.3 million in 2014 to RMB1,245 million in 2015, and as the percentage of our total revenues increased from 8.4% in 2014 to 9.2% in 2015. The increase in our selling, general and administrative expenses in absolute amounts was primarily due to increase in shipping costs due to increase in sales volume in 2015 and increase in employee compensation expenses resulted from increase of headcount.

 

·                  Research and development expenses. Our research and development expenses increased from RMB139.7 million in 2014 to RMB148.5 million in 2015 and as a percentage of our total revenues slightly lowered from 1.2% in 2014 to 1.1% in 2015. The increase in the absolute amount of our research and development expenses was due primarily to greater research and development activities undertaken by us.

 

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·                  Impairment loss on project assets. In 2015, we incurred impairment loss of RMB32.6 million on project assets related to our decision to suspend the construction of certain projects.

 

Interest expenses. We incurred an interest expenses of RMB229.7 million and RMB249.4 million in 2014 and 2015, respectively. The slight increase in our interest expense was primarily due to increase of our borrowings.

 

Interest income. Our interest income was RMB25.6 million in 2015 and RMB28.2 million in 2014, respectively.

 

Foreign exchange (loss)/gain.  We recorded a foreign exchange gain of RMB31.9 million in 2015 as compared to a foreign exchange loss of RMB61.8 million in 2014, primarily due to appreciation of U.S. dollar against RMB.

 

Other income. Our other income increased from RMB33.1 million in 2014 to RMB48.5 million in 2015 primarily due to the increase in government subsidies.

 

Income tax expense. Our income tax expense increased from RMB73.4 million in 2014 to RMB157.3 million in 2015, primarily due to the increase of our taxable income and the increase of income tax rate from 14.1% in 2014 to 20.4% in 2015. Income tax rate increased from 14.1% in 2014 to 20.4% in 2015 because income tax expense in 2014 included income tax benefit of RMB267.0 million generated by reserved and utilized of the valuation allowance against deferred tax assets while income tax expense in 2015 included income tax benefit of RMB92.7 million.

 

Net Income. As a result of the above factors, we recorded a net income of RMB614.5 million in 2015 as compared to a net income of RMB446.7 million in 2014.

 

B.                          LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flows, Working Capital and Liquidity

 

We have financed our operations primarily through equity contributions by our shareholders through our initial and follow-on public offerings, the 2008 Senior Notes, issuance of warrants, short-term and long-term borrowings and cash flow from operations. As of December 31, 2016, we had RMB2.6 billion (US$370.1 million) in cash and cash equivalents and restricted cash. Our cash and cash equivalents consist primarily of cash on hand, demand deposits and money market funds. Restricted cash represents amounts temporarily held by banks as collateral for issuance of letters of credit, letters of guarantee, bank acceptance notes as well as certain bank borrowings, which are not available for our use.

 

As of December 31, 2016, we had RMB3.4 billion (US$495.2 million) in outstanding short-term borrowings and long-term borrowings (current portions). As of December 31, 2016, we had RMB2.7 billion (US$389.1 million) in outstanding long-term borrowings (excluding current portions). These loans were borrowed from various financial institutions and generally have terms of 2 to 182 months and expire at various times. Our outstanding borrowings as of December 31, 2016 bore an average interest rate of 4.64% per annum. These credit facilities were granted for long-term project development as well as working capital usages. These facilities contain no specific renewal terms, but we have historically been able to obtain extensions of some of the facilities shortly before they mature. We have restrictive covenants for RMB830 million (US$119.5 million) of our loans, which are subject to financial ratio covenants. As of  December 31, 2016, we are not in breach of any financial ratio covenants.

 

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Our long-term borrowing of RMB70.0 million (US$10.1 million) with Agricultural Bank of China was secured by certain of our buildings and land use right in Shanghai Jinglong. Our entrustment loan with Hefei High-Tech Industrial Development Zone Management Co., Ltd. in the total amount of RMB1,440.0 million (US$207.4 million) was secured by buildings, machinery and equipment, construction in progress and land use rights owned by JA Hefei Technology and all our equity interests in JA Hefei Technology. Our long-term borrowing of RMB546.0 million (US$78.6 million) with Industrial and Commercial Bank of China was secured by project assets of JA Dunhuang. Our long-term borrowing of RMB250.5 million (US$36.1 million) from Industrial and Commercial Bank of China was secured by our project assets. Our long-term borrowing of RMB13.5 million (US$1.9 million) from 77 Bank was secured by our project assets. Our short-term loan of RMB90.8 million (US$13.1 million) with China Construction Bank was secured by buildings and land use right in JA Lianyungang. Our short-term borrowing of RMB200.0 million (US$28.8 million) with the Industrial and Commerce Bank of China was secured by certain of our buildings in Shanghai JA Solar PV Technology Co., Ltd., Our short-term bank borrowing of RMB80.0 million (US$11.5 million) from Huaxia Bank was secured by Yangzhou JA Property Co., Ltd., Our short-term bank borrowing of RMB39.0 million (US$5.6 million) from China Construction Bank was secured by the building of JA Yangzhou. Our short-term bank borrowing of RMB34.7 million (US$5.0 million) from Industrial and Commercial Bank of China was secured by the building of Shanghai Jinglong. Our short-term bank borrowing of RMB50.0 million (US$7.2 million) from Shanghai Pudong Development Bank was secured by Donghai District Longhai Property Co., Ltd., Our short-term bank borrowing of RMB292.6 million (US$42.1 million) from Ping An Bank was secured by all of the equity interests in JA Yangzhou. Our short-term bank borrowing of RMB0.7 million (US$0.1 million) from 77 Bank was secured by our project assets. Our short-term bank borrowing of RMB10.0 million (US$1.4 million) from China Construction Bank was secured by the building of JA Yangzhou.

 

The unused lines of credit were RMB1,395.0 million (US$201.0 million) as of December 31, 2016. No terms and conditions of the unused credit line are available yet because utilization of such unused lines of credit requires approval by the banks and separate loan agreements setting forth detailed terms and conditions will only be entered into with the banks upon utilization.

 

Working capital and access to financing for purchase of silicon raw materials are critical to growing and sustaining our business. We have significant working capital commitments because suppliers of silicon wafers and polysilicon require us to make prepayments in advance of shipments. Our prepayments to suppliers decreased from RMB789.3 million as of December 31, 2014 to RMB668.7 million as of December 31, 2015 and to RMB379.8 million (US$54.7 million) as of December 31, 2016, as a combined result of utilization of prepayments previously made as well as additional allowance provided against prepayments. Our net inventory decreased from RMB1.9 billion as of December 31, 2014 to RMB1.7 billion as of December 31, 2015 as a result of rush-in orders towards the end of 2015 and increased to RMB2.5 billion (US$354.4 million) as of December 31, 2016 as a result of increase in market demands.

 

 

Our accounts receivable was RMB2.8 billion (US$396.6 million) as of December 31, 2016. For the year ended December 31, 2016, net provisions of RMB18.1 million (US$2.6 million) were reversed against accounts receivable for estimated losses, including reversals in the amount of RMB114.4 million (US$16.5 million) resulting from customers’ ability to make payment in light of the market revival.

 

We believe that current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next twelve months starting from the date of this annual report. We may, however, require additional cash to repay existing debt obligations or to re-finance our existing debts or due to changing business conditions or other future developments.

 

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

 

 

 

Year ended December 31,

 

 

 

2014

 

2015

 

2016

 

 

 

(in millions)

 

 

 

RMB

 

RMB

 

RMB

 

Net cash provided by operating activities

 

526

 

1,258

 

1,020

 

Net cash used in investing activities

 

(1,373

)

(1,103

)

(3,086

)

Net cash provided by financing activities

 

877

 

563

 

1,706

 

Effect of exchange rate changes on cash and cash equivalents

 

5

 

10

 

46

 

Net increase/(decrease) in cash and cash equivalents

 

35

 

728

 

(314

)

Cash and cash equivalents at the beginning of the year

 

2,120

 

2,155

 

2,883

 

Cash and cash equivalents at the end of the year

 

2,155

 

2,883

 

2,569

 

 

Operating Activities.

 

Net cash provided by operating activities consisted primarily of our net income, or net loss, offset or mitigated by non-cash adjustments, such as depreciation and amortization, impairment on property, plant and equipment, allowance for doubtful accounts, and adjusted by changes in operating assets and liabilities, such as accounts receivable, inventories, accounts payable and accrued expenses and other liabilities. The fluctuations of net cash provided by operating activities largely correspond to the changes in net income or net loss.

 

Net cash provided by operating activities for the year ended December 31, 2016 was RMB1,020 million (US$146.9 million), primarily attributable to a net income of RMB719.6 million (US$103.6 million), positively adjusted for certain items such as a depreciation and amortization of RMB912.7 million (US$131.5 million), a decrease in notes receivables of RMB274.6 million (US$39.5 million), a decrease in advance to third party suppliers of RMB247.9 million (US$35.7 million), and an increase in accounts payable of RMB232.5 million (US$33.5 million), partially offset by certain items such as an increase in inventories of RMB926.5 million (US$133.4 million), the RMB303.4 million (US$43.7 million) non-cash reversal of interest relating to the Hemlock dispute settlement and an increase in other assets of RMB196.5 million (US$28.3 million).

 

Net cash provided by operating activities for the year ended December 31, 2015 was RMB1,257.5 million, primarily attributable to a net income of RMB614.5 million, positively adjusted for certain items such as a depreciation and amortization of RMB797.7 million, a decrease in accounts receivables from related party customers of RMB213.8 million, a decrease in inventories of RMB218.8 million, a decrease in other current assets of RMB257.8 million and an increase in advance from customers of RMB447.9 million, partially offset by certain items such as an increase in notes receivables of RMB762.7 million, an increase in accounts receivables from third party customers of RMB659.6 million, and a decrease in accounts payable of RMB380.8 million.

 

Net cash provided by operating activities for the year ended December 31, 2014 was RMB526.2 million, primarily attributable to a net income of RMB446.7 million, positively adjusted for certain items such as a depreciation and amortization or RMB685.3 million, a decrease in notes receivables of RMB132.2 million, a decrease in advance to third party suppliers of RMB265.1 million, an increase in accounts payable of RMB887.7 million and an increase in other payables of RMB105.0 million, partially offset by certain items such as deferred income taxes of RMB116.2 million, an increase in accounts receivables from third party customers of RMB1.3 billion, and an increase in inventories of RMB536.1 million and a decrease in other current assets of RMB167.0 million.

 

Investing Activities.

 

Net cash used in investing activities in 2016 was RMB3.1 billion (US$444.5 million). This was primarily due to the purchase of property, plant and equipment of RMB1.8 billion (US$252.4 million) and investments in project assets of RMB1.1 billion (US$157.6 million).

 

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Net cash used in investing activities in 2015 was RMB1.1 billion. This was primarily due to the purchase of property, plant and equipment of RMB892.0 million and investments in project assets of RMB382.8 million, partially offset by the decrease in restricted cash of RMB169.6 million.

 

Net cash used in investing activities in 2014 was RMB1.4 billion. This was primarily due to the purchase of property, plant and equipment of RMB649.6 million, investments in project assets of RMB473.7 million and increase in restricted cash of RMB244.7 million, partially offset by government grant received of RMB45.3 million.

 

Financing Activities.

 

Net cash provided by financing activities for the year ended December 31, 2016 was RMB1.7 billion (US$245.8 million), primarily consisting of proceeds from short-term borrowings of RMB4.4 billion (US$630.0 million), proceeds from long-term borrowings of RMB919.4 million (US$132.4 million) and proceeds from capital lease of RMB481.3 million (US$69.3 million), partially offset by repayment of short-term borrowings of RMB3.7 billion (US$535.0 million), and repayment of long-term borrowings of RMB391.2 million (US$56.4 million).

 

Net cash provided by financing activities for the year ended December 31, 2015 was RMB563.5 million, primarily consisting of proceeds from short-term borrowings of RMB3.0 billion, proceeds from long-term borrowings of RMB797.0 million, partially offset by repayment of short-term borrowings of RMB3.1 billion, and repurchase of ADS of RMB139.8 million.

 

Net cash provided by financing activities for the year ended December 31, 2014 was RMB877.3 million, primarily consisting of proceeds from short-term borrowings of RMB2.9 billion, proceeds from long-term borrowings of RMB1.8 billion, partially offset by repayment of short-term borrowings of RMB1.8 billion, repayment of long-term borrowings of RMB2.4 billion and proceeds from issuance of ordinary shares upon exercise of warrants of RMB286.7 million.

 

Dividends from Subsidiaries.

 

Except for certain administrative, research and development and after-sales activities conducted through our wholly-owned subsidiaries in the U.S. and Germany, we conduct a significant portion of our operating activities inside China through our various PRC subsidiaries. As such, we currently do not rely heavily on dividends remitted to us by our PRC subsidiaries to sustain our worldwide operations; and restrictions under PRC law on the remittance of dividends outside the PRC have not had a material adverse effect on our liquidity or capital resources. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Our operating subsidiaries in China are subject to legal limitations in paying dividends to us, which may restrict our ability to satisfy our liquidity requirement.”

 

Capital Expenditures

 

We made capital expenditures of RMB1.1 billion, RMB1.3 billion and RMB2.8 billion (US$400.1 million) in the years ended December 31, 2014, 2015 and 2016, respectively. Our capital expenditures have historically been used primarily to purchase property and equipment, to invest in project assets and to construct and expand our solar product manufacturing lines.

 

We expect to incur capital expenditures of approximately RMB2.7 billion (US$385.9 million) in 2017, which will be used primarily for upgrading and expanding our manufacturing capacity. As of December 31, 2016, we have contracted for capital expenditure of RMB891.5 million (US$128.4 million).

 

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C.                          RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

 

We believe that we have an experienced and committed research and development team. Upon our formation, we acquired proprietary technical know-how related to the commercial production process of solar cells from Australia PV Science & Engineering Co., as part of its capital contribution to us within an implied value of RMB9.0 million.

 

Since our commencement of production in April 2006, we have significantly improved our solar cell fabricating process technologies, including improvements in the processing steps of texturing, diffusion, and drying and firing. These technological improvements have increased cell conversion efficiencies in the various types of silicon wafers that we produce and have improved the production yields of our manufacturing lines. In 2010, our research and development efforts resulted in the introduction of the SECIUM solar cells. In February 2011, we introduced the MAPLE technology, a significant breakthrough in multicrystalline silicon technology that has increased the conversion efficiency rate of multicrystalline solar cells. In 2012, we introduced the new Cypress series, which have higher conversion efficiency, to replace the SECIUM and the MAPLE technology. In addition, the Cypress series cells also feature excellent solderability and lower encapsulation power loss resulting from high-voltage, low-current electrical performance parameters, elaborated current rating, and positive tolerance for cell power compensation. In 2013, we introduced the second generation of the Cypress series, named Cypress2, which have an even higher conversion efficiency and more reliable performance compared with the Cypress series. In 2014 and after, we upgraded the Cypress Series from Cypress3 to Cypress 5 and implement PERC and RIE as our high end product.

 

We intend to continue to focus our research and development efforts on improving and developing processing technologies for production of solar modules and cells aimed at increasing conversion efficiency and other qualities as well as reducing production costs, including one or more of the following projects and topics:

 

·                  Quality Control Techniques.  We intend to develop enhanced techniques to be applied in the quality control of our products and manufacturing lines, including characterization of product performance, in-line diagnostics, and methods to control production yield, product durability and reliability.

 

·                  High-efficiency Cell Technology.  We intend to continuously improve the conversion efficiency of solar cells by utilizing cutting-edge technologies including PERC technology, half-cell technology, Bi-facial cell technology, N-type cell technology, etc.

 

Our research and development expenditures were RMB139.7 million, RMB148.5 million and RMB175.5 million (US$25.3 million) in 2014, 2015 and 2016, respectively.

 

For intellectual property, see “Item 4. Information on the Company—B. Business Overview—Intellectual Property.”

 

D.                          TREND INFORMATION

 

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events since January 1, 2016 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

 

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E.                          OFF-BALANCE SHEET ARRANGEMENTS

 

As of December 31, 2016 we did not have any material off-balance sheet arrangements, including guarantees, outstanding derivative financial instruments or interest rate swap transactions, that had or were reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

F.                           TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

 

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2016:

 

 

 

Payments due by period

 

 

 

Total

 

Less than
1 year

 

1-3
years

 

3-5
years

 

More than
5 years

 

 

 

(amounts in RMB thousands)

 

Loan obligations (including interest averaging 4.64%)

 

6,727,304

 

3,664,617

 

2,219,175

 

217,252

 

626,260

 

Operating lease obligations

 

149,628

 

62,246

 

84,872

 

510

 

 

Non-cancelable capital expenditures

 

891,509

 

891,509

 

 

 

 

Purchase commitments under agreements

 

2,892,350

 

1,199,583

 

1,692,767

 

 

 

Accrued warranty cost reflected on the company’s balance sheet

 

553,214

 

 

 

 

553,214

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

11,214,005

 

5,819,955

 

3,996,814

 

217,762

 

1,179,474

 

 

Loan obligations

 

Our loan obligations relate to borrowings borrowed from various financial in China with an average interest rate of 4.64% per annum. The borrowings have terms of 2-182 months and expire at various times throughout 2017 to 2030.

 

Operating lease obligations

 

Our operating lease obligations mainly relate to non-cancelable lease for certain land and assets used by our manufacturing facilities in Ningjin, Langfang, Hebei, Penang, Malaysia, Viet Yen, Vietnam and offices used by JA Beijing, JA Solar USA Inc., JA Solar Gmbh, JA Japan and JA Solar South Africa (PTY) Limited.

 

Non-cancelable purchase obligations

 

As of December 31, 2016, we had contracted for capital expenditures on machinery and equipment of RMB891.5 million (US$128.4 million).

 

Purchase commitments under agreements

 

In order to better manage our unit costs and to secure adequate and timely supply of polysilicon and silicon wafers during the recent periods of shortages of polysilicon and silicon wafer supplies, we entered into a number of long-term supply contracts from 2007 through 2020 in amounts that were expected to meet our anticipated production needs. As a condition to our receiving the raw materials under those agreements, and in line with industry practice, we were required to, and have made advances to suppliers for all, or a portion, of the total contract price to our suppliers, which are then offset against future purchases.

 

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Set out below are our fixed obligations under these long-term contracts including “take or pay” arrangements.

 

“Take or Pay” Supply Agreements

 

Our long-term supply agreements with some suppliers are structured as fixed price and quantity “take or pay” arrangements which allow the supplier to invoice us for the full stated purchase price of polysilicon or silicon wafers we are obligated to purchase each year, whether or not we actually purchases the contractual volume.

 

Other Long-Term Supply Agreements

 

In addition to the “take or pay” arrangements above, we have also entered into other long-term supply agreements to purchase fixed volumes of polysilicon or silicon wafers from certain suppliers. Under these agreements, the purchase price is to be periodically adjusted based on relevant energy price index. The purchase price is stated in certain of these agreements for periods less than six months with price adjustment terms.

 

Accrued warranty cost reflected on the company’s balance sheet

 

Accrued warranty cost reflected on our balance sheet relate to product warranty costs we accrued for module sales, which is expected to increase as we generate more module revenue.

 

G.                         SAFE HARBOR

 

This annual report on Form 20-F contains forward-looking statements. These statements are made under the “safe harbor” provisions of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can be identified by terminology such as “will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “may,” “intend,” “is currently reviewing,” “it is possible,” “subject to” and similar statements. Among other things, the sections titled “Item 3. Key Information—Risk Factors,” “Item 4. Information on the Company,” and “Item 5. Operating and Financial Review and Prospects” in this annual report on Form 20-F, as well as our strategic and operational plans, contain forward-looking statements. We may also make written or oral forward-looking statements in our reports filed with or furnished to the Securities and Exchange Commission, in our annual report to shareholders, in press releases and other written materials and in oral statements made by our officers, directors or employees to third parties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements and are subject to change, and such change may be material and may have a material adverse effect on our financial condition and results of operations for one or more prior periods. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained, either expressly or impliedly, in any of the forward-looking statements in this annual report on Form 20-F. Potential risks and uncertainties include, but are not limited to, a further slowdown in the growth of China’s economy, government measures that may adversely and materially affect our business, failure of the wealth management services industry in China to develop or mature as quickly as expected, diminution of the value of our brand or image due to our failure to satisfy customer needs and/or other reasons, our inability to successfully execute the strategy of expanding into new geographical markets in China, our failure to manage growth, and other risks outlined in our filings with the Securities and Exchange Commission. All information provided in this annual report on Form 20-F and in the exhibits is as of the date of this annual report on Form 20-F, and we do not undertake any obligation to update any such information, except as required under applicable law.

 

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ITEM 6.                                                DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.                          DIRECTORS AND SENIOR MANAGEMENT

 

Directors and Executive Officers

 

The following table sets forth our directors and executive officers, their ages as of the date of this annual report and the positions held by them. The business address for each of our directors and executive officers is Building No.8, Noble Center, Automobile Museum East Road, Fengtai, Beijing, the People’s Republic of China.

 

Name

 

Age

 

Position

Baofang Jin

 

65

 

Executive Chairman of the Board of Directors and Chief Executive Officer

Jian Xie

 

39

 

Director and President

Yuhong Fan

 

52

 

Director

Bingyan Ren

 

71

 

Director

Erying Jia

 

62

 

Director

Hope Ni

 

45

 

Independent Director

Jiqing Huang

 

80

 

Independent Director

Yuwen Zhao

 

78

 

Independent Director

Shaohua Jia

 

67

 

Independent Director

Hexu Zhao

 

60

 

Chief Financial Officer

Wei Shan

 

61

 

Chief Technology Officer

 

Baofang Jin, Executive Chairman of the Board of Directors and Chief Executive Officer.  Mr. Jin has been our chairman since May 2005 and our executive chairman since July 2009. Mr. Jin also served as our chief executive officer from August 2009 to January 2010 and since January 2013. Mr. Jin has been the chairman and chief executive officer of Hebei Jinglong since 2003. From April 1984 to January 1992, Mr. Jin was the general manager of Ningjin County Agricultural Equipment Company. Mr. Jin currently also serves as a vice-chairman of the Chinese People’s Political Consultative Conference of Ningjin County. Mr. Jin graduated from Hebei Broadcast and Television University with an associate’s degree in 1996.

 

Jian Xie, Director and President.  Mr. Xie has been our president since December 2013 and our director since August 2009. Since joining us in April 2006, Mr. Xie has served in such capacities as our director of corporate finance, director of investor relations, assistant to the chief executive officer, secretary of the board of directors and chief operating officer. Prior to joining us, Mr. Xie worked in the investment banking department of Ping’an Securities Co., Ltd., and as an associate in the investment department at Dogain Holdings Group Co., Ltd. Mr. Xie received his master’s degree in finance from Guanghua School of Management at Beijing University in 2004.

 

Yuhong Fan, Director.  Mr. Fan has been our director since March 2015. He has also served as our vice president from July 2011 to February 2017, the general manager of Solar Silicon Valley from January 2010 to December 2015, and the deputy general manager of Jinglong Group from July 2009 to February 2017. Mr. Fan started his career at Jinglong Group and has held various managerial positions at Jinglong Group and within JA Solar overseeing multiple facets of our manufacturing operations, including wafer production, processing and quality assurance. Mr. Fan graduated from Hebei Broadcast and Television University in June 1997.

 

Bingyan Ren, Director.  Mr. Ren has been our director since May 2005. He has also served as a director and vice chairman of Hebei Jinglong since 2003. Prior to becoming our director, he was a professor of semiconductor materials and PV materials at the Hebei University of Technology from 1972 to May 2003. Mr. Ren currently is a member of the semiconductor material academic committee of China and a member of semiconductor standardization technical committee of China. He also serves as a vice-director of semiconductor material research institute of Hebei University of Technology and a consultant to Hebei Ningjin Monocrystalline Silicon Industry Park. Mr. Ren graduated from North Jiaotong University in July 1970.

 

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Erying Jia, Director.  Mr. Jia has been our director since September 2007. He has also served as the chief operating officer and director of Hebei Jinglong since January 2006. Prior to that, he served at several administrative positions in Ningjin County, Hebei Province, China. Mr. Jia holds a bachelor’s degree in public administration from Hebei Provincial Party School.

 

Hope Ni, Independent Director.  Ms. Ni has been our independent director since August 2009. Ms. Ni has been an executive director at Cogobuy Group (Stock code: 00400.HK) since March 1, 2015 and its chief investment officer since June 2014. She currently also serves on the boards of KongZhong Corporation (NASDAQ: KONG), ATA, Inc. (NASDAQ: ATAI) and Digital China Holdings Ltd. (Stock code: 00861.HK). In 2008, Ms. Ni served as the vice chairman of COGO Group Inc. From 2004 to 2007, Ms. Ni was the chief financial officer and director of COGO Group Inc. Prior to that, Ms. Ni spent six years as a practicing attorney at Skadden, Arps, Slate, Meagher & Flom LLP in New York and Hong Kong. Earlier in her career, Ms. Ni worked at Merrill Lynch’s investment banking division in New York. Ms. Ni received her J.D. degree from University of Pennsylvania Law School and her B.S. degree in Applied Economics and Business Management from Cornell University.

 

Jiqing Huang, Independent Director.  Mr. Jiqing Huang has been our independent director since August 2009. Mr. Huang has extensive experience in the research and manufacturing of monocrystalline silicon and related products. He currently serves as a committee member at the Academic Committee of Semi-conductive Materials of the Nonferrous Metals Society of China. He also currently serves as an independent director of EGing Photovoltaic Technology. From 2001 to 2007, Mr. Huang served as the chief representative of the Beijing representative office of Space Energy Corporation, where he pioneered the introduction of the TDR-80 monocrystalline puller into China and subsequent modifications to improve its efficiency. Prior to his engagement at Space Energy Corporation, Mr. Huang was a director of manufacturing, chief engineer and deputy director of Beijing 605 Factory, as well as general manager of Beijing Mingcheng Optical & Electronic Material Co., Ltd. Mr. Huang graduated from Nanjing Institute of Technology (now Southeast University) in 1962.

 

Yuwen Zhao, Independent Director.  Mr. Yuwen Zhao has been our independent director since October 2009. Mr. Zhao has extensive experience in the study of high efficiency solar cell and solar energy materials. He is a renowned solar industry expert, currently serving as vice chairman of the Chinese Renewable Energy Industries Association and is a director of international solar energy industry associations such as PVSEC and WCPEC. Since 1978, Mr. Zhao has been the vice chairman, chief engineer, director of academic committee and chief scientist of Beijing Solar Energy Institute. He is also a member of the editorial board of Solar Energy Journal. Prior to his engagement at Beijing Solar Energy Institute, Mr. Zhao was a researcher in the Institute of Mechanics in the Chinese Academy of Sciences and 501 Institute of Ministry of Aerospace Industry. He is also the founder of Chinese National New Energy Engineering Research Center. Mr. Zhao graduated from Tianjin University in 1964 and studied in Germany in 1990 and 1991.

 

Shaohua Jia, Independent Director.  Dr. Jia has been our independent director since October 2012. Dr. Jia is an academic committee member of the China Taxation Association, as well as an executive member of the Beijing Taxation Association. He also serves as vice chairman of the China Financial and Tax Law Institute. Dr. Jia worked as chief editor of the China Tax Publishing House from 2006 to 2011. Prior to that, he was the deputy director of the State Taxation Administration of Hainan province and president of the Yangzhou Tax Institute of the State Administration of Taxation. Dr. Jia received his Ph. D. in Economics from Graduate School of Chinese Academy of Social Sciences in 2001.

 

Hexu Zhao, Chief Financial Officer.  Mr. Zhao has been our chief financial officer since December 2013. Mr. Zhao previously served as our chief financial officer from July 2006 to May 2008. Since then, he has served as the chief financial officer at Legend Silicon Corporation, a Silicon Valley-based fabless semiconductor company, and Sky Solar Holdings Co., Ltd., a downstream solar-project developer. Mr. Zhao received his MBA degree in accounting from Golden Gate University in 1990, and his B.S. degree in naval engineering from Dalian Maritime University in 1982.

 

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Wei Shan, Chief Technology Officer.  Dr. Shan has been our chief technology officer since March 2015. Dr. Shan led our R&D efforts since 2008. He has more than three decades of experience in both academic research and industrial development over a number of important semiconductor material systems that include silicon, germanium, II-VI and III-V compounds, wide-band-gap nitrides, dilute III-nitrides and related nanostructures such as quantum wells, wires, and dots, as well as optoelectronic and photovoltaic device applications based on these material systems. His professional experience includes research fellow at Center for Laser and Photonics Research of Oklahoma State University, staff scientist at Material Sciences Division of Lawrence Berkeley National Laboratory (LBNL), leading scientist with Intematix Corporation in charge of US DOE funded hydrogen energy program. Dr. Shan received his Ph.D. in physics from Chinese Academy of Science in 1989, M.S. degree in Semiconductor Device Physics from Shanghai Institute of Technical Physics in 1985 and B.S. degree from Nanjing University in 1982.

 

There is no family relationship between any of our directors and officers named above. There are no arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or officer.

 

Employment Agreements

 

We have entered into employment agreements with each of our executive officers. Under these agreements, we may terminate his or her employment for cause at any time, without notice or remuneration, for certain acts of the employee, including but not limited to a conviction or plea of guilty to a felony or to an act of fraud, misappropriation or embezzlement, negligence or dishonest act to the detriment of the company, or misconduct of the employee and failure to perform his or her agreed-to duties after a reasonable opportunity to cure the failure. Furthermore, we may terminate the employment without cause at any time, in which case we will pay the employee a certain amount of compensation. An executive officer may terminate the employment at any time upon one to three months written notice.

 

Each executive officer has agreed to hold, both during and subsequent to the term of the agreement, our confidential information in strict confidence and not to disclose such information to anyone except to our other employees who have a need to know such information in connection with our business or except as required in the performance of his or her duties in connection with the employment. An executive officer is prohibited from using our confidential information other than for our benefits. The executive officers have also agreed to assign to us all rights, titles and interests to or in any inventions that they may conceive or develop during the period of employment, including any copyrights, patents, mark work rights, trade secrets or other intellectual property rights pertaining to such inventions.

 

Term of Directors and Officers

 

The term of each director is three years pursuant to his or her director service agreement. Our directors may be removed from office by resolutions of the shareholders. Under the employment agreement generally entered into by us and our executive officers, the initial term of our executive officers is three to four years.

 

B.                          COMPENSATION

 

Compensation of Directors and Executive Officers

 

For the year ended December 31, 2016, we paid an aggregate compensation of RMB10 million (US$1.4 million) to our directors and executive officers. For the year ended December 31, 2016, we did not grant any options or restricted share units to our executive officers. Other than fees paid to our independent directors for board services rendered, we only paid compensation to those directors who also served as executive officers.

 

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Code of Ethics

 

We have adopted a code of ethics for chief executive and senior financial officers, which we filed with the SEC as an exhibit to our annual report on Form 20-F for the year ended December 31, 2006 and we have also posted a copy of our code of ethics on our company website at http://investors.jasolar.com. This home country practice of ours was established by us by reference to similarly situated foreign private issuers and differs from the NASDAQ Stock Market Rules that require listed companies to adopt one or more codes of conduct applicable to all directors, officers and employees and make those codes of conduct publicly available. There are, however, no specific requirements under Cayman Islands law requiring the adoption of codes of conduct.

 

Stock Option Plan

 

We adopted our 2006 Plan on August 18, 2006 and our 2014 Plan on June 30, 2014, which provide for the grant of incentive stock options, non-qualified stock options, restricted stock and restricted stock units, referred to as “awards.” The purpose of the 2006 Plan and the 2014 Plan is to provide additional incentive to those officers, employees, directors, consultants and other service providers whose contributions are essential to the growth and success of our business, in order to strengthen the commitment of such persons to us and motivate such persons to faithfully and diligently perform their responsibilities and attract and retain competent and dedicated persons whose efforts will result in our long-term growth and profitability.

 

The following paragraphs describe the principal terms of our 2006 Plan.

 

Award Pool.  Under our 2006 Plan, we may grant options to purchase up to 10% of our share capital.

 

Plan Administration.  Our 2006 Plan is administered by our board of directors or a committee or subcommittee appointed by our board of directors. In each case, our board of directors or the committee will determine the provisions and terms and conditions of each award grant, including, but not limited to, the exercise price for the options, vesting schedule, form of payment of exercise price and other applicable terms.

 

Award Agreement.  Awards granted under our 2006 Plan are evidenced by an award agreement that sets forth the terms and conditions for each award grant, which include, among other things, the vesting schedule, exercise price, type of option and expiration date of each award grant.

 

Eligibility.  We may grant awards to an officer, director, employee, consultant, advisor or other service providers of our company or any of our parent or subsidiary companies, provided that directors of our company or any of our parent or subsidiary companies who are not also employees of our company or any of our parent or subsidiary companies, or consultants or advisors to our company or any of our parent or subsidiary may not be granted incentive stock options.

 

Option Term.  The term of each option granted under the 2006 Incentive Stock Option may not exceed ten years from the date of grant. If an incentive stock option is granted to an eligible participant who owns more than 10% of the voting power of all classes of our share capital, the term of such option shall not exceed five years from the date of grant.

 

Exercise Price.  In the case of non-qualified stock option, the per share exercise price of shares purchasable under an option shall be determined by the plan administrator in its sole discretion at the time of grant. In the case of incentive stock option, the per share exercise price of shares purchasable under an option shall not be less than 100% of the fair market value per share at the time of grant. However, if we grant an incentive stock option to an employee, who at the time of that grant owns shares representing more than 10% of the voting power of all classes of our share capital, the exercise price cannot be less than 110% of the fair market value of our ordinary shares on the date of that grant.

 

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Amendment and Termination.  Our board of directors may at any time amend, alter or discontinue the plan, provided that no amendment, alteration, or discontinuation shall be made that would impair the rights of a participant under any award theretofore granted without such participant’s consent. Unless terminated earlier, our 2006 Plan shall continue in effect for a term of ten years from the effective date of the plan.

 

The following paragraphs describe the principal terms of our 2014 Plan.

 

Award Pool.  Under our 2014 Plan, we may grant options to purchase 10% of our total issued and outstanding shares as of the date when the board approves the 2014 Plan; provided that, the shares reserved in the award pool shall be increased automatically if and whenever the unissued shares reserved in the award pool accounts for less than 1% of the total then issued and outstanding shares, as a result of which increase the shares unissued and reserved in the award pool immediately after each such increase shall equal to 10% of the then issued and outstanding shares.

 

Plan Administration.  Our board and the compensation committee of the board will administer our 2014 plan. A committee of one or more members of the board designated by our board or the compensation committee is also authorized to grant or amend awards to participants other than senior executives. The committee will determine the provisions and terms and conditions of each award grant. It shall also have discretionary power to interpret the terms of our 2014 plan.

 

Award Agreement.  Awards granted under our 2014 plan are evidenced by an award agreement that sets forth terms, conditions and limitations for each award, which may include the term of an award, the provisions applicable in the event the participant’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind an award.

 

Eligibility. We may grant awards to our employees, consultants and directors. However, no shares may be optioned, granted or awarded if such action would cause an incentive share option to fail to qualify as an incentive share option under Section 422 of the Internal Revenue Code of 1986 of the U.S.

 

Acceleration of Awards upon Change in Control. The participant’s awards shall become fully exercisable and all forfeiture restrictions on such awards shall lapse, unless converted, assumed or replaced by a successor.

 

Exercise Price. The exercise price of an option shall be determined by the plan administrator and set forth in the award agreement and may be a fixed or variable price related to the fair market value of the shares, to the extent not prohibited by applicable laws. Subject to certain limits set forth in the 2014 plan, the exercise price may be amended or adjusted in the absolute discretion of the plan administrator, the determination of which shall be final, binding and conclusive. To the extent not prohibited by applicable laws or any exchange rule, a downward adjustment of the exercise prices of options shall be effective without the approval of the shareholders or the approval of the affected participants.

 

Vesting Schedule. In general, our plan administrator determines or the evidence of the award specifies, the vesting schedule.

 

Amendment and Termination of the Plan. With the approval of our board, our plan administrator may, at any time and from time to time, amend, modify or terminate the 2014 plan, provided, however, that no such amendment shall be made without the approval of the our shareholders to the extent such approval is required by applicable laws, or in the event that such amendment increases the number of shares available under our 2014 plan, permits our plan administrator to extend the term of our 2014 plan or the exercise period for an option beyond ten years from the date of grant or results in a material increase in benefits or a change in eligibility requirements, unless we decides to follow home country practice.

 

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During the year ended December 31, 2016, we did not grant any options or restricted share units to our employees under our 2006 Plan and 2014 Plan.

 

Our board has authorized a committee, currently consisting of Mr. Baofang Jin, our executive chairman and Mr. Jian Xie, our president and director, to approve option grants under our 2006 Plan and 2014 Plan.

 

As of March 31, 2017, we have granted options to purchase 23,299,000 ordinary shares and awarded 4,912,000 restricted share units under our 2006 Plan and 2014 Plan, options to purchase 4,651,500 ordinary shares and 691,110 restricted share units remained outstanding.

 

C.                          BOARD PRACTICES

 

Board of Directors and Board Committees

 

Our board of directors currently consists of nine members, including four independent directors who satisfy the “independence” requirements of the NASDAQ Stock Market Rules and meet the criteria for “independence” under Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. This home country practice of ours was established by our board of directors by reference to similarly situated foreign private issuers and differs from the NASDAQ Stock Market Rules that require the board to be comprised of a majority of independent directors. There are, however, no specific requirements under Cayman Islands law that the board must be comprised of a majority of independent directors.

 

We do not have regularly scheduled meetings at which only independent directors are present, or executive sessions. This home country practice of ours was established by our board of directors by reference to similarly situated foreign private issuers and differs from the NASDAQ Stock Market Rules that require a company to have regularly scheduled executive sessions at which only independent directors are present. There are, however, no specific requirements under Cayman Islands law on executive sessions.

 

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

 

Audit Committee.  Our audit committee consists of Ms. Hope Ni, Mr. Jiqing Huang, Mr. Yuwen Zhao and Dr. Shaohua Jia, and is chaired by Ms. Hope Ni. All of the members of the audit committee satisfy the “independence” requirements of the NASDAQ Stock Market Rules and meet the criteria for “independence” under Rule 10A-3 under the Exchange Act. The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:

 

·                  appointment, compensation, retention and oversight of the work of the independent registered public accounting firm;

 

·                  approving all auditing and non-auditing services permitted to be performed by the independent registered public accounting firm;

 

·                  meeting separately and periodically with management and the independent registered public accounting firm;

 

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·                  oversight of annual audit and quarterly reviews, including reviewing with independent registered public accounting firm the annual audit plans;

 

·                  oversight of financial reporting process and internal controls, including reviewing the adequacy and effectiveness of our internal controls policies and procedures on a regular basis;

 

·                  establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters; and

 

·                  reviewing and implementing related person transaction policies and procedures for the committee’s review and approval of proposed related person transactions, including all transactions required to be disclosed by Item 404(a) of Regulation S-K under the Securities Act.

 

Compensation Committee.  Our compensation committee consists of Ms. Hope Ni, Mr. Yuwen Zhao, Mr. Baofang Jin, Mr. Jiqing Huang and Dr. Shaohua Jia, and is chaired by Mr. Jiqing Huang. Except Mr. Baofang Jin, all other members of the compensation committee satisfy the “independence” requirements of the NASDAQ Stock Market Rules and meet the criteria for “independence” under Rule 10A-3 under the Exchange Act. This home country practice of ours was established by our board of directors and differs from the NASDAQ Stock Market Rules that require the compensation committees of listed companies to be comprised solely of independent directors. There are, however, no specific requirements under Cayman Islands law on the composition of compensation committees. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. The compensation committee is responsible for, among other things:

 

·                  reviewing at least annually our executive compensation plans;

 

·                  evaluating annually the performance of our chief executive officer and other executive officers;

 

·                  determining and recommending to the board the compensation package for our chief executive officer and other executive officers;

 

·                  evaluating annually the appropriate level of compensation for board and board committee service by non-employee directors;

 

·                  reviewing and approving any severance or termination arrangements to be made with any of our executive officers; and

 

·                  reviewing at least annually our general compensation plans and other employee benefits plans.

 

Nominating and Corporate Governance Committee.  Our nominating and corporate governance committee consists of Ms. Hope Ni, Mr. Jiqing Huang, Mr. Yuwen Zhao, Mr. Baofang Jin and Dr. Shaohua Jia, and is chaired by Mr. Baofang Jin. Except Mr. Baofang Jin, all other members of the nominating and corporate governance committee satisfy the “independence” requirements of the NASDAQ Stock Market Rules and meet the criteria for “independence” under Rule 10A-3 under the Exchange Act. This home country practice of ours was established by our Board of Directors and differs from the NASDAQ Stock Market Rules that require the nominating committees of listed companies to be comprised solely of independent directors. There are, however, no specific requirements under Cayman Islands law on the composition of nominating committees. The nominating and corporate governance committee assists our board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things:

 

·                  establishing procedures for evaluating the suitability of potential director nominees;

 

·                  recommending to the board nominees for election by the stockholders or appointment by the board;

 

·                  reviewing annually with the board the current composition of the board with regards to characteristics such as knowledge, skills, experience, expertise and diversity required for the board as a whole;

 

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·                  reviewing periodically the size of the board and recommending any appropriate changes;

 

·                  recommending to the board the size and composition of each standing committee of the board; and

 

·                  reviewing periodically and at least annually the corporate governance principles adopted by the board to assure that they are appropriate for us and comply with the requirements under the rules and regulations of the SEC and the Nasdaq Stock Market, Inc. where applicable.

 

Duties of Directors

 

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

 

The functions and powers of our board of directors include, among others:

 

·                  convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;

 

·                  declaring dividends and distributions;

 

·                  appointing officers and determining the term of office of officers;

 

·                  exercising the borrowing powers of our company and mortgaging the property of our company; and

 

·                  approving the transfer of shares of our company, including the registering of such shares in our share register.

 

Term of Office and Benefits

 

Our directors serve a term of three years and do not receive any special benefits upon termination.

 

Interested Transactions

 

A director may vote in respect of any contract or transaction in which he or she is interested, provided that the nature of the interest of any directors in such contract or transaction is disclosed by him or her at or prior to its consideration and any vote in that matter.

 

D.                          EMPLOYEES

 

As of December 31, 2014, 2015 and 2016, we had a total of 12,300, 12,550 and 14,056 employees, respectively. The following table sets forth the number of our employees categorized by our areas of operations and as a percentage of our workforce as of December 31, 2016:

 

 

 

Number of
employees

 

Percentage
of total

 

Manufacturing and engineering

 

11,028

 

78.5

%

Quality assurance

 

1,039

 

7.4

%

General and administration

 

1,262

 

9.0

%

Purchasing and logistics

 

166

 

1.2

%

Research and development

 

147

 

1.0

%

Marketing and sales

 

261

 

1.9

%

Others

 

153

 

1.0

%

Total

 

14,056

 

100.00

%

 

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Of our total employees as of December 31, 2016, 3,307 were located in Ningjin, Hebei Province, 3,279 were located in Yangzhou, Jiangsu Province, 1,057 were located in Shanghai, 1,160 were located in Lianyungang, Jiangsu Province, 1,569 were located in Hefei, Anhui Province and 1,019 were located in Xingtai, Hebei Province, 1,243 were located in Malaysia and 1,422 were located in other cities in China and abroad.

 

From time to time, we also employ part-time employees and independent contractors to support our research and development, manufacturing and sales and marketing activities.

 

Our success depends to a significant extent upon our ability to attract, retain and motivate qualified personnel. As of December 31, 2016, 1,991 of our employees held bachelor’s or higher degrees. A number of our employees have overseas education and industry experience.

 

We are required by applicable PRC regulations to contribute amounts equal to 20-22%, 7-12%, 1-2%, 0.5-2% and 0.6-1%, of our employees’ aggregate salary to a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a personal injury insurance plan and a maternity insurance plan, respectively, for our employees.

 

Our employees are not covered by any collective bargaining agreement. We believe that we have a good relationship with our employees.

 

E.                          SHARE OWNERSHIP

 

The following table sets forth information with respect to the beneficial ownership of our ordinary shares, as of March 31, 2017, by:

 

·                  each of our directors and executive officers; and

 

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

 

The calculations in the table below assume there are 237,853,602 ordinary shares outstanding as of March 31, 2017.

 

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Shares Beneficially 

 

Owned

 

 

 

Number(1)

 

%(2)

 

Directors and Executive Officers:

 

 

 

 

 

Baofang Jin(3)

 

39,752,976

 

16.71

 

Jian Xie

 

*

 

*

 

Yuhong Fan

 

*

 

*

 

Bingyan Ren

 

*

 

*

 

Erying Jia

 

*

 

*

 

Hope Ni

 

*

 

*

 

Jiqing Huang

 

*

 

*

 

Yuwen Zhao

 

*

 

*

 

Shaohua Jia

 

*

 

*

 

Hexu Zhao

 

*

 

*

 

Wei Shan

 

*

 

*

 

All Directors and Officers as a Group

 

41,091,126

 

17.28

 

 

 

 

 

 

 

Principal Shareholders:

 

 

 

 

 

Jinglong Group Co., Ltd.(4)

 

38,897,366

 

16.35

 

 


*                 Upon exercise of all options and vesting of all restricted shares granted, would beneficially own less than 1.0% of the company’s outstanding ordinary shares.

 

(1)         Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, and includes voting or investment power with respect to the securities.

 

(2)         In computing the percentage ownership of a person, we have included shares that the person has the right to acquire within 60 days after March 31, 2017, including through the exercise of any option, restricted shares, warrant or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person.

 

(3)         Consists of (i) 253,293 ADSs, representing 1,266,465 ordinary shares, and 37,630,901 ordinary shares held by Jinglong Group Co., Ltd., of which Mr. Baofang Jin is a director and has a 32.96% economic interest, and (ii) 855,610 ordinary shares issuable upon exercise of options and restricted share units held by Mr. Baofang Jin that are exercisable within 60 days of March 31, 2017. Mr. Jin disclaims beneficial ownership of the shares held by Jinglong BVI except to the extent of his pecuniary interest therein.

 

(4)         Consists of 253,293 ADSs, representing 1,266,465 ordinary shares, and 37,630,901 ordinary shares held by Jinglong Group Co., Ltd., a British Virgin Island Company, which is owned by Mr. Baofang Jin (our executive chairman and chief executive officer, 32.96%), Mr. Huixian Wang (9.58%), Mr. Binguo Liu (9.58%), Mr. Jicun Yan (7.18%), Mr. Rongrui Liu (7.18%), Mr. Huiqiang Liu (7.18%), Mr. Ruiying Cao (7.18%), Mr. Guichun Xing (4.79%), Mr. Ning Wen (4.79%), Mr. Bingyan Ren (our director, 4.79%) and Mr. Ruchang Wen (4.79%).

 

As of March 31, 2017, none of our existing shareholders has different voting rights from other shareholders.

 

To our knowledge, as of March 31, 2017, a total of 201,431,010 ordinary shares are held by one record holder in the U.S., which is the Bank of New York Mellon, the depositary of our ADS program. The number of beneficial owners of our ADSs in the U.S. is likely to be much larger than the number of record holders of our ordinary shares in the U.S.

 

ITEM 7.                                                MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A.                          MAJOR SHAREHOLDERS

 

Please refer to “Item 6. Directors, Senior Management and Employees—Share Ownership.”

 

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B.                          RELATED PARTY TRANSACTIONS

 

Significant Transactions with Hebei Jinglong

 

Hebei Jinglong is 100% owned by four of the eleven shareholders of our largest shareholder, Jinglong BVI, and thus, is a related party of our company. Mr. Baofang Jin, our executive chairman, owns 32.96% equity interests in Jinglong BVI and 78.45% in Hebei Jinglong, and Mr. Bingyan Ren, our director, owns 4.79% equity interests in each of Hebei Jinglong and Jinglong BVI. We purchase silicon wafers from Jinglong Group, including Hebei Jinglong.

 

Wafer supply

 

We historically made prepayments to Jinglong Group under the silicon wafer supply contracts we entered into with Hebei Jinglong. Due to the reorganization of Jinglong Group, Hebei Jinglong disposed its wafer production business in the middle of 2014 so we did not purchase any silicon wafer from Hebei Jinglong in 2015 and 2016. Unused prepayment was RMB25.0 million (US$3.6 million) as of December 31, 2016 and will be deducted by the rental fee according to the supplemental agreements signed every quarter to offset this prepayment with rental fee under the operating lease agreements.

 

Guarantee

 

As of December 31, 2016, we received guarantees from Hebei Jinglong for short-term bank borrowing and long-term bank borrowing with a principal of RMB561.1 million (US$80.8 million).

 

Leasing

 

We lease properties from Hebei Jinglong and another related party under operating lease agreements. We incurred rental expenses to Hebei Jinglong in the amount of RMB39.9 million (US$5.7 million) for the year ended December 31, 2016.

 

Transactions with other Related Parties

 

We sold solar power products to several related companies in the amount of RMB183.4 million (US$26.4 million) for the year ended December 31, 2016.

 

We outsourced processing service to several related companies. The processing service fee amounted to RMB111.0 million (US$16.0 million) for the year ended December 31, 2016.

 

We purchased RMB2,358 million (US$339.7 million) of silicon wafers and other raw material, from several related companies for the year ended December 31, 2016.

 

As of December 31, 2016, we received guarantees from Yangzhou JA Property Co., Ltd. for a short-term borrowing with a principal amount of RMB80.0 million (US$11.5 million) and from Donghai District Longhai Property Co., Ltd. for a short-term borrowing with a principal amount of RMB50.0 million (US$7.2 million).

 

As of December 31, 2016, we provided guarantees to Hebei Ningjin Songgong Electronics Co., Ltd. for a short-term borrowing with a principal amount of RMB260.0 million (US$37.4 million) and to Ningjin Saimei Ganglong Electronics Co., Ltd. for a short-term borrowing with a principal amount of RMB50.0 million (US$7.2 million).

 

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In June 2013, we provided an entrustment loan to Yangzhou JA Property Co., Ltd. with a principal of RMB 40.0 million, with an annual interest rate of 6.6% and was due for repayment in one year.  In 2014, the repayment date for the entrustment loan was extended to June 8, 2015. In 2015, the repayment date for this loan is extended to June 10, 2016 with interest rate of 7%. And in 2016, the repayment date for this loan was extended to June 10, 2017 with interest rate of 7%. In August 2016, we provided an entrustment loan to Donghai District Longhai Property Co., Ltd. with a principal of RMB 15.0 million (US$2.2 million), with an annual interest rate of 5.36%. In October 2016, we provided an entrustment loan to Hebei Ningjin Songgong Electronics Co., Ltd. with a principal of RMB 15.0 million (US$2.2 million), with an annual interest rate of 5.36%.

 

We purchased equipment from subsidiaries of Hebei Jinglong in the amount of RMB2.6 million (US$0.4 million) and sold equipment to subsidiaries of Hebei Jinglong in the amount of RMB3.7 million (US$0.5 million) for the year ended December 31, 2016.

 

We consider that these transactions were at market with prices comparable to other similar transactions with unrelated third parties. All related party transactions were approved by our audit committee in accordance with our policy and procedures with respect to related person transactions if so required thereunder.

 

C.                          INTERESTS OF EXPERTS AND COUNSEL

 

Not applicable.

 

ITEM 8.                                                FINANCIAL INFORMATION

 

A.                          CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

 

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

 

Legal Proceedings

 

We have, from time to time, been involved in certain legal proceedings arising out of the ordinary course of our business, such as employment disputes and disputes with our suppliers.

 

On April 18, 2016, we were served with court papers for a lawsuit initially brought by Hemlock against JA Yangzhou in the Supreme Court of the State of New York (Index No. 650182/2015) on January 20, 2015, which was later amended on June 22, 2015. Hemlock claimed that JA Yangzhou breached its obligations under the Original Supply Agreement entered into between Hemlock and JA Yangzhou, and alleged damages in an amount of no less than US$921 million. On October 31, 2016, we agreed to settle the lawsuit with Hemlock. As part of the settlement, JA BVI, JA Yangzhou and Hemlock Operations, entered into the New Supply Agreement under which we agreed to purchase a certain amount of solar grade polycrystalline silicon products from Hemlock Operations on a quarterly basis until October 31, 2026. Meanwhile, Hemlock agreed not to commence any civil action against us in relation to the Original Supply Agreement unless we breach the New Supply Agreement. After detailed assessment, we expect to fulfill the obligation under the New Supply Agreement and did not record any contingency liabilities as of December 31, 2016. Meanwhile, Hemlock agreed not to commence any civil action against us in relation to the Original Supply Agreement unless we breach the New Supply Agreement. After detailed assessment, we expect to fulfill the obligation under the New Supply Agreement and did not record any contingency liabilities as of December 31, 2016.

 

We are currently not involved in any legal or administrative proceedings that may have a material adverse impact on our business, financial position or profitability.

 

Dividend Distribution Policy

 

We have never declared or paid any dividends on our ordinary shares. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and to strengthen our business.

 

Our board of directors has complete discretion on whether to pay dividends, subject to the approval of our shareholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial conditions, contractual restrictions and other factors that the board may deem relevant. Cash dividends on our ADSs, if any, will be paid in U.S. dollars.

 

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As we are a holding company incorporated in the Cayman Islands, we primarily rely on dividends paid to us by our subsidiaries in China for our cash requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, service any debt we may incur and pay our operating expenses. PRC regulations currently permit payment of dividends only out of accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Pursuant to laws applicable to entities incorporated in the PRC, our PRC subsidiaries are required to make appropriations from after-tax profit to non-distributable reserve funds. These reserve funds include the following: (i) a general reserve, (ii) an enterprise expansion fund, and (iii) a staff bonus and welfare fund. Our PRC subsidiaries are required to transfer at least 10% of their profit after taxation (as determined under accounting principles generally accepted in the PRC at each year-end) to the general reserve fund until the reserve balance reaches 50% of their respective registered capital. The appropriations to other funds are at the discretion of our PRC subsidiaries. These reserve funds can only be used for specific purposes of enterprises expansion, staff bonus, and welfare and not distributable as cash dividends. The general reserves made by our PRC subsidiaries in 2014, 2015 and 2016 were RMB26.7 million, RMB116.3 million and RMB112.6 million (US$16.2 million), respectively.

 

B.                          SIGNIFICANT CHANGES

 

None.

 

ITEM 9.                                                THE OFFER AND LISTING

 

A.                          OFFER AND LISTING DETAILS

 

Our ADSs, each representing five of our ordinary shares, are quoted on the NASDAQ Global Select Market. Our ADSs trade under the symbol “JASO.” From the initial listing of our ADSs on the NASDAQ Global Select Market on February 7, 2007 to February 7, 2008, the trading prices of our ADSs ranged from US$16.17 to US$76.50 per ADS. From the day after the date of our 3-for-1 ADS split on February 7, 2008 to December 7, 2012, each of our ADSs represented one ordinary share and the trading price of our ADSs on the NASDAQ Global Select Market ranged from US$0.58 to US$27 per ADS. From the day after the date of our 1-for-5 reverse ADS split on December 10, 2012 through April 25, 2017, the trading price of our ADSs has ranged from US$3.21 to US$13.14 per ADS.

 

The following table provides the high and low trading prices for our ADSs on the NASDAQ Global Select Market for the periods indicated.

 

 

 

Trading Price (US$)

 

 

 

High

 

Low

 

Annual Highs and Lows

 

 

 

 

 

2012 (through December 7, 2012)

 

2.34

 

0.58

 

2012 (from December 10, 2012 to December 31, 2012)

 

4.38

 

3.21

 

2013

 

12.80

 

3.37

 

2014

 

13.14

 

6.70

 

2015

 

10.80

 

6.30

 

2016

 

9.78

 

4.69

 

Quarterly Highs and Lows

 

 

 

 

 

2015

 

 

 

 

 

First Quarter of 2015

 

10.15

 

7.43

 

Second Quarter of 2015

 

10.80

 

8.01

 

Third Quarter of 2015

 

8.84

 

6.30

 

 

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Trading Price (US$)

 

 

 

High

 

Low

 

Fourth Quarter of 2015

 

10.09

 

7.75

 

2016

 

 

 

 

 

First Quarter of 2016

 

9.78

 

7.88

 

Second Quarter of 2016

 

9.10

 

6.16

 

Third Quarter of 2016

 

8.15

 

5.66

 

Fourth Quarter of 2016

 

7.15

 

4.69

 

Monthly Highs and Lows

 

 

 

 

 

2016

 

 

 

 

 

October 2016

 

7.15

 

5.78

 

November 2016

 

5.99

 

5.19

 

December 2016

 

5.68

 

4.69

 

2017

 

 

 

 

 

January 2017

 

5.09

 

4.42

 

February 2017

 

5.60

 

4.56

 

March 2017

 

6.68

 

4.70

 

April 2017 (through April 25, 2017)

 

7.04

 

6.21

 

 

B.                          PLAN OF DISTRIBUTION

 

Not applicable.

 

C.                          MARKETS

 

Our ADSs, each representing five of our ordinary shares, par value US$0.0001 per share, have been listed on the NASDAQ Global Select Market under the symbol “JASO,” and commenced trading on February 8, 2007. Prior to that time, there was no public market for our ADSs or ordinary shares.

 

D.                          SELLING SHAREHOLDERS

 

Not applicable.

 

E.                          DILUTION

 

Not applicable.

 

F.                           EXPENSES OF THE ISSUE

 

Not applicable.

 

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ITEM 10.                                         ADDITIONAL INFORMATION

 

A.                          SHARE CAPITAL

 

Not applicable.

 

B.                          MEMORANDUM AND ARTICLES OF ASSOCIATION

 

We are a Cayman Islands company and our corporate affairs are governed by our memorandum and articles of association and by the Companies Law (as amended) and common law of the Cayman Islands.

 

Our authorized share capital is US$50,000 divided into 500,000,000 ordinary shares of a nominal or par value of US$0.0001 each. There were 237,853,602 ordinary shares issued and outstanding as of December 31, 2016, not including 1,238,310 ordinary shares issued to and held by the depositary for the purpose of future option exercise.

 

The following are summaries of material provisions of our third amended and restated memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our common shares.

 

Registered Office and Objects

 

The Registered Office of the Company is at the offices of Conyers Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, PO Box 2681 GT, George Town, Grand Cayman, British West Indies. The objects for which the Company is established are unrestricted.

 

Board of Directors

 

See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Board of Directors and Board Committees.”

 

Ordinary Shares

 

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

 

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

 

Voting Rights. Subject to any rights or restrictions attached to any shares, at any general meeting on a show of hands every shareholder who is present in person (or, in the case of a shareholder being a corporation, by its duly authorized representative) or by proxy shall have one vote and on a poll every shareholder present in person (or, in the case of a shareholder being a corporation, by its duly appointed representative) or by proxy shall have one vote for each share which such shareholder is the holder. Voting at any meeting of the shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chairman or at least three shareholders present in person or by proxy or a member present in person or by proxy holding at least 10.0% of the total voting rights or of the total sum paid up on all the shares giving a right to attend and vote at the meeting.

 

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Any ordinary resolution to be passed by our shareholders requires the affirmative vote of a simple majority of the votes cast at a meeting of our shareholders, while a special resolution requires the affirmative vote of not less than two-thirds of the votes cast at a meeting of our shareholders. Holders of our ordinary shares may by ordinary resolution, among other things, elect directors, and make alterations of capital. A special resolution is required for matters such as a change of name.

 

No shareholder shall be entitled to vote or be reckoned in a quorum, in respect of any share, unless such shareholder is registered as our shareholder as of the applicable record date for that meeting.

 

If a recognized clearing house (or its nominee(s)) is our shareholder, it may authorize such person or persons as it thinks fit to act as its representative(s) at any meeting or at any meeting of any class of shareholders provided that, if more than one person is so authorized, the authorization shall specify the number and class of shares in respect of which each such person is so authorized. A person authorized pursuant to this provision is entitled to exercise the same powers on behalf of the recognized clearing house (or its nominee(s)) as if such person was the registered holder of our shares held by that clearing house (or its nominee(s)) including the right to vote individually on a show of hands.

 

While there is nothing under the laws of the Cayman Islands which specifically prohibits or restricts the creation of cumulative voting rights for the election of our directors, unlike the requirement under Delaware General Corporation Law where cumulative voting for the election of directors is permitted only if expressly authorized in the certificate of incorporation, it is not a concept that is accepted as a common practice in the Cayman Islands, and we have made no provisions in our memorandum and articles of association to allow cumulative voting for such elections.

 

Transfer of Shares. Subject to any applicable restrictions set forth in our articles of association, any of our shareholders may transfer all or any of his or her shares by an instrument of transfer in the usual or common form or in any other form which our directors may approve.

 

Our board of directors may, in its absolute discretion, decline to register any transfer of any share (not being a fully paid up share) without assigning any reasons thereof.

 

If our directors refuse to register a transfer they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.

 

The registration of transfers may be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year.

 

Liquidation. Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any class or classes of shares, if we shall be wound up the liquidator may, with the sanction of a special resolution and any other sanction required by the Companies Law, divide among our shareholders in kind the whole or any part of our assets (whether they shall consist of property of the same kind or not) and may, for that purpose, value any assets as the liquidator deems fair upon any asset and determine how the division shall be carried out as between our shareholders or different classes of shareholders. The liquidator may, with the like sanction, vest any part of such assets in trustees upon such trusts for the benefit of our shareholders as the liquidator, with the like sanction, shall think fit, but so that no contributory shall be compelled to accept any shares or other property upon which there is a liability. If we shall be wound up, and the assets available for distribution among our shareholders as such shall be insufficient to repay the whole of the paid-up capital, such assets shall be distributed so that, as nearly as may be, the losses shall be borne by our shareholders in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively. And if winding up the assets available for distribution among our shareholders shall be more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed amongst our shareholders in proportion to the capital paid up at the commencement of the winding up on the shares held by them respectively.

 

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

 

Redemption of Shares. We are empowered by the Companies Law and our articles of association to purchase our own shares, subject to certain restrictions. Our directors may only exercise this power on our behalf, subject to the Companies Law, our memorandum and articles of association and to any applicable requirements imposed from time to time by the SEC, the NASDAQ Global Select Market, or by any recognized stock exchange on which our securities are listed.

 

Variations of Rights of Shares. Subject to the Companies Law, all or any of the special rights attached to any class, unless otherwise provided for by the terms of issue of the shares of that class, may be varied, modified or abrogated with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. The provisions of our articles of association relating to general meetings shall apply mutatis mutandis to every such separate general meeting, but so that the quorum for the purposes of any such separate general meeting shall be a person or persons together holding, or represented by proxy, on the date of the relevant meeting not less than one-third in nominal value of the issued shares of that class, every holder of shares of the class shall be entitled on a poll to one vote for every such share held by such holder and that any holder of shares of that class present in person or by proxy may demand a poll.

 

The special rights conferred upon the holders of any class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of such shares, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.

 

Inspection of Books and Records. Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will permit our shareholders to inspect our register of members in accordance with the articles of association and we will provide our shareholders with annual audited financial statements. For additional information, please visit our corporate website www.jasolar.com.

 

C.                          MATERIAL CONTRACTS

 

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

 

D.                          EXCHANGE CONTROLS

 

See “Item 4. Information on the Company—B. Business Overview—Regulation—Foreign Currency Exchange.”

 

E.                          TAXATION

 

Cayman Islands Taxation

 

At the present time, there is no Cayman Islands income tax, corporation tax, capital gains tax or other taxes payable by the Company or its shareholders. The Company is an exempted company under Cayman Islands law and as such has received an undertaking as to tax concessions pursuant to Section 6 of the Tax Concessions Law (1999 Revision). This undertaking provides that, for a period of 20 years from the date of issue of the undertaking (being 18 July 2006), no law thereafter enacted in the Cayman Islands imposing any taxes to be levied on profits, income, gains or appreciation will apply to the Company or its operations. No capital or stamp duties are levied in the Cayman Islands on the issue, transfer or redemption of shares. An annual registration fee will be payable by the Company to the Cayman Islands government which will be calculated by reference to the nominal amount of its authorised capital.

 

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People’s Republic of China Taxation

 

The CIT Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate as to their worldwide income. Circular 82, as amended, clarified that dividends and other income paid by certain offshore enterprises controlled by a PRC company or a PRC company group established outside of the PRC will be considered PRC-source income and subject to PRC withholding tax, currently at a rate of 10% (or a lower rate under an applicable tax treaty, if any), when paid to non-PRC enterprise shareholders. Under the implementation regulations to the CIT Law, “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, the circular mentioned above specifies that certain offshore enterprises controlled by a PRC company or a PRC company group will be classified as PRC resident enterprises if the following are located or resident in the PRC: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision-making bodies; key properties, accounting books, the company seal, and minutes of board meetings and shareholders meetings; and half or more of the senior management or directors having voting rights. Although the circular only applies to offshore enterprises controlled by PRC enterprises and not those controlled by PRC individuals, the determining criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management bodies” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals.

 

If the PRC tax authorities determine we are a PRC resident enterprise for EIT purposes, we may be required to withhold tax at the rate of 10% (or a lower rate under an applicable tax treaty, if any) from dividends we pay to our non-PRC resident enterprise shareholders (20% for non-PRC individual shareholders), including the holders of our ADSs. In addition, non-PRC holders of shares and ADSs may be subject to PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares at the same rates if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC holders of shares and ADSs would be able to claim the benefits of any tax treaties between their jurisdictions of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. See “Item.3 Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may be deemed a PRC resident enterprise under the CIT Law and be subject to the PRC taxation on our worldwide income.”

 

U.S. Federal Income Tax Considerations

 

The following discussion is a summary of U.S. federal income tax considerations generally applicable to the ownership and disposition of our ADSs or ordinary shares by U.S. Holders (as defined below) that will acquire our ADSs or ordinary shares and will hold our ADSs or ordinary shares as “capital assets” (generally, property held for investment) under the U.S. Internal Revenue Code of 1986, as amended (the “Code”). This summary is based upon existing U.S. federal income tax law as in effect on the date of this annual report, which is subject to differing interpretations or change, possibly with retroactive effect. Furthermore, there can be no assurance that the Internal Revenue Service (the “IRS”) or a court will not take a contrary position with respect to any U.S. federal income tax consequences described below.

 

This summary does not discuss all aspects of U.S. federal income taxation that may be important to particular investors in light of their individual investment circumstances, including investors subject to special tax rules (for example, certain financial institutions, insurance companies, regulated investment companies, real estate investment trusts, traders in securities that elect mark-to-market treatment, tax-exempt organizations (including private foundations), investors who are not U.S. Holders, investors who own (directly, indirectly, or constructively) 10% or more of our voting stock, investors that hold their ADSs or ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated transaction for U.S. federal income tax purposes, investors that have a functional currency other than the U.S. dollar, or certain former or long-term residents of the U.S.), all of whom may be subject to tax rules that differ significantly from those summarized below.

 

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In addition, this summary does not discuss any state, local, or any U.S. federal estate, gift, alternative minimum tax or Medicare contribution tax considerations and, except for the limited instances where PRC tax law and potential PRC taxes are discussed below, does not discuss any non-U.S. tax considerations. Each potential investor is urged to consult its tax advisor regarding the U.S. federal, state, local, and non-U.S. income and other tax considerations of an investment in our ADSs or ordinary shares.

 

General

 

For purposes of this summary, a “U.S. Holder” is a beneficial owner of our ADSs or ordinary shares that is, for U.S. federal income tax purposes, (i) an individual who is a citizen or resident of the U.S., (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created in, or organized under the law of, the U.S. or any state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise elected to be treated as a U.S. person under the Code.

 

If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of our ADSs or ordinary shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships and partners of a partnership holding our ADSs or ordinary shares are urged to consult their tax advisors regarding an investment in our ADSs or ordinary shares.

 

The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement have been and will be complied with in accordance with the terms. For U.S. federal income tax purposes, a U.S. Holder of ADSs will be treated as a beneficial owner of the underlying shares represented by the ADSs. Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to U.S. federal income tax.

 

Passive Foreign Investment Company Considerations

 

Although it is likely that we were a PFIC in the past, based on the market price of ADSs and ordinary shares, the value of our assets, and the composition of our assets and income, we believe that we were not a PFIC for our taxable year ended on December 31, 2016, and we do not expect to be a PFIC for our current taxable year ending December 31, 2017 or in the foreseeable future. However, we can give no assurances in this regard as the PFIC determination is inherently factual and, in addition, depends upon certain questions of law for which there is inadequate or uncertain authority. Accordingly, we cannot assure you that we will not be a PFIC for our current or any future taxable year.

 

A non-U.S. corporation, such as our company, will be a PFIC for U.S. federal income tax purposes for any taxable year, if either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the value of its assets (determined on the basis of a quarterly average) during such year produce or are held for the production of passive income (“passive assets”). Passive income generally includes dividends, interest, royalties, rents, annuities, net gains from the sale or exchange of property producing such income and net foreign currency gains. For this purpose, cash and assets readily convertible into cash are categorized as passive assets and the company’s unbooked intangibles are taken into account for determining the value of its assets. We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporation in which we own, directly or indirectly, more than 25% (by value) of the stock.

 

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We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. In particular, because the total value of our assets for purposes of the asset test generally will be calculated using the market price of our ADSs and ordinary shares, our PFIC status will depend in large part on the market price of our ADSs and ordinary shares, which may fluctuate considerably. Accordingly, fluctuations in the market price of the ADSs and ordinary shares may result in our being a PFIC for any year. If we are a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we will generally continue to be treated as a PFIC for all succeeding years during which such holder holds the ADSs or ordinary shares even if we cease to meet the threshold requirements for PFIC status.

 

If we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or ordinary shares, unless the U.S. Holder makes a mark-to-market election (as described below), the U.S. Holder will generally be subject to special tax rules that have a penalizing effect, regardless of whether we remain a PFIC, on (i) any excess distribution that we make to the U.S. Holder (which generally means any distribution paid during a taxable year to a U.S. Holder that is greater than 125% of the average annual distributions paid in the three preceding taxable years or, if shorter, the U.S. Holder’s holding period for the ADSs or ordinary shares), and (ii) any gain realized on the sale or other disposition, including, under certain circumstances, a pledge, of ADSs or ordinary shares. Under the PFIC rules:

 

·                  the excess distribution and/or gain will be allocated ratably over the U.S. Holder’s holding period for the ADSs or ordinary shares;

 

·                  the amount allocated to the current taxable year and any taxable years in the U.S. Holder’s holding period prior to the first taxable year in which we are a PFIC, or pre-PFIC year, will be taxable as ordinary income; and

 

·                  the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for such year and would be increased by an additional tax equal to interest on the resulting tax deemed deferred with respect to each such other taxable year.

 

If we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or ordinary shares and any of our non-U.S. subsidiaries is also a PFIC, such U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC and would be subject to the rules described above on certain distributions by a lower-tier PFIC and a disposition of shares of a lower-tier PFIC even though such U.S. Holder would not receive the proceeds of those distributions or dispositions. U.S. Holders should consult their tax advisors regarding the application of the PFIC rules to any of our subsidiaries.

 

If a company that is a PFIC provides certain information to U.S. Holders, a U.S. Holder can then avoid certain adverse tax consequences described above by making a “qualified electing fund” election to be taxed currently on its proportionate share of the PFIC’s ordinary income and net capital gains. However, because we do not intend to prepare or provide the information that would enable you to make a qualified electing fund election, such election will not be available to you.

 

Alternatively, a U.S. Holder of “marketable stock” in a PFIC may make a mark-to-market election with respect to such stock.  Marketable stock is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange (such as the NASDAQ Global Select Market) or other market as defined in applicable U.S. Treasury regulations.  We believe that our ADSs, but not ordinary shares, qualify as being regularly traded on the NASDAQ Global Select Market, but no assurances may be given in this regard.  If a U.S. Holder makes this election, the holder will generally (i) include as income for each taxable year the excess, if any, of the fair market value of ADSs held at the end of the taxable year over the adjusted tax basis of such ADSs and (ii) deduct as a loss the excess, if any, of the adjusted tax basis of the ADSs over the fair market value of such ADSs held at the end of the taxable year, but only to the extent of the amount previously included in income as a result of the mark-to-market election.  The U.S. Holder’s adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election.  If a U.S. Holder makes a mark-to-market election in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, the holder will not be required to take into account the gain or loss described above during any period that such corporation is not classified as a PFIC.

 

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Because, as a technical matter, a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to the PFIC rules with respect to such U.S. Holder’s indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes.

 

A U.S. Holder that holds our ADSs or ordinary shares in any year in which we are classified as a PFIC may make a “deemed sale” election with respect to such ADSs or ordinary shares in a subsequent taxable year in which we are not classified as a PFIC. If you make a valid deemed sale election with respect to your ADSs or ordinary shares, you will be treated as having sold all of your ADSs or ordinary shares for their fair market value on the last day of the last taxable year in which we were a PFIC and such ADSs or ordinary shares will no longer be treated as PFIC stock. You will recognize gain (but not loss), which will be subject to tax as an “excess distribution” received on the last day of the last taxable year in which we were a PFIC. Your basis in the ADSs or ordinary shares would be increased to reflect gain recognized, and your holding period would begin on the day after we ceased to be a PFIC.

 

The deemed sale election is only relevant to U.S. Holders that hold the ADSs or ordinary shares during a taxable year in which we are a PFIC, regardless of whether we were a PFIC in any prior taxable year. U.S. Holders are urged to consult their tax advisors regarding the advisability of making a deemed sale election and the consequences thereof in light of the U.S. Holder’s individual circumstances.

 

If a U.S. Holder holds ADSs or ordinary shares in any year in which we are treated as a PFIC with respect to such U.S. Holder, the U.S. Holder will be required to file IRS Form 8621 and such other forms as may be required by the U.S. Treasury Department. Each U.S. Holder is advised to consult with its tax advisor regarding the application of the PFIC rules if we become classified as a PFIC, including the possibility of making either a deemed sale election or a mark-to-market election.

 

Dividends

 

Subject to the PFIC rules discussed above, any cash distributions (including the amount of any PRC tax withheld) paid on our ADSs or ordinary shares out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, will generally be includible in the gross income of a U.S. Holder as dividend income on the day actually or constructively received by the U.S. Holder, in the case of ordinary shares, or by the depositary bank, in the case of ADSs. Because we do not intend to determine our earnings and profits on the basis of U.S. federal income tax principles, any distribution paid will generally be reported as dividend income for U.S. federal income tax purposes.

 

A non-corporate recipient will be subject to tax at the lower capital gain tax rate applicable to “qualified dividend income,” provided that certain conditions are satisfied, including that (1) the ADSs or ordinary shares, as applicable, are readily tradable on an established securities market in the U.S., or, in the event that we are deemed to be a PRC resident enterprise under the PRC tax law, we are eligible for the benefit of the U.S.-PRC income tax treaty, (2) we are neither a PFIC nor treated as such with respect to a U.S. Holder (as discussed above) for the taxable year in which the dividend was paid and the preceding taxable year, and (3) certain holding period requirements are met.  Although no assurance may be given, we believe that our ADSs are readily tradable on the NASDAQ Global Select Market, which is an established securities market in the U.S.  There can be no assurance, however, that our ADSs will be considered readily tradable on an established securities market in the U.S. in later years.  Since we do not expect that our ordinary shares will be listed on an established securities market in the U.S., it is unclear whether dividends that we pay on our ordinary shares that are not backed by ADSs currently meet the conditions required for the reduced tax rate.  If, however, we are deemed to be a PRC “resident enterprise” under PRC tax law, see “Item 10. Additional Information —E. Taxation — People’s Republic of China Taxation,” we may be eligible for the benefits of the U.S.-PRC income tax treaty.  If we are eligible for such benefits, dividends we pay on our ordinary shares could be eligible for the reduced rate of taxation, regardless of whether such shares are represented by ADSs.

 

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For U.S. foreign tax credit purposes, dividends paid on our ADSs or ordinary shares will generally be treated as foreign source income and will generally constitute passive category income. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any nonrefundable foreign withholding taxes imposed on dividends received on our ADSs or ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim a deduction for U.S. federal income tax purposes in respect of such withholding, but only for a year in which such holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex. U.S. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.

 

Sale or Other Disposition of ADSs or Ordinary Shares

 

A U.S. Holder will generally recognize capital gain or loss upon the sale or other disposition of ADSs or ordinary shares in an amount equal to the difference between the amount realized upon the disposition and the holder’s adjusted tax basis in such ADSs or ordinary shares. The deductibility of a capital loss may be subject to limitations. Any capital gain or loss will be long-term if the ADSs or ordinary shares have been held for more than one year and will generally be U.S. source gain or loss for U.S. foreign tax credit purposes, which will generally limit the availability of foreign tax credits. However, in the event we are deemed to be a PRC “resident enterprise” under PRC tax law, we may be eligible for the benefits of the income tax treaty between the U.S. and the PRC. In such event, if PRC tax were to be imposed on any gain from the disposition of the ADSs or ordinary shares, a U.S. Holder that is eligible for the benefits of the income tax treaty between the U.S. and the PRC may elect to treat such gain as PRC source income. U.S. Holders are urged to consult their tax advisors regarding the tax consequences if a foreign tax is imposed on a disposition of our ADSs or ordinary shares, including the availability of the foreign tax credit under their particular circumstances.

 

Information Reporting and Backup Withholding

 

U.S. Holders may be subject to information reporting to the IRS with respect to dividends on and proceeds from the sale or other disposition of our ADSs or ordinary shares.  Dividend payments with respect to our ADSs or ordinary shares and proceeds from the sale or other disposition of our ADSs or ordinary shares are not generally subject to U.S. backup withholding (provided that certain certification requirements are satisfied).

 

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit against a U.S. Holder’s U.S. federal income tax liability if the required information is furnished by the U.S. Holder on a timely basis to the IRS.

 

Certain U.S. Holders who are individuals are required to report information relating to an interest in “specified foreign financial assets,” including shares issued by a non-U.S. corporation for any year in which the aggregate value of all specified foreign financial assets exceeds $50,000, subject to certain exceptions (including an exception for ordinary shares held in custodial accounts maintained with a U.S. financial institution). Penalties may me imposed for a failure to disclose such information. U.S. Holders are advised to consult with their tax advisors regarding the application of the U.S. information reporting and backup rules to their particular circumstances.

 

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THE PRECEDING DISCUSSION OF U.S. FEDERAL INCOME TAX CONSIDERATIONS IS INTENDED FOR GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE TAX ADVICE. U.S. HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE ADSS OR ORDINARY SHARES.

 

European Countries Taxation

 

JA Solar GmbH is incorporated in Germany and is subject to effective income tax rate of 32.98% which consists of 15% corporate income tax plus a solidarity surcharge of 5.5% on corporate income tax and a trade income tax rate of 17.15%.

 

F.                           DIVIDENDS AND PAYING AGENTS

 

Not applicable.

 

G.                         STATEMENT BY EXPERTS

 

Not applicable.

 

H.                         DOCUMENTS ON DISPLAY

 

We have filed this annual report, including exhibits, with the SEC. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we filed with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report.

 

We are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we will be required to file reports, including annual reports on Form 20-F, and other information with the SEC. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of proxy statements to shareholders. Our annual reports and other information so filed can be inspected and copied at the public reference facility maintained by the SEC at 100 F. Street, N.E., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facility. Our SEC filings will also be available to the public on the SEC’s Internet Web site at http://www.sec.gov.

 

I.                              SUBSIDIARY INFORMATION

 

Not applicable.

 

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ITEM 11.                                         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

Our exposure to interest rate risk primarily relates to interest expenses incurred in respect of our borrowings, and interest income generated by excess cash invested in demand deposits and liquid investments with original maturities of three months or less. As of December 31, 2016, we had RMB3.4 billion (US$495.2 million) of short-term borrowings and long-term borrowings (current portions) and RMB2.7 billion (US$389.1 million) of long-term borrowings (excluding current portions), with an average interest rate of 5.15% per annum. A hypothetical one percentage point (100 basis-point) increase in interest rates would have resulted in an increase of approximately RMB61.4 million (US$8.8 million) in interest expense for the year ended December 31, 2016. Interest-earning instruments carry a degree of interest rate risk. Although we have not historically used and do not expect to use in the future, any derivative financial instruments to manage our interest risk exposure, we believe we do not have significant exposure to fluctuations in interest rates.

 

Foreign Exchange Risk

 

Our financial statements are expressed in Renminbi, which is our reporting and functional currency. A certain portion of our revenues and expenses are denominated in Renminbi. The Renminbi prices of some of our equipment that is imported may be affected by fluctuations in the value of Renminbi against foreign currencies. To the extent that we need to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes, appreciation of RMB against U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs, strategic acquisitions or investments or other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. We recorded a foreign exchange gain of RMB80.8 million (US$11.6 million) in 2016 primarily due to the appreciation of U.S. dollar against RMB. 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.

 

Fluctuations in currency exchange rates, particularly between JPY/Euro/U.S. dollar and Renminbi, may continue to have a significant effect on our net profit margins and would result in foreign currency exchange gains and losses on our assets and liabilities denominated in JPY/Euro/U.S. dollar. Any appreciation of Renminbi against JPY/Euro/U.S. dollar could result in a change to our statement of operations. On the other hand, any depreciation of Renminbi to JPY/Euro/U.S. dollar could reduce the Renminbi equivalent amounts of our financial results, the proceeds from our public offerings and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the prices of our ADSs. Since 2009, we have entered into foreign currency forward contracts with commercial banks to hedge part of our exposure to foreign currency exchange risk for the forecasted sales denominated in foreign currencies. We do not use foreign currency forward contracts to hedge all of our foreign currency denominated transactions. As with all hedging instruments, there are risks associated with the use of foreign currency forward contracts. While the use of such foreign currency forward contracts provides us with protection from certain fluctuations in foreign currency exchange, we potentially forego the benefits that might result from favorable fluctuations in foreign currency exchange. Any default by the counterparties to these transactions could adversely affect our financial condition and results of operations. Furthermore, these financial hedging transactions may not provide adequate protection against future foreign currency exchange rate fluctuations and, consequently, such fluctuations could adversely affect our financial condition and results of operations.

 

Credit Risk

 

We are generally required to make prepayments to silicon wafer suppliers in advance of shipments. We do not require collateral or other security against our prepayments to our suppliers for raw materials and have recorded a provision balance of RMB20.7 million (US$3.0 million) for potential losses against these prepayments as of December 31, 2016. In the event of a failure by our suppliers to fulfill their contractual obligations and to the extent that we are not able to recover our prepayments, we would suffer losses. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Prepayment arrangements for procurement of silicon wafers and/or polysilicon from our major suppliers expose us to the credit risks of such suppliers and may also significantly increase our costs and expenses, either of which could in turn have a material adverse effect on our financial condition, results of operations and liquidity.”

 

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We extend credit terms to certain customers after assessing a number of factors to determine whether collections from the customers are probable. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We make our estimates of the collectability of our accounts receivable by analyzing historical bad debts, specific customer credit worthiness and current economic trends. We recorded RMB188.3 million (US$27.1 million) for doubtful accounts as of December 31, 2016. If the financial condition of our customers were to deteriorate such that their ability to make payments was impaired, additional allowances could be required.

 

In addition, as a result of the current global economic crisis, we are increasingly exposed to credit risk in relation to our bank deposits. Since the fourth quarter of 2008, banks and other financial institutions, possibly including ones we engage in business with, have come under strain during the current global liquidity and credit crisis. It is possible that these banks and other financial institutions may be unable to weather the current economic storm, resulting in a loss of our deposits which will have a material adverse effect on our financial condition, results of operations and liquidity.

 

In line with its effects on banks, the current economic crisis has also affected our customers. The negative impact of the current economy on our clients may affect their ability to pay us for our products and services that we have delivered and/or completed based on our extension of credit to our clients. If our clients fail to pay us for our products and services, our financial condition, results of operations and liquidity may be adversely affected.

 

Inflation Risk

 

In the last three years, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2014, 2015 and 2016 were increases of 1.5%, 1.6% and 2.1%, respectively. Although we have not been materially affected by inflation in the past, we cannot assure you that we will not be affected in the future by higher rates of inflation in China.

 

ITEM 12.                                         DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

A.                          DEBT SECURITIES

 

Not applicable.

 

B.                          WARRANTS AND RIGHTS

 

Not applicable.

 

C.                          OTHER SECURITIES

 

Not applicable.

 

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D.                          AMERICAN DEPOSITARY SHARES

 

Fees paid by our ADS holders

 

The Bank of New York Mellon, the depositary of our ADS program, collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deducting from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them.

 

The table below sets forth all fees and charges, which may change from time to time, that a holder of our ADSs may have to pay to the depositary bank of our ADS program, either directly or indirectly:

 

Persons depositing or withdrawing shares must pay:

 

For:

US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)

 

· Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property

· Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates

US$0.02 (or less) per ADS

 

· Any cash distribution to ADS holders

 

 

 

A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs

 

· Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS holders

 

 

 

US$0.02 (or less) per ADSs per calendar year

 

· Depositary services

 

 

 

Registration or transfer fees

 

· Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares

 

 

 

Expenses of the depositary

 

· Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)

· converting foreign currency to U.S. dollars

 

 

 

Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes

 

· As necessary

 

 

 

 Any charges incurred by the depositary or its agents for servicing the deposited securities

 

· As necessary

 

Fees and Payments from the Depositary to Us

 

None.

 

PART II

 

ITEM 13.                                         DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

None.

 

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

 

On February 7, 2008, our board of directors approved a change in the ratio of 1 ADS to 3 ordinary shares of the company to 1 ADS to 1 ordinary share of the Company. Each shareholder of record at the close of business on February 6, 2008 received two additional ADSs for every ADS held on the record date. There was no change to the rights and preferences of the underlying ordinary shares. No action was required on the part of any ADS holder to effect the ratio change.

 

We changed the ratio of our ADSs to ordinary shares from one ADS representing one ordinary share to one ADS representing five ordinary shares, effective on December 10, 2012. For our ADS holders, this ratio change had the same effect as a one-for-five reverse ADS split. There was no change to the rights and preferences of the underlying ordinary shares. Our ADSs holders were required to surrender their existing ADSs in exchange for new ADSs.

 

ITEM 15.                                         CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of December 31, 2016, the end of the period covered by this annual report on Form 20-F, management performed, under the supervision and with the participation of our chief executive officer and chief financial officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Disclosure controls and procedures are those controls and procedures designed to provide reasonable assurance that the information required to be disclosed in our Exchange Act filings is (1) recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms, and (2) accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2016, our disclosure controls and procedures were effective at a reasonable assurance level.

 

Management’s Report on Internal Control over Financial Reporting

 

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

 

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

 

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As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the Securities and Exchange Commission, management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016 using criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2016 based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

The report of PricewaterhouseCoopers Zhong Tian LLP, our independent registered public accounting firm, on the effectiveness of our internal control over financial reporting appears on page F-2 in this annual report.

 

Changes in Internal Control Over Financial Reporting

 

We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. We consider there are no changes in internal control over financial reporting that occurred during the most recent annual period covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 16A.           AUDIT COMMITTEE FINANCIAL EXPERT

 

Our board of directors has determined that Ms. Hope Ni, an independent director (under the standards set forth in NASDAQ Stock Market Rule 5605(a)(2) and Rule 10A-3 under the Exchange Act, as amended) and a member of our audit committee, is an audit committee financial expert.

 

ITEM 16B.           CODE OF ETHICS

 

We have adopted a code of ethics for chief executive officer and senior financial officers, which we filed with the SEC as an exhibit to our annual report on Form 20-F for the year ended December 31, 2006 and we have also posted a copy of our code of ethics on our company website at http://investors.jasolar.com. This home country practice of ours was established by us by reference to similarly situated issuers and differs from the NASDAQ Stock Market Rules that require listed companies to adopt one or more codes of conduct applicable to all directors, officers and employees and make those codes of conduct publicly available. There are, however, no specific requirements under Cayman Islands law requiring the adoption of codes of conduct.

 

ITEM 16C.           PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The following table sets forth the aggregate audit fees, audit-related fees, tax fees of our principal accountants and all other fees billed for services provided by our principal accountants for each of the fiscal years 2015 and 2016:

 

 

 

For the Year Ended December 31,

 

 

 

2015

 

2016

 

 

 

(RMB in million)

 

Audit fees(1)

 

10.0

 

10.5

 

Audit-related fees(2)

 

 

1.0

 

Tax fees(3)

 

0.5

 

0.5

 

 


(1)         “Audit fees” means the aggregate fees incurred for professional services rendered by our principal auditors for the audit of our annual financial statements.

 

(2)   “Audit-related fees” represents aggregate fees incurred for professional services rendered by our principal auditors for the assurance and related services.

 

(3)         “Tax fees” represents aggregate fees incurred for professional services rendered by our principal auditors for the tax compliance, tax advice and tax planning.

 

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Before our principal accountants were engaged by our company or our subsidiaries to render audit or non-audit services, the engagement has been approved by our audit committee. Our audit committee will review and approve our independent auditor’s annual engagement letter, including the proposed fees, as well as all audit and permitted non-audit engagements and relationships between the company and such independent auditors prior to the services being provided.

 

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

 

Not applicable.

 

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

 

None.

 

ITEM 16F.           CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

Not applicable.

 

ITEM 16G.          CORPORATE GOVERNANCE

 

NASDAQ Stock Market Rules provide that foreign private issuers may follow home country practice in lieu of the corporate governance requirements of The NASDAQ Stock Market LLC, subject to certain exceptions and requirements to the extent that such exemptions would be contrary to U.S. federal securities laws and regulations. The significant differences between our corporate governance practices and those followed by U.S. companies under the NASDAQ Stock Market Rules are summarized as follows:

 

·                  We follow home country practice that permits our board of directors to have less than a majority of independent directors.

 

·                  We follow home country practice that does not restrict a company’s transactions with directors, requiring only that directors exercise a duty of care and owe a fiduciary duty to the companies for which they serve. Under our memorandum and articles of association, subject to any separate requirement for audit committee approval under the applicable rules of the NASDAQ Stock Market Rules or unless disqualified by the chairman of the relevant board meeting, so long as a director discloses the nature of his interest in any contract or arrangement in which he is interested, such a director may vote in respect of any contract or proposed contract or arrangement in which such director is interested and may be counted in the quorum at such meeting.

 

·                  We follow home country practice that does not require the nominating and corporate government committee and compensation committee of our board of directors to be comprised solely of independent directors.

 

·                  We follow home country practice that does not require us to have regularly scheduled meetings at which only independent directors are present, or executive sessions.

 

·                  We follow home country practice that does not specifically require us to have one or more codes of conduct applicable to all directors, officers and employees and make those codes of conduct publicly available. There are no specific requirements under Cayman Islands law requiring the adoption of codes of conduct.

 

·                  We follow home country practice that does not require us to seek shareholders’ approval for adopting or amending our stock incentive plan.

 

·                  We follow home country practice that does not require us to obtain shareholder approval for issuing additional securities exceeding 20% of our outstanding ordinary shares.

 

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In accordance with NASDAQ Stock Market Rule 5250(d)(1), we will post this annual report on Form 20-F on our company website at http://investors.jasolar.com. In addition, we will provide hard copies of our annual report free of charge to shareholders and ADS holders upon request.

 

ITEM 16H.          MINE SAFETY DISCLOSURE

 

Not applicable.

 

PART III

 

ITEM 17.                                         FINANCIAL STATEMENTS

 

Not applicable.

 

ITEM 18.                                         FINANCIAL STATEMENTS

 

The consolidated financial statements of JA Solar Holdings Co., Ltd. and its subsidiaries are included at the end of this annual report.

 

ITEM 19.                                         EXHIBITS

 

1.1

 

Second Amended and Restated Memorandum of Association and Third Amended and Restated Articles of Association of the Registrant (incorporated by reference to Exhibit 4.1 from our registration statement on Form S-8 (File No. 333-197750), initially filed with the Securities and Exchange Commission on July 31, 2014)

 

 

 

1.2

 

Amendment to the Third Amended and Restated Articles of Association of the Registrant adopted by the shareholders of the Registrant on June 28, 2013 (incorporated herein by reference to Exhibit 99.1 to the Report of Foreign Private Issuer on Form 6-K furnished to the Commission on July 10, 2013)

 

 

 

2.1

 

Specimen American Depositary Receipt of the Registrant (included in Exhibit 2.3)

 

 

 

2.2

 

Specimen Certificate for Ordinary Shares of the Registrant (incorporated by reference to Exhibit 4.2 from our F-1 registration statement (File No. 333-140002), as amended, initially filed with Securities and Exchange Commission on January 16, 2007)

 

 

 

2.3

 

Form of Deposit Agreement (incorporated by reference to Exhibit 4.3 from our registration statement on Form F-1 (File No. 333-140002), as amended, initially filed with Security and Exchange Commission on January 16, 2007)

 

 

 

2.4

 

Shareholders Agreement among JA Development Co., Ltd. and other parties therein dated as of August 21, 2006, as amended as of August 14, 2006 (incorporated by reference to Exhibit 4.6 from our F-1 registration statement (File No. 333-140002), as amended, initially filed with Securities and Exchange Commission on January 16, 2007)

 

 

 

2.5

 

Form of Indenture (incorporated by reference to Exhibit 4.4 from our registration statement on Form F-3ASR, initially filed with the SEC on May 12, 2008.)

 

 

 

2.6

 

Form of First Supplemental Indenture between The Bank of New York as trustee and JA Solar (incorporated by reference to Exhibit 4.1 on Form 6-K initially filed with the Securities and Exchange Commission on May 20, 2008).

 

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4.1

 

2014 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 from our registration statement of Form S-8 (File No. 333-197750), initially filed with the Securities and Exchange Commission on July 31, 2014)

 

 

 

8.1*

 

List of Significant Subsidiaries

 

 

 

11.1

 

Code of Business Conduct and Ethics (incorporated by reference to Exhibit 11.1 from our 2006 annual report on Form 20-F (File No. 001-33290) initially filed with the Securities and Exchange Commission on June 1, 2007.)

 

 

 

12.1*

 

Certification by the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Act and Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

12.2*

 

Certification by the Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Act and Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

13.1**

 

Certification by the Chief Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Act, Section 1350 of Chapter 63 of the United States Code and Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

13.2**

 

Certification by the Chief Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Act, Section 1350 of Chapter 63 of the United States Code and Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

15.1*

 

Consent of Independent Registered Public Accounting Firm

 

 

 

101.INS*

 

XBRL Instance Document

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


*                 Filed herewith

 

**          Furnished herewith

 

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SIGNATURES

 

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

 

 

JA Solar Holdings Co., Ltd.

 

 

 

By:

/s/ Hexu Zhao

 

 

Name: Hexu Zhao

 

 

Title: Chief Financial Officer

 

 

Date: April 26, 2017

 

 

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Table of Contents

 

 

Page

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets

F-3-F-4

Consolidated Statements of Operations and Comprehensive Income

F-5-F-6

Consolidated Statements of Changes In Shareholders’ Equity

F-7-F-9

Consolidated Statements of Cash Flows

F-10-F-11

Notes to Consolidated Financial Statements

F-12-F-64

 

F-1



Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of JA Solar Holdings Co., Ltd.:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, of changes in shareholders’ equity, and of cash flows present fairly, in all material respects, the financial position of JA Solar Holdings Co., Ltd. (the “Company”) and its subsidiaries at December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing in item 15 of this Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

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

 

/s/ PricewaterhouseCoopers Zhong Tian LLP

 

Shanghai, the People’s Republic of China

 

April 26, 2017

 

 

F-2



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share and per share data)

 

 

 

 

 

December 31,

 

December 31,

 

 

 

Note

 

2015

 

2016

 

 

 

 

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

2

(d)

2,883,294

 

2,569,402

 

Restricted cash

 

2

(d)

663,518

 

836,761

 

Notes receivable

 

5

 

837,711

 

563,144

 

Accounts receivable from third party customers, net

 

6

 

2,704,300

 

2,623,897

 

Accounts receivable from related party customers, net

 

6,25

(b)

168,475

 

129,781

 

Inventories

 

7

 

1,660,542

 

2,460,488

 

Advances to third party suppliers, net

 

8

 

434,116

 

257,407

 

Advances to related party suppliers, net

 

8,25

(b)

39,194

 

24,962

 

Amount due from related parties

 

25

(b)

45,654

 

73,509

 

Other current assets

 

9

 

448,560

 

587,725

 

Deferred tax assets

 

12

 

139,143

 

138,080

 

Total current assets

 

 

 

10,024,507

 

10,265,156

 

Property, plant and equipment, net

 

10

 

4,365,348

 

5,219,501

 

Project assets, net

 

2

(r)

1,028,615

 

2,338,648

 

Intangible asset, net

 

11

 

12,234

 

11,713

 

Deferred tax assets

 

12

 

196,196

 

281,603

 

Advances to third party suppliers, net

 

8

 

168,584

 

97,429

 

Advances to related party suppliers, net

 

8,25

(b)

26,757

 

 

Prepaid land use rights

 

14

 

428,493

 

524,208

 

Investment in joint venture and affiliates

 

4

 

55,169

 

69,022

 

Other assets

 

13

 

 

223,976

 

Total assets

 

 

 

16,305,903

 

19,031,256

 

 

F-3



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

CONSOLIDATED BALANCE SHEETS (Continued)

 

(In thousands, except share and per share data)

 

 

 

 

 

December 31,

 

December 31,

 

 

 

Note

 

2015

 

2016

 

 

 

 

 

RMB

 

RMB

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term borrowings and current portion of long term borrowings

 

15

 

2,433,357

 

3,438,122

 

Accounts payable to third parties

 

 

 

2,027,059

 

2,018,345

 

Accounts payable to related parties

 

25

(a)

362,408

 

617,180

 

Tax payables

 

 

 

125,342

 

43,045

 

Advances from third party customers

 

 

 

672,845

 

610,718

 

Advances from related party customers

 

25

(a)

19,022

 

 

Other payables to third parties

 

17

 

894,273

 

1,323,617

 

Payroll and welfare payables

 

 

 

294,620

 

300,962

 

Accrued expenses

 

18

 

267,172

 

282,655

 

Amounts due to related parties

 

25

(a)

7,478

 

16,196

 

Derivatives liabilities - warrants

 

22,27

 

71,237

 

 

Total current liabilities

 

 

 

7,174,813

 

8,650,840

 

Accrued warranty costs

 

19

 

380,132

 

533,214

 

Other long-term liabilities

 

16

 

372,793

 

684,434

 

Long-term borrowings

 

15

 

2,461,017

 

2,701,438

 

Total liabilities

 

 

 

10,388,755

 

12,569,926

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

26

 

 

 

 

 

Shareholders’ equity :

 

 

 

 

 

 

 

Ordinary shares(US$0.0001 par value; 500,000,000 shares authorized, 237,853,602 and 237,853,602 shares issued and outstanding as of December 31, 2015 and December 31, 2016, respectively)

 

30

 

176

 

176

 

Additional paid-in capital

 

 

 

5,649,304

 

5,651,557

 

Statutory reserves

 

23

(b)

553,144

 

665,753

 

(Accumulated deficit)/retained earnings

 

 

 

(358,977

)

212,113

 

Accumulated other comprehensive loss

 

 

 

(23,952

)

(68,469

)

Total shareholders’ equity attributable to JA Solar Holdings

 

 

 

5,819,695

 

6,461,130

 

Non-controlling interest

 

 

 

97,453

 

200

 

Total shareholders’ equity

 

 

 

5,917,148

 

6,461,330

 

Total liabilities and shareholders’ equity

 

 

 

16,305,903

 

19,031,256

 

 

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

 

F-4



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

 

(In thousands, except share and per share data)

 

 

 

 

 

For the year
ended

 

For the year
ended

 

For the year
ended

 

 

 

Note

 

December 31,
2014

 

December 31,
2015

 

December 31,
2016

 

 

 

 

 

RMB

 

RMB

 

RMB

 

Revenues

 

 

 

 

 

 

 

 

 

Solar modules

 

 

 

9,291,940

 

12,688,843

 

14,781,004

 

Solar cells and other products

 

 

 

1,847,456

 

761,931

 

799,572

 

Electricity generation

 

 

 

 

64,226

 

156,300

 

Solar products processing

 

 

 

156,127

 

10,407

 

 

Total revenues

 

 

 

11,295,523

 

13,525,407

 

15,736,876

 

Cost of revenues

 

 

 

 

 

 

 

 

 

Solar modules

 

 

 

(7,843,582

)

(10,520,727

)

(12,612,637

)

Solar cells and other products

 

 

 

(1,602,597

)

(675,384

)

(742,723

)

Electricity generation

 

 

 

 

(29,736

)

(87,975

)

Solar products processing

 

 

 

(92,849

)

(6,971

)

 

Total cost of revenues

 

 

 

(9,539,028

)

(11,232,818

)

(13,443,335

)

Gross profit

 

 

 

1,756,495

 

2,292,589

 

2,293,541

 

Selling, general and administrative expenses

 

 

 

(954,307

)

(1,246,449

)

(1,058,319

)

Research and development expense

 

 

 

(139,683

)

(148,548

)

(175,450

)

Loss from purchase commitments and contract termination costs

 

17

 

 

 

(148,541

)

Impairment loss on project assets

 

 

 

 

(32,574

)

(8,073

)

Total operating expenses

 

 

 

(1,093,990

)

(1,427,571

)

(1,390,383

)

Income from operations

 

 

 

662,505

 

865,018

 

903,158

 

Change in fair value of derivatives

 

21,22,27

 

84,484

 

44,033

 

48,845

 

Interest expense

 

 

 

(229,665

)

(249,382

)

(284,334

)

Interest income

 

 

 

28,213

 

25,571

 

18,850

 

Foreign exchange (loss)/gain

 

 

 

(61,822

)

31,890

 

80,786

 

Income from equity method investments

 

4

 

3,211

 

6,180

 

9,856

 

Other income, net

 

16

 

33,114

 

48,492

 

65,750

 

Income before income taxes

 

 

 

520,040

 

771,802

 

842,911

 

Income tax expense

 

12

 

(73,390

)

(157,332

)

(123,301

)

Net income

 

 

 

446,650

 

614,470

 

719,610

 

Less: (earnings)/loss attributable to the non-controlling interest

 

 

 

(22,879

)

9,243

 

(35,911

)

Net income attributable to JA Solar Holdings

 

 

 

423,771

 

623,713

 

683,699

 

Less: allocation of net income to a participating warrant holder

 

 

 

(77,174

)

(107,828

)

 

Net income attributable to JA Solar’s ordinary shareholders

 

 

 

346,597

 

515,885

 

683,699

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

446,650

 

614,470

 

719,610

 

Other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax

 

 

 

4,597

 

(35,038

)

(44,517

)

Other comprehensive income/(loss)

 

 

 

4,597

 

(35,038

)

(44,517

)

Comprehensive income

 

 

 

451,247

 

579,432

 

675,093

 

Less: comprehensive (income)/loss attributable to the non-controlling interest

 

 

 

(22,879

)

9,243

 

(35,911

)

Comprehensive income attributable to JA Solar Holdings

 

 

 

428,368

 

588,675

 

639,182

 

Less: allocation of net income to a participating warrant holder

 

 

 

(77,174

)

(107,828

)

 

Comprehensive income attributable to JA Solar’s ordinary shareholders

 

 

 

351,194

 

480,847

 

639,182

 

 

F-5



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Continued)

 

(In thousands, except share and per share data)

 

 

 

 

 

For the year
ended

 

For the year
ended

 

For the year
ended

 

 

 

Note

 

December 31,
2014

 

December 31,
2015

 

December 31,
2016

 

 

 

 

 

RMB

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

1.43

 

2.12

 

2.92

 

Diluted

 

 

 

1.38

 

2.12

 

2.92

 

Weighted average number of shares outstanding :

 

24

 

 

 

 

 

 

 

Basic

 

 

 

242,192,859

 

243,506,821

 

234,290,842

 

Diluted

 

 

 

242,863,084

 

243,744,921

 

234,402,452

 

Net income per ADS:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

7.17

 

10.59

 

14.59

 

Diluted

 

 

 

6.88

 

10.58

 

14.58

 

Weighted average number of ADS:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

48,438,572

 

48,701,364

 

46,858,168

 

Diluted

 

 

 

48,572,617

 

48,748,984

 

46,880,490

 

 

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

 

F-6



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total JA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Solar

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

Holdings

 

Non-

 

Total

 

 

 

Ordinary shares

 

Additional

 

Statutory

 

Accumulated

 

comprehensive

 

shareholders’

 

controlling

 

shareholders’

 

 

 

Shares

 

Amount

 

paid-in capital

 

reserves

 

deficit

 

Income

 

equity

 

interest

 

equity

 

 

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

Balance at December 31, 2013

 

227,499,837

 

170

 

5,327,177

 

410,150

 

(1,123,724

)

6,489

 

4,620,262

 

83,817

 

4,704,079

 

Share based compensation

 

 

 

16,281

 

 

 

 

16,281

 

 

16,281

 

Exercise of stock options

 

268,750

 

0

 

2,171

 

 

 

 

2,171

 

 

2,171

 

Vesting of restricted share units

 

85,000

 

0

 

 

 

 

 

 

 

 

Statutory reserves

 

 

 

 

26,657

 

(26,657

)

 

 

 

 

Exercise of warrants (Note 22)

 

24,448,330

 

16

 

293,074

 

 

 

 

293,090

 

 

293,090

 

Net income

 

 

 

 

 

423,771

 

 

423,771

 

22,879

 

446,650

 

Other comprehensive income for foreign currency translation adjustment

 

 

 

 

 

 

4,597

 

4,597

 

 

4,597

 

Balance at December 31, 2014

 

252,301,917

 

186

 

5,638,703

 

436,807

 

(726,610

)

11,086

 

5,360,172

 

106,696

 

5,466,868

 

 

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

 

F-7



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total JA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Solar

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

Holdings

 

Non-

 

Total

 

 

 

Ordinary shares

 

Additional

 

Statutory

 

Accumulated

 

comprehensive

 

shareholders’

 

controlling

 

shareholders’

 

 

 

Shares

 

Amount

 

paid-in capital

 

reserves

 

deficit

 

Income/(loss)

 

equity

 

interest

 

equity

 

 

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

Balance at December 31, 2014

 

252,301,917

 

186

 

5,638,703

 

436,807

 

(726,610

)

11,086

 

5,360,172

 

106,696

 

5,466,868

 

Share based compensation

 

 

 

9,405

 

 

 

 

9,405

 

 

9,405

 

Exercise of stock options

 

140,000

 

0

 

1,196

 

 

 

 

1,196

 

 

1,196

 

Vesting of restricted share units

 

267,500

 

 

 

 

 

 

 

 

 

Statutory reserves

 

 

 

 

116,337

 

(116,337

)

 

 

 

 

Shares repurchase (Note 31)

 

(14,855,815

)

(10

)

 

 

(139,743

)

 

(139,753

)

 

(139,753

)

Net income/(loss)

 

 

 

 

 

623,713

 

 

623,713

 

(9,243

)

614,470

 

Other comprehensive loss for foreign currency translation adjustment

 

 

 

 

 

 

(35,038

)

(35,038

)

 

(35,038

)

Balance at December 31, 2015

 

237,853,602

 

176

 

5,649,304

 

553,144

 

(358,977

)

(23,952

)

5,819,695

 

97,453

 

5,917,148

 

 

F-8



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total JA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Solar

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (Accumulated

 

other

 

Holdings

 

Non-

 

Total

 

 

 

Ordinary shares

 

Additional

 

Statutory

 

Deficit)/retained

 

comprehensive

 

shareholders’

 

controlling

 

shareholders’

 

 

 

Shares

 

Amount

 

paid-in capital

 

reserves

 

earnings

 

Loss

 

equity

 

interest

 

equity

 

 

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

Balance at December 31, 2015

 

237,853,602

 

176

 

5,649,304

 

553,144

 

(358,977

)

(23,952

)

5,819,695

 

97,453

 

5,917,148

 

Share based compensation

 

 

 

2,253

 

 

 

 

2,253

 

 

2,253

 

Statutory reserves

 

 

 

 

112,609

 

(112,609

)

 

 

 

 

Capital injection by non-controlling interests

 

 

 

 

 

 

 

 

 

200

 

200

 

Liquidation of a subsidiary

 

 

 

 

 

 

 

 

(133,364

)

(133,364

)

Net income

 

 

 

 

 

683,699

 

 

683,699

 

35,911

 

719,610

 

Other comprehensive loss for foreign currency translation adjustment

 

 

 

 

 

 

(44,517

)

(44,517

)

 

(44,517

)

Balance at December 31, 2016

 

237,853,602

 

176

 

5,651,557

 

665,753

 

212,113

 

(68,469

)

6,461,130

 

200

 

6,461,330

 

 

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

 

F-9



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Note

 

For the year
ended December
31, 2014

 

For the year
ended December
31, 2015

 

For the year
ended December
31, 2016

 

 

 

 

 

RMB

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

 

 

446,650

 

614,470

 

719,610

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Share based compensation

 

 

 

16,281

 

9,405

 

2,253

 

Depreciation and amortization

 

 

 

685,345

 

797,671

 

912,699

 

Allowance for doubtful accounts

 

 

 

15,383

 

(4,746

)

(18,076

)

Write off of other current assets

 

 

 

 

19,078

 

 

Inventory provision

 

 

 

15,073

 

6,905

 

126,570

 

Loss from purchase commitments and contract termination costs

 

 

 

 

 

148,541

 

Hemlock interest accrual/(reversal)

 

17

 

93,797

 

123,524

 

(303,380

)

Allowance for advance to third party suppliers

 

 

 

56,980

 

1,045

 

 

Change in fair value of derivatives

 

 

 

(84,484

)

(44,033

)

(48,845

)

Gain on acquisition of a subsidiary

 

 

 

(4,628

)

 

 

Loss/(income) from equity method investments

 

 

 

441

 

(2,147

)

147

 

Revaluation gain from acquisition of a subsidiary

 

 

 

(3,652

)

 

 

Exchange gain

 

 

 

(850

)

(11,274

)

(54,907

)

Loss from disposal of fixed assets

 

 

 

16,831

 

21,182

 

117,582

 

Impairment on project assets

 

 

 

 

32,574

 

8,073

 

Deferred income taxes

 

 

 

(116,232

)

(96,648

)

(84,344

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Decrease/(increase) in notes receivables

 

 

 

132,240

 

(762,727

)

274,567

 

(Increase)/decrease in accounts receivables from third party customers

 

 

 

(1,346,434

)

(659,587

)

98,479

 

(Increase)/decrease in accounts receivables from related party customers

 

 

 

(86,579

)

213,801

 

38,694

 

(Increase)/decrease in inventories

 

 

 

(551,171

)

218,821

 

(926,516

)

Decrease in advance to third party suppliers

 

 

 

265,094

 

115,409

 

247,864

 

Decrease in advance to related party suppliers

 

 

 

43,458

 

4,194

 

40,989

 

(Increase)/decrease in other current assets and amount due from related parties

 

 

 

(167,030

)

257,846

 

(134,856

)

Increase in prepaid land use rights

 

 

 

 

 

(109,266

)

Increase in other assets

 

 

 

 

 

(196,543

)

Increase/(decrease) in accounts payable

 

 

 

887,668

 

(380,832

)

232,505

 

Increase/(decrease) in tax payables

 

 

 

81,723

 

45,780

 

(82,297

)

Increase in advance from customers

 

 

 

41,236

 

447,908

 

(81,149

)

Increase/(decrease) in other payables

 

 

 

11,247

 

8,629

 

(62,995

)

Increase in payroll and welfare payables

 

 

 

31,499

 

60,452

 

6,336

 

(Decrease)/increase in accrued expenses

 

 

 

(18,669

)

119,878

 

15,483

 

Increase/(decrease) in amounts due to related parties

 

 

 

4,301

 

(637

)

8,718

 

Increase in accrued warranty costs

 

 

 

92,843

 

128,392

 

153,082

 

Decrease in other long-term liabilities

 

 

 

(32,192

)

(26,788

)

(29,319

)

Net cash provided by operating activities

 

 

 

526,169

 

1,257,545

 

1,019,699

 

 

F-10



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands)

 

 

 

For the year
ended December
31, 2014

 

For the year
ended December
31, 2015

 

For the year
ended December
31, 2016

 

 

 

RMB

 

RMB

 

RMB

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

(649,624

)

(891,925

)

(1,752,450

)

Proceeds from disposal of property, plant and equipment

 

6,420

 

3,576

 

1,538

 

Purchase of intangible assets

 

(945

)

(1,818

)

(2,522

)

Investments in project assets

 

(473,663

)

(382,817

)

(1,095,297

)

Government grants received

 

45,300

 

230

 

27,976

 

Proceeds from disposal of a subsidiary

 

(3,038

)

 

 

Cash paid for acquisition of a subsidiary, net of cash acquired

 

(38,945

)

 

(77,892

)

Cash paid for purchase of an equity investee

 

(13,600

)

 

(14,000

)

(Increase)/decrease in restricted cash

 

(244,671

)

169,566

 

(173,243

)

Net cash used in investing activities

 

(1,372,766

)

(1,103,188

)

(3,085,890

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from short-term borrowings

 

2,913,292

 

2,969,303

 

4,373,862

 

Proceeds from long-term borrowings

 

1,810,400

 

797,017

 

919,358

 

Proceeds from capital lease

 

 

41,808

 

481,252

 

Proceeds from trade finance

 

 

 

100,269

 

Proceeds from exercise of stock options

 

2,171

 

1,196

 

 

Proceeds from investment of non-controlling interests

 

 

 

200

 

Proceeds from issuance of ordinary shares upon exercise of warrants

 

286,747

 

 

 

Repayment of short-term borrowings

 

(1,758,307

)

(3,084,106

)

(3,714,384

)

Repurchase of shares

 

 

(139,753

)

 

Repayment of capital lease obligation

 

 

 

(62,953

)

Repayment of long-term borrowings

 

(2,377,034

)

(22,000

)

(391,240

)

Net cash provided by financing activities

 

877,269

 

563,465

 

1,706,364

 

Effect of exchange rate changes on cash and cash equivalents

 

4,597

 

10,463

 

45,935

 

Net increase/(decrease) in cash and cash equivalents

 

35,269

 

728,285

 

(313,892

)

Cash and cash equivalents at the beginning of the year

 

2,119,740

 

2,155,009

 

2,883,294

 

Cash and cash equivalents at the end of the year

 

2,155,009

 

2,883,294

 

2,569,402

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest (net of amounts capitalized)

 

290,026

 

224,237

 

293,657

 

Cash paid for income tax

 

121,088

 

160,526

 

289,942

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment included in other payables and long-term liabilities

 

195,069

 

286,114

 

330,277

 

Purchases of project assets included in other payables

 

134,667

 

187,230

 

354,709

 

Swap accounts receivable from third party customers for equity method investment

 

 

39,498

 

 

Payables to non-controlling interests for liquidation of a subsidiary

 

 

 

133,364

 

Payables for acquisition of a subsidiary

 

 

 

70,000

 

 

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

 

F-11



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

1.        ORGANIZATION AND PRINCIPAL ACTIVITIES

 

The accompanying consolidated financial statements include the financial statements of JA Solar Holdings Co., Ltd. (the “Company”), and its subsidiaries, collectively referred to as the “Group”.

 

JA Solar Holdings Co., Ltd. was incorporated in the Cayman Islands on July 6, 2006. In February 2007, the Company’s ADS became listed on the NASDAQ Global Market in the United States. The Group is primarily engaged in the development, production and marketing of high-performance solar power products, and sales of electricity produced by the solar power plants.

 

In November 2011, the Company completed the acquisition of 100% equity interest of Silver Age Holdings Limited (“Silver Age”), of which Full Shine Holdings Limited (“Full Shine”) and Solar Silicon Valley Electronic Science and Technology Co., Ltd. (“Solar Silicon Valley”) are 100% owned subsidiaries. Thereafter, Silver Age, Full Shine and Solar Silicon Valley became wholly owned subsidiaries of the Company.

 

In January 2013, the Company completed the acquisition of 65% equity interest of Hebei Ningjin Songgong Semiconductor Co., Ltd. (“Ningjin Songgong”). As of December 31, 2016, Ningjin Songgong was liquidated and the assets and liabilities of Ningjin Songgong have been adjusted to liquidation value, with no gain or loss impact on the consolidated statements of operations and comprehensive income. The net assets attributable to the non-controlling interest party were reclassified as payables accordingly (Refer to Note 17 Other payables to third parties).

 

In March 2011, the Company entered into a joint venture agreement with MEMC Singapore to form a jointly-owned company named JA MEMC (Yangzhou) Solar Technology Company Ltd. (“JA MEMC”). In June 2014, the Company completed the acquisition of 50% of JA MEMC’s total equity interests held by MEMC Singapore. Thereafter, JA MEMC became wholly owned subsidiary of the Company. Subsequently, JA MEMC’s assets were transferred to JA Yangzhou and JA MEMC was dissolved in December 2014.

 

In June 2016, the Company completed the acquisition of 100% equity interest of Jiuzhou Fangyuan New Energy (Yichang) Co., Ltd. (“Jiuzhou Yichang”) (Refer to Note 3(b) Acquistition of Jiuzhou Yichang).

 

Majority of the Group’s business is conducted through the operating subsidiaries established in the PRC, JingAo Solar Co., Ltd. (“JA Hebei”), JA Solar Technology Yangzhou Co., Ltd. (“JA Yangzhou”), Shanghai JA Solar Technology Co., Ltd. (“JA Fengxian”), Hefei JA Solar Technology Co., Ltd. (“JA Hefei Technology”), Solar Silicon Valley Electronic Science and Technology Co., Ltd. (“Solar Silicon Valley”), Jing Hai Yang Semiconductor Materials (Donghai) Co., Ltd. (“JA Lianyungang”), JA Solar Malaysia Sdn. Bhd., Dunhuang JA Solar Power Development Co., Ltd. (“JA Dunhuang”), Jingneng New Energy Development (Lincheng) Co., Ltd. (“Lincheng Jingneng”), JA Solar PV Electric (Datong) Co., Ltd. and Jiuzhou Fangyuan New Energy (Xinjiang) Co., Ltd. (“Jiuzhou Xinjiang”) in which the Company indirectly holds a 100% interest.

 

As of December 31, 2016, the Company’s principal subsidiaries include the following entities:

 

 

 

Date of Incorporation/Acquisition

 

Place of
Incorporation

 

Percentage
of Ownership

 

JingAo Solar Co., Ltd. (“JA Hebei”)

 

May 18, 2005

 

PRC

 

100

%

JA Development Co., Ltd. (“JA BVI”)

 

July 6, 2006

 

BVI

 

100

%

Shanghai JA Solar Technology Co., Ltd. (“JA Fengxian”)

 

November 16, 2006

 

PRC

 

100

%

JA Solar USA Inc. (“JA USA”)

 

April 13, 2007

 

USA

 

100

%

Shanghai JA Solar PV Technology Co., Ltd. (“JA Zhabei”)

 

June 22, 2007

 

PRC

 

100

%

JA Solar Technology Yangzhou Co., Ltd. (“JA Yangzhou”)

 

November 19, 2007

 

PRC

 

100

%

JA Solar Hong Kong Limited (“JA Hong Kong”)

 

December 10, 2007

 

Hong Kong

 

100

%

Jing Hai Yang Semiconductor Materials (Donghai) Co., Ltd. (“JA Lianyungang”)

 

October 11, 2008

 

PRC

 

100

%

JA Yangzhou PV Technology Co., Ltd. (“JA Yangzhou PV”)

 

November 23, 2009

 

PRC

 

100

%

JA Solar GmbH (“JA GmbH”)

 

February 17, 2010

 

Germany

 

100

%

Shanghai Jinglong Solar Technology Co., Ltd. (“JA Jinglong”)

 

July 5, 2010

 

PRC

 

100

%

 

F-12



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

1.        ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)

 

As of December 31, 2016, the Company’s principal subsidiaries include the following entities (continued):

 

 

 

Date of Incorporation/Acquisition

 

Place of
Incorporation

 

Percentage
of Ownership

 

Donghai JA Solar Technology Co., Ltd. (“JA Wafer R&D”)

 

November 4, 2010

 

PRC

 

100

%

JA (Hefei) Renewable Energy Co., Ltd. (“JA Hefei Renewable Energy”)

 

March 30, 2011

 

PRC

 

100

%

Hefei JA Solar Technology Co., Ltd. (“JA Hefei Technology”)

 

July 8, 2011

 

PRC

 

100

%

JA Solar Investment China Co., Ltd (“JA Investment”)

 

October 31, 2011

 

PRC

 

100

%

Silver Age Holdings Limited (“Silver Age”)

 

November 30, 2011

 

BVI

 

100

%

Full Shine Holdings Limited (“Full Shine”)

 

November 30, 2011

 

Hong Kong

 

100

%

Solar Silicon Valley Electronic Science and Technology Co., Ltd. (“Solar Silicon Valley”)

 

November 30, 2011

 

PRC

 

100

%

JA Solar Japan Limited (“JA Japan”)

 

July 12, 2012

 

Japan

 

100

%

Dunhuang JA Solar Power Development Co., Ltd. (“JA Dunhuang”)

 

July 23, 2012

 

PRC

 

100

%

JA Solar Investment (Hong Kong) Limited

 

May 16, 2013

 

Hong Kong

 

100

%

JA Solar Australia PTY Limited

 

June 12, 2013

 

Australia

 

100

%

JA Solar PV Technology Co., Ltd.

 

January 13, 2014

 

PRC

 

100

%

JA Solar PV Electric (Shexian) Co,. Ltd.

 

March 10, 2014

 

PRC

 

100

%

Aiyouen Power Electric (Yinchuan) Co,. Ltd.

 

March 25, 2014

 

PRC

 

65

%

Beijing JA Solar PV Technology Co., Ltd.

 

April 14, 2014

 

PRC

 

100

%

JA Solar PV Electric (Huanghua) Co,. Ltd.

 

July 1, 2014

 

PRC

 

100

%

JA Solar South Africa (PTY) Limited

 

July 5, 2014

 

South Africa

 

100

%

JA Solar PV Electric (Yanchi) Co,. Ltd. (“JA Yanchi”)

 

July 17, 2014

 

PRC

 

100

%

JA New Energy Development (Hebei) Co., Ltd.

 

August 25, 2014

 

PRC

 

100

%

JA Solar New Energy Electric (Chifeng) Co., Ltd. (“JA Chifeng”)

 

October 20, 2014

 

PRC

 

100

%

JA Solar PV Electric (Wulanchabu) Co,. Ltd.

 

November 12, 2014

 

PRC

 

100

%

JA Solar Malaysia Sdn. Bhd.

 

December 10, 2014

 

Malaysia

 

100

%

Jingneng New Energy Development (Renxian) Co., Ltd.

 

March 23, 2015

 

PRC

 

100

%

Jingneng New Energy Development (Lincheng) Co., Ltd. (“Lincheng Jingneng”)

 

April 20, 2015

 

PRC

 

100

%

JA Solar PV Electric (Hefei) Co., Ltd. (“JA Hefei Electric”)

 

April 22, 2015

 

PRC

 

100

%

JA Solar PV Electric (Jarud) Co., Ltd. (“JA Jarud”)

 

May 5, 2015

 

PRC

 

100

%

JA Solar PV Electric (Linzhou) Co., Ltd. (“JA Linzhou”)

 

May 8, 2015

 

PRC

 

100

%

JA Solar Technology (Karamay) Co., Ltd.

 

May 11, 2015

 

PRC

 

100

%

JA Solar (Xingtai) Co., Ltd.

 

July 13, 2015

 

PRC

 

100

%

JA Solar PV Electric (Hoboksar) Co., Ltd.

 

July 27, 2015

 

PRC

 

100

%

JA Solar PV Electric (Datong) Co., Ltd. (“JA Datong”)

 

July 30, 2015

 

PRC

 

100

%

Jiuzhou Fangyuan New Energy (Xinjiang) Co., Ltd. (“Jiuzhou Xinjiang”)

 

June 30, 2016

 

PRC

 

100

%

JA Solar International Ltd.

 

May 12, 2016

 

Hong Kong

 

100

%

 

F-13



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

2.       Summary of significant accounting policies

 

a)       Basis of presentation and consolidation

 

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The consolidated financial statements include the financial statements of the Company and its subsidiaries. For consolidated subsidiaries where the Company’s ownership in the subsidiary is less than 100%, the equity interest not held by the Company is presented as non-controlling interest. All inter-company transactions and balances among the Company and its subsidiaries have been eliminated upon consolidation.

 

b)       Use of estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Group bases its estimates on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Significant accounting estimates reflected in the Company’s consolidated financial statements include allowance for doubtful accounts and advances to suppliers, valuation of inventories, derivative and other financial instruments, useful lives of long-lived assets, assumptions used to measure impairment of long-lived assets and equity method investment, determination of fair value of identifiable assets and liabilities acquired through business combination, accrual for warranty and other liabilities, provision for uncertain tax positions and deferred tax valuation allowances, loss contingency, provision for inventory purchase commitment, assumptions used in the computation of share-based compensation, including the associated forfeiture rates, and classification for short-term and long-term assets based on management’s best estimate of the expected utilization in the next twelve-months as of the balance sheet date.

 

c)        Fair value of financial instruments

 

The Group estimated the fair value of its financial assets and liabilities in accordance with ASC 820, Fair Value Measurements and Disclosure. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price). ASC 820 establishes a hierarchy 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.

 

When available, the Group measures the fair value of financial instruments based on quoted market prices in active markets, valuation techniques that use observable market-based inputs or unobservable inputs that are corroborated by market data. Pricing information the Group obtains from third parties is internally validated for reasonableness prior to use in the consolidated financial statements. When observable market prices are not readily available, the Group generally estimates 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 the Group’s evaluation of those factors changes. Although the Group uses its 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 its estimate of fair value, thereby increasing or decreasing the amounts of the Company’s consolidated assets, liabilities, shareholders’ equity and net income or loss.

 

d)       Cash, cash equivalents and restricted cash

 

The Group considers all cash on hand and demand deposits as cash and considers all highly liquid investments with an original maturity of three months or less as cash equivalents. Restricted cash as of December 31, 2015 and 2016 represents amounts held by banks, which are not available for the Group’s use, as collateral for issuance of letters of credit, letters of guarantee, bank acceptance notes as well as certain borrowings.

 

F-14



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

2.                     Summary of significant accounting policies (continued)

 

e)        Investments

 

Investments in entities where the Group does not have a controlling financial interest, but have the ability to exercise significant influence over the operating and financial policies of the investee, are accounted for using the equity method of accounting. Investment in a joint venture or an affiliate is accounted for by the equity method of accounting as the Group has the ability to exercise significant influence but does not own a majority equity interest. Under the equity method of accounting, the Group’s share of the investee’s results of operations is included in equity gain for the investee in the Company’s Consolidated Statements of Operations and Comprehensive Income. Unrealized gains on transactions between the Company and the joint venture or affiliate are eliminated to the extent of the Group’s interest in the joint venture or affiliate, if any; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Group’s share of losses in the joint venture or affiliate equals or exceeds its interest in the joint venture or affiliate, the Group does not recognize further losses, unless the Group has incurred obligations or made payments on behalf of the joint venture or affiliate.

 

f)         Account receivables and allowance for doubtful accounts

 

Provisions are made against accounts receivable for estimated losses resulting from the inability of the Group’s customers to make payments. The Group periodically assesses 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 receivables in the balance sheets are stated net of such provision.

 

The Group assesses the credit line and credit term for each customer, taking into consideration the credit worthiness of such customer, the payment history of such customer and macro-economic conditions of the regional market. The Group signs the sales contract and executes the transaction with the customer after sufficient credit assessment. After the sales are made, the Group closely monitors the collectability of receivables on an on-going basis for any subsequent changes in the customers’ financial position and credit rating, and any relevant circumstances which may impact collectability of the receivables. The Group generally will not enter into further transactions with any customers with significant overdue balances.

 

g)       Inventories

 

Inventories are stated at the lower of cost or market value. Cost of inventories is determined by the weighted-average method. Cost of work-in-progress and finished goods are comprised of direct materials, direct labor and related manufacturing overhead based on normal operating capacity. Adjustments are recorded to cost of revenues to write down the carrying amount of any obsolete and excess inventory to its estimated net realizable value. Certain factors could impact the realizable value of inventory, so the Group continually evaluates 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 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 write-downs may be required that could negatively impact the Group’s gross margin and operating results. If actual market conditions are more favorable, the Group may have higher gross margin when products that have been previously written down are eventually sold.

 

The Group also assesses whether losses should be accrued on long-term inventory purchase commitments in accordance with ASC 330-10-35-17 to 18, which requires that losses that are expected to arise from those firm, non-cancellable, and unhedged commitments for the future purchase of inventory items, measured in the same way as inventory losses, should be recognized unless recoverable through firm sales contacts or when there are other circumstances that reasonably assure continuing sales without price decline.

 

Under the long-term supply contracts (“LTAs”) between the Group and certain suppliers, polysilicon and silicon wafer purchase would be made pursuant to the purchase prices and quantities set forth in the relevant LTAs. As a result of the significant declines in the market prices of polysilicon and silicon wafer due to the significant downturn in the solar industry in recent years, the purchase prices set forth in certain LTAs exceeded market prices.

 

F-15



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

2.       Summary of significant accounting policies (continued)

 

g)       Inventories (continued)

 

At the end of each reporting period, the Group separately assesses the potential losses on those firm inventory purchases for each supplier. When making the assessment, the Group considers whether it is able to renegotiate with its suppliers and get positive outcome by taking into account various considerations, such as stated contract price, purchase price reduction, overall amendment to LTA to eliminate fixed price arrangement, its ability to obtain concessions (i.e., reduced purchase prices and/or additional quantities at no cost) so that the actual purchase prices are less than the stated contract prices or close to the market price at the time of purchase, historical outcome of the renegotiation with the same supplier, contract period, the minimum purchase quantity, tax costs involved in the import or export of raw materials and products, status of a particular LTA at the time of assessment, and other circumstances and uncertainties that may impact such assessment.

 

If it is determined that a loss provision calculation is necessary considering the status of a LTA and all facts and circumstances impacting the evaluation, the Group follows the guidance of ASC 330-10-35-17 and assesses whether there should be loss on the firm purchase commitments by applying a methodology similar to that used in the lower of cost or market evaluation with respect to inventory. In assessing the potential loss provision, the Group uses the stated contract price and volume under the relevant LTA as the major assumptions. Loss provision will be provided if the net realizable value after considering estimated costs to convert those 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 in the years ended December 31, 2014 and 2015. For the year ended December 31, 2016, the loss provision was amounted to RMB 48,906 (Refer to Note 7 Inventories).

 

h)       Short-term and long-term advances to suppliers

 

The Group provides short-term and long-term advances to secure its raw material needs, which are then offset against future purchases. The Group does not require collateral or other security against its advances to related or third party suppliers. The Group continually assesses the credit quality of its suppliers and the factors that affect the credit risk. If there is deterioration in the creditworthiness of its suppliers, the Group will seek to recover its advances from the suppliers and provide for losses on advances which are akin to receivables in selling, general and administrative expenses because of their inability to return its advances. Recoveries of the allowance for advances to supplier are recognized when they are received. The Group classified short-term and long-term advances to suppliers based on management’s best estimate of the expected purchase in the next twelve-months as of the balance sheet date and the Group’s ability to make requisite purchases under existing supply contracts. The balances expected to be utilized outside of the twelve months are recorded in long-term advances to suppliers.

 

i)          Prepaid land use rights

 

Land use rights are carried at cost less accumulated amortization and impairment losses, if any.  Amortization is provided on a straight-line basis over the lease period of 40 or 50 years.

 

j)          Property, plant and equipment, net

 

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

 

Buildings

 

20 years

 

Leasehold improvements

 

Shorter of the lease term or their estimated useful lives

 

Machinery and equipment

 

5-15 years

 

Furniture and fixtures

 

5 years

 

Motor vehicles

 

5 years

 

 

Construction in progress primarily represents the construction of new production lines and buildings. Costs incurred in the construction are capitalized and transferred to property, plant and equipment when an asset is ready for its intended use, at which time depreciation commences. Interest expense incurred for qualifying assets are capitalized in accordance with ASC 835-20, Capitalization of Interest .

 

F-16



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

2.                     Summary of significant accounting policies (continued)

 

j)          Property, plant and equipment, net (continued)

 

Expenditures for repairs and maintenance are expensed 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 Statements of Operations and Comprehensive Income upon disposal.

 

k)       Leases

 

Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Other leases are accounted for as capital leases. Payments made under operating leases, net of any incentives received by the Group from the leasing company, are charged to the Consolidated Statements of Operations and Comprehensive Income on a straight-line basis over the lease periods. Leases that qualify as capital leases are recorded at the lower of the fair value of the asset or the present value of the future minimum lease payments over the lease term generally using the Group’s incremental borrowing rate. Assets leased under capital leases are included in property, plant and equipment and generally are depreciated over the lease term. Lease payments under capital leases are recognized as a reduction of the capital lease obligation and interest expense.

 

For a sale-leaseback transaction, an analysis is performed to determine if the Group can record a sale and remove the assets from the balance sheet and recognize the lease; and if so, to determine whether to record the lease as either an operating or capital lease. If the Group has continued involvement beyond a normal lease, the lease is accounted for as a capital lease transaction and the assets and related financing obligation are recognized on the balance sheet. The Group’s assets under the capital lease transaction were derecognized upon sale at the net book value and rebooked at the financed amount; and the differences between the net book value derecognized and the rebooked financed amount of the assets were deferred and amortized over the lease term.

 

Accordingly, the asset is depreciated over its estimated useful life in accordance with the Group’s policy.

 

When the assets transaction does not qualify as a sale-leaseback transaction, it will be treated as financing transactions.

 

If the sale-leaseback transaction involves assets other than real estate, those are evaluated to determine whether they are considered integral with real estate, in which case the sale-leaseback rules related to real estate are applied.

 

l)          Business combination

 

Business combinations are accounted for under the acquisition method in accordance with ASC 805, Business Combinations. The consideration transferred is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of the (i) the fair value of consideration transferred , fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the fair value of consideration transferred, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquire is less than the fair value of the net assets of the entity acquired, the difference, a bargain purchase, is recognized as a gain directly in the Statements of Operations and Comprehensive Income upon obtaining control. In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in earnings.

 

The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed, including non-controlling interests if applicable, is based on various assumptions and valuation methodologies requiring considerable management judgment.  The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets and forecasted life cycle and forecasted cash flows over that period. Although management believes that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.

 

F-17



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

2.                     Summary of significant accounting policies (continued)

 

m)   Intangible asset, net

 

Intangible assets primarily represent technical know-how, purchased accounting and operational software, and customer relationships acquired through business combinations.

 

Technical know-how, contributed by one of the Group’s shareholders upon formation of JA Hebei, is carried at cost, less accumulated amortization. The technical know-how consists of one component relating to the commercial production process of photovoltaic solar cells. Amortization is calculated on a straight-line basis over the estimated useful life of eight years.

 

Intangible assets acquired through business combinations are recognized as assets separate from goodwill if they satisfy either the “contractual-legal” or “separability” criterion. Customer relationship is recorded at fair value at the acquisition date less accumulated amortization. Amortization is calculated on a straight-line basis over the estimated useful life of five years.

 

Purchased software and others with a finite useful life is being amortized on a straight line basis over its estimated useful life of three to ten years.

 

n)       Impairment of long-lived assets

 

The Group evaluates its long-lived assets and finite-lived intangible asset for impairment whenever events or changes in circumstances indicate that the 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. Impairments are recognized based on the difference between the fair value of the asset and its carrying value in the event that the carrying amount exceeds the estimated future undiscounted cash flow attributed to such assets. Fair value is generally measured based on either quoted market prices, if available, or discounted cash flow analyses. Additionally, determining fair values requires probability weighting the cash flows to reflect expectations about possible variations in their amounts or timing and the selection of an appropriate discount rate. Although cash flow estimates are based on relevant information available at the time the estimates are made, estimates of future cash flows are, by nature, highly uncertain and may vary significantly from actual results. Any write-downs would be treated as permanent reductions in the carrying amounts of the assets and an operating loss would be recognized.

 

o)       Income taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax assets bases and operating loss and tax credit carry forwards. Deferred 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 tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to reduce the carrying amount of deferred tax assets if it is considered more likely than not that some portion, or all, of the deferred tax assets will not be realized.

 

Uncertain tax position is accounted for in accordance with ASC 740-10-25, which clarifies the accounting for uncertain tax positions and requires that the Company recognizes 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. The Company’s accounting policy is to accrue interest and penalties related to uncertain tax positions, if and when required, as interest expense and a component of general and administrative expenses, respectively, in the Consolidated Statements of Operations and Comprehensive Income. In the years ended December 31, 2014, 2015 and 2016, the Group did not record any interest and penalties associated with uncertain tax positions as there were no uncertain tax positions.

 

F-18



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

2.                     Summary of significant accounting policies (continued)

 

p)                    Revenue recognition

 

(i)                    Revenue recognition for solar modules, solar cells and other products (hereafter “solar products”)

 

The Group recognizes revenue from the sale of solar products when the goods are delivered and title and risk of loss transfer is passed to the customers. The Group sells its solar products at agreed upon prices to its customers, which reflect prevailing market prices.

 

The Group’s considerations for recognizing revenue are based on the following:

 

·                      Persuasive evidence that an arrangement (sales contract) exists between a willing customer and the Group that outlines the terms of the sale (including customer information, product specification, quantity of goods, purchase price and payment terms). Customers do not have a right of return. The Group does provide a warranty on its solar module products.

 

·                      For EX Works (“EXW”) terms, which mean that a seller has the goods ready for collection at its premises (works, factory, warehouse, plant),  the contract specifies that the risks are assumed by the customer when the customer picks up the goods from the Company’s warehouse, at which time revenue is recognized. For FOB shipping point terms, the contract specifies that the customer takes title to the goods and is responsible for all risks and rewards of ownership once products are over shipping rail at the named loading port from the Company’s premises, at which time revenue is recognized. For CIF terms, the Company pays the costs of insurance and freight necessary to bring the goods to the named port of destination, but the title to and risk/rewards of ownership of the goods is passed to the buyer according to each of the contract term, which is defined in each contract. For Delivered Duty Paid (“DDP”) terms, the Company pays the costs of insurance and freight necessary to bring the goods to the named port of destination as well as the import duty, and the title to and risk/rewards of ownership of the goods is passed to the buyer once the goods are delivered and the import duty is paid. The point of delivery could be at the port of shipping, or it could also be when the goods arrive at the named port of destination. When title to the goods transfers at the port of shipping, the beneficiary of the insurance is the buyer and the Company has no obligations to the buyer if goods are damaged during shipping. Revenue is therefore, recognized when the title to and risk/rewards of ownership of the goods is passed to the buyer which is at port of shipping or port of destination, depending on the terms of the contract.

 

·                      The Group’s price to the customer is fixed and determinable as specifically outlined in the sales contract.

 

·                      For customers to whom credit terms are extended, the Group assesses a number of factors to determine whether collection from the customers is reasonably assured, including past transaction history with these customers and their credit-worthiness. All credit extended to customers is pre-approved by management. If the Group determines that collection is not reasonably assured, including cases where the customers retain a portion of the full contract price as retainage after a specific period, it defers the recognition of revenue until such criterion is met, which is generally upon receipt of payment.

 

(ii)                 Revenue recognition for solar products processing

 

The Group provides solar products processing services to customers with their own wafer/polysilicon supplies. Under certain of these solar products processing service arrangements, the Group purchases raw materials from a customer and agrees to sell a specified quantity of solar products produced from such materials back to the same customer. The Group records revenue from these processing transactions on a net basis, recording revenue based on the amount received for solar products sold less the amount paid for the raw materials purchased from the customer.

 

(iii)              Revenue recognition for electricity generation

 

The Group recognizes electricity generation revenue when persuasive evidence of a power purchase arrangement with the power grid company exists, electricity has been generated and 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 includes a portion that is subsidized by the Chinese central government. Subsidized portion of electricity generation revenue is recognized after the Company meets the subsidy criterion, which includes electricity sales agreement with state grid, electricity generation and government approval of the Company’s application of the subsidy.

 

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Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

2.                     Summary of significant accounting policies (continued)

 

q)       Cost of revenue

 

Cost of revenue — solar products

 

Cost of revenue for solar products includes production related direct labor, direct material cost , depreciation and amortization, indirect costs, shipping (freight in) and handling costs for products sold, inventory obsolescence and lower of cost or market charge, capacity underutilization charges and warranty cost.

 

Cost of revenue - solar products processing

 

Cost of revenue for solar products processing includes direct labor, depreciation and amortization, indirect costs, and shipping and handling costs.

 

Cost of revenue — electricity generation

 

Cost of electricity generation revenue includes depreciation of solar power project assets and costs associated with operation and maintenance of the power plants came into use.

 

r)        Project assets

 

Project assets consist primarily of direct costs relating to solar power projects in various stages of development. A project asset is initially recorded at the actual cost. For a self-developed project asset that is initially obtained by application of feed-in-tariff (“FIT”) contract and other required permits, consents, the actual cost capitalized is the amount of the expenditure incurred for the application of those contracts, permits, consents, material and labor costs, cost of lands, capitalized interest and other similar direct costs. For a project asset acquired from external parties, the initial cost is the acquisition cost which includes the consideration transferred and certain direct acquisition cost. Modules cost, equipment cost and development and others incurred in the project development process will build up the cost of project assets.

 

 

 

As of December 31,

 

As of December 31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

Project assets completed and connected to the grid

 

 

 

 

 

Power station cost

 

626,911

 

2,371,978

 

Less: Accumulated depreciation

 

(25,685

)

(100,542

)

Subtotal

 

601,226

 

2,271,436

 

 

 

 

 

 

 

Project assets in-process

 

 

 

 

 

Modules cost

 

177,602

 

30,982

 

Equipment, development and other cost

 

249,787

 

36,230

 

Subtotal

 

427,389

 

67,212

 

 

 

 

 

 

 

Project assets, net

 

1,028,615

 

2,338,648

 

 

The Group reviews project assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In determining whether or not the project assets are recoverable, the Group considers a number of factors, including changes in environmental, ecological, permitting, marketing price or regulatory conditions that affect the project. Such changes may cause the cost of the project to increase or the selling price of the project to decrease. The Group impaired project assets with the amount of RMB 32,574 and RMB 8,073 for the years ended December 31, 2015 and 2016, respectively, as a result of the Group’s decision to suspend the construction of these projects.

 

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 its intended use, which is at the point when the solar power plant is connected to grids and begins to generate electricity. Depreciation of the completed solar power plant commences once the solar power plant is ready for its intended use. Depreciation will be computed using the straight-line method over the expected life of about 20 years (shorter of land use right or the estimated useful life of module used in project assets). RMB 626,911 and RMB 2,371,978 of project assets had been completed and connected to the grid as of the years ended December 31, 2015 and 2016, respectively. Depreciation expenses of project assets were RMB 25,685 and RMB 74,857 for the years ended December 31, 2015 and 2016.

 

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Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

2.                     Summary of significant accounting policies (continued)

 

r)        Project assets (continued)

 

As of December 31, 2015, project assets with net book value of RMB 601,226 were pledged as collateral for the Group’s borrowings of RMB 588,000 from Industrial and Commercial Bank of China. As of December 31, 2016, project assets with net book value of RMB 574,014 were pledged as collateral for the Group’s borrowings of RMB 546,000 from Industrial and Commercial Bank of China; project assets with net book value of RMB 894 were pledged as collateral for the Group’s borrowings of RMB 14,277 from 77 Bank; project assets with net book value of RMB 194,919 were pledged as collateral for the Group’s borrowings of RMB 250,500 from Industrial and Commercial Bank of China.

 

For the year ended December 31, 2016, the Group sold certain modules and equipment (“leased group”) with carrying amount of RMB 374,907 to a third party (the “purchaser-lessor”) for cash consideration of RMB 481,252 and simultaneously entered into a three-year or ten-year contract to lease back the leased assets from the purchase-lessor. Pursuant to the terms of the contract, the Group is required to pay to the purchaser-lessor lease payment over 3 or 10 years and is entitled to obtain the ownership of these equipment at a nominal price upon the expiration of the lease. The lease is classified as capital lease (Refer to Note 16 Other long term liabilities).

 

For the years ended December 31, 2014, 2015 and 2016, total interest capitalized was RMB nil, RMB 4,837 and RMB 7,549, respectively.

 

s)         Share based compensation

 

In accordance with ASC 718, Compensation-Stock Compensation, the Group measures the cost of employee services received in exchange for share-based compensation at the grant date fair value of the award.

 

The Group recognizes the share-based compensation costs, net of a forfeiture rate, on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards.

 

ASC 718 requires forfeitures to be estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates.

 

t)          Research and development

 

Research and development costs are expensed when incurred.

 

u)       Advertising expenses

 

Advertising expenses are expensed when incurred. Advertising expenses are not significant during any of the periods covered by these consolidated financial statements.

 

v)       Warranty cost

 

Solar modules produced by the Group are typically sold with a 10-year guarantee for defects in materials and workmanship and a 10-year and 25-year warranty against declines of more than 10.0% and 20.0%, respectively, of the initial minimum electricity generation capacity at the time of delivery. The Group therefore maintains warranty reserves (recorded as accrued warranty costs) to cover potential liabilities that could arise from these guarantees and warranties. The potential liability is generally in the form of product replacement or repair. The Group accrues 1.0% of its net revenues attributable to module sales as warranty costs at the time revenues are recognized and include that amount in its cost of revenues. Liabilities arising from special customer claims other than product replacement or repair are accrued separately and charged into cost of revenues instead of utilizing warranty reserves. Due to limited warranty claim history, the Group accrues the estimated costs of warranties based on its own history, industry data and an assessment of its competitors’ accrual history. Through the Group’s relationships with, and its management’s experience working at, other solar power companies and on the basis of publicly available information regarding other solar power companies’ accrued warranty costs, the Group believes that accruing 1.0% of its net revenues attributable to module sales as warranty costs is within the range of industry practice and is consistent with industry-standard accelerated testing, which assists the Group in estimating the long-term reliability of solar modules, estimates of failure rates from its quality review and other assumptions that it believes to be reasonable under the circumstances. However, although the Group conducts quality testing and inspection of its solar module products, these products have not been and cannot be tested in an environment simulating the up to 25-year warranty periods. Actual warranty costs are accumulated and charged against the accrued warranty liability. To the extent that the actual warranty costs differ from the estimates, the Group will prospectively revise its accrual rate.

 

w)     Foreign currencies translation

 

The functional and reporting currency of the Company and the majority of its subsidiaries is Renminbi (“RMB”). Transactions denominated in other currencies are translated into RMB at the exchange rates quoted by the People’s Bank of China (the “PBOC”) prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are translated into RMB at rates of exchange in effect at the balance sheet dates. All exchange gains and losses are included in the Consolidated Statements of Operations and Comprehensive Income as a separate line item after income from operations.

 

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Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

2.                     Summary of significant accounting policies (continued)

 

w)     Foreign currencies translation (continued)

 

For the Company’s subsidiaries whose functional currency is not RMB, the asset and liability accounts are translated into RMB, its reporting currency, using exchange rates in effect at the balance sheet dates, equity accounts are translated at historical exchange rates, and income and expense items are translated using average exchange rates. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of accumulative other comprehensive income, net of tax, in the Consolidated Statements of Operations and Comprehensive Income.

 

x)       Segment reporting

 

The Group has adopted ASC 280, Segment Reporting, for its segment reporting. The Group’s chief decision-maker (“CODM”), which is identified as the Chief Executive Officer, reviews operating results to make decision about allocating resources and assessing performance by segment. The Group operates and manages its business by two segments.

 

The Group’s first segment is the design, development, and manufacture of PV products (“manufacturing segment”).

 

The Group’s second segment is the downstream solar projects (“solar projects segment”), through which the Group connects solar projects to the grid and get the revenue from electricity generation.

 

y)       Commitments and Contingencies

 

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.

 

z)        Earnings per share

 

In accordance with ASC 260, Earnings Per Share, basic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. Under the two-class method, net income is allocated between ordinary shares and other participating securities (i.e. warrants) based on their participating rights. Diluted earnings per share is calculated by dividing net income attributable to ordinary shareholders, as adjusted for the change in income or loss resulting from the assumed conversion of those participating securities, if any, by the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the year. Ordinary share equivalents consist of the ordinary shares issuable upon the conversion of the senior convertible notes (using the if-converted method) and ordinary shares issuable upon the exercise of outstanding share options and RSUs (using the treasury stock method). Potential dilutive securities are not included in the calculation of dilutive earnings per share if the effect is anti-dilutive.

 

aa)          Other Comprehensive income/(loss)

 

The Group has adopted ASC 220, Comprehensive Income. ASC 220 defines other comprehensive income/(loss) to include all changes in equity, including adjustments to minimum pension liabilities, accumulated foreign currency translation, unrealized gains or losses on available-for-sale marketable securities, and unrealized hedging gain/(loss) to the extent effective, except those resulting from investments by owners and distributions to owners.

 

ab)    Share repurchase

 

When the shares are repurchased for retirement, the excess of cost over par value is charged entirely to retained earnings/(accumulated deficit).

 

F-22



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

2.                     Summary of significant accounting policies (continued)

 

ac)            Recent accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which contains new accounting literature relating to how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for the Group’s fiscal year beginning January 1, 2018, which reflects a one year deferral approved by the FASB in July 2015, with early application permitted provided that the effective date is not earlier than the original effective date. The Group is currently undertaking an assessment of its revenue contracts to determine impact, if any, the adoption of ASU 2014-09 will have on its financial statements and related disclosures. The Group anticipates the impact of ASU 2014-09 will likely be limited to the timing of recognition of its variable consideration. This variable consideration arises from situations when certain domestic customers in mainland China settle the final portion of receivables, usually above one year, according to the revenue contract. Such amount is currently recognized as revenue when the amount is received from the certain customers. The timing of the recognition of such amounts may be earlier under the new guidance; the Group plans to finalize its assessment in early 2017 and plans to adopt the standard starting 2018. The standard permits the use of either the full retrospective or modified retrospective transition method. The Group has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements — Going Concern”, which requires management to evaluate for each annual and interim reporting period whether it is probable that the reporting entity will not be able to meet its obligations as they become due within one year after the date that the financial statements are issued. If the entity is in such a position, the standard provides for certain disclosures depending on whether or not the entity will be able to successfully mitigate its going concern status. This guidance is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. The Group has adopted ASU 2014-15 in 2016.

 

The Group had positive working capital as of December 31, 2016. The Group’s management believes that the current cash position as of December 31, 2016, the cash expected to be generated from operations and funds available from borrowings under the bank credit facilities will be sufficient to meet the Group’s working capital for at least the next 12 months from April 26, 2017, the date of issuance of the fiscal 2016 financial statements.

 

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” which applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, first-out (“LIFO”). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Group has evaluated the impact of adopting this guidance and has concluded it will likely have no effect on the financial statements as the Group’s adjustments already reflect the concept of net realizable value. Inventory provisions are generally full write-downs for the affected inventory.

 

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”. This ASU amends existing guidance to require that deferred income tax liabilities and assets be classified as noncurrent in a classified balance sheet, and eliminates the prior guidance which required an entity to separate deferred tax liabilities and assets into a current amount and a noncurrent amount in a classified balance sheet. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual period. Additionally, the new guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Group has not yet selected an adoption method. The impact of adopting this guidance is not expected to be material to the consolidated financial statements given the Group’s deferred tax amounts. As of December 31, 2016, the current portion of deferred tax assets and deferred tax liability is RMB 138,080 and RMB nil, respectively.

 

In February 2016, the FASB issued an ASU 2016-02, “Leases (Topic 842).” The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. This ASU is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. The Group is currently evaluating the impact the pronouncement will have on the Group’s financial statements and related disclosures.

 

In March 2016, the FASB issued an ASU 2016-07, “Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting,” which eliminates the requirement to retrospectively apply the equity method in previous periods. Instead, the investor must apply the equity method prospectively from the date the investment qualifies for the equity method. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The impact of adopting this pronouncement is not expected to be material to the consolidated financial statements given the Company’s investments.

 

In March 2016, the FASB issued an ASU 2016-09 “Improvements to Employee Share-based Payment Accounting”, which amends ASC Topic 718, Compensation — Stock Compensation. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Group is currently evaluating the impact the pronouncement will have on the Group’s financial statements and related disclosures.

 

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 230).” This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The Company will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As the likelihood of the Group experiencing one or more of the eight particular specified transactions is low, ASU 2016-15 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18, “Restricted Cash (Topic 230).” The amendments in this Update are an improvement to GAAP by providing guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows, thereby reducing the diversity in practice described above. ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Group does not expect that the adoption will have a material impact on its consolidated financial statements. For the year ended December 31, 2016, the increase of restricted cash with the amount of RMB 173,243 is included in investing activities of the statements of cash flows.

 

F-23



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

3.              Acquisition

 

a)             Acquisition of JA MEMC

 

In June 2014, the Group acquired additional 50% equity interests in JA MEMC (Yangzhou) Technology Co., Ltd. (“JA MEMC”) held by a joint venture partner for a consideration of RMB 47.4 million (USD 7.7 million) in cash.  The Group previously owned 50% equity interest in JA MEMC and accounted for its investment in JA MEMC using equity method of accounting since 2011 (Refer to Note 4 Investments in joint venture and affiliates). The transaction is assessed as business combination and was completed on June 18, 2014, the date on which JA obtained control of JA MEMC.

 

Upon completion, JA MEMC became a wholly-owned subsidiary of the Group. As a result of the acquisition, revaluation gain of RMB 3,652 was recognized in income from equity method investments, representing the difference of the fair value of previously held 50% equity and the then carrying amount of that investment. In addition, a negative goodwill of RMB 4,628 was recognized and recorded as other income, reflecting the excess of the fair value of the identified net assets of the acquiree and the consideration transferred. Immediately after the acquisition, JA MEMC transferred all of its assets and liabilities to JA Yangzhou and was dissolved in December, 2014. The Group fully consolidated JA MEMC after the completion of the equity transfer until its dissolution.

 

Purchase price allocation

 

The total purchase price was allocated to JA MEMC’s tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values as set forth below. The Group makes estimates and judgments in determining the fair value of the acquired assets and assumed liabilities, based on its experience with similar assets and liabilities in similar industries. In performing the purchase price allocation, the Group considered the analyses of historical financial performance and estimates of future performance of JA MEMC’s business.

 

 

 

As of June 24, 2014

 

 

 

RMB

 

Assets acquired:

 

 

 

Cash and cash equivalents

 

8,426

 

Other current assets

 

13,260

 

Property, plant and equipment, net (1)

 

83,025

 

Total assets acquired

 

104,711

 

Liabilities

 

 

 

Accounts payable

 

697

 

Other liabilities

 

2

 

Total liabilities assumed

 

699

 

Total fair value of net assets

 

104,012

 

 


(1)  The fair value of property, plant and equipment was recognized and measured at fair value using discounted future cash flow method.  Accumulated depreciation was not carried forward.

 

JA MEMC contributed revenues of RMB 40,996 or 0.4% of total revenue from June 24, 2014 through December 31, 2014.

 

F-24



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

3.              Acquisition (continued)

 

b)             Acquisition of Jiuzhou Yichang

 

On March 11, 2016, the Group signed a share transfer contract with Jiuzhou Fangyuan New Energy Co. Ltd. (“Jiuzhou Fangyuan”), in which the Group would acquire 100% of shares of Jiuzhou Yichang, which is engaged in solar projects business. The consideration of the acquisition is RMB 150,000. The acquisition transaction was completed in June 2016. This transaction was accounted as a business combination under ASC 805. The result of the acquired entity’s operations has been included in the consolidated financial statements of the Group since the acquisition date. On the acquisition date, the allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows:

 

 

 

As of June 30, 2016

 

 

 

RMB

 

Assets acquired:

 

 

 

Cash and cash equivalents

 

2,108

 

Other current assets

 

31,032

 

Project assets (1)

 

200,187

 

Total assets acquired

 

233,327

 

Liabilities

 

 

 

Accounts payable

 

13,553

 

Other liabilities

 

69,774

 

Total liabilities assumed

 

83,327

 

Total fair value of net assets

 

150,000

 

 


(1)  The fair value of project assets was recognized and measured at fair value using discounted future cash flow method.

 

As of December 31, 2016, the Group has paid RMB 80,000 for the consideration. The unpaid consideration of RMB 70,000 is payable on demand and is recorded as a current liability accordingly. Based on the Group’s assessment, the revenue and net earnings of Jiuzhou Yichang were not considered material to the Group both individually and in aggregate for the year ended December 31, 2016. Pro forma results of operations for the acquisitions described above have not been presented because they are not material to the consolidated statements of operations and comprehensive income, either individually or in aggregate.

 

F-25



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

4.              Investments in joint venture and affiliates

 

a)             Investment in JA MEMC

 

In March 2011, the Group entered into a joint venture agreement with SunEdison Products Singapore Pte.Ltd. (“SunEdison”), (formerly known as MEMC Singapore Pte.Ltd.,) to form a jointly-owned company JA MEMC, to build and operate a solar cell production facility in China. Pursuant to the joint venture agreement, JA Yangzhou and SunEdison each contributed a capital investment of RMB 96,211 in cash, which represents 50% of the share capital of JA MEMC. The Group accounts for its investment in the joint venture using the equity method and the Group’s share of JA MEMC’s results of operations is included in equity gain/(loss) for a joint venture in the Company’s Consolidated Statements of Operations and Comprehensive Income. The Group’s equity in net loss of JA MEMC amounted to RMB 441 for the years ended December 31, 2014.

 

The Group reviews its investment in JA MEMC to determine whether a decline in fair value below the carrying value, if any, is other- than-temporary. No impairment loss occurred in 2014. Although assumptions used in estimates of fair value of the investment in JA MEMC are management best estimates, such assumptions are, by nature, highly judgmental and may vary significantly from actual results.

 

As disclosed in Note 3, the Group acquired additional 50% equity interests in JA MEMC in June 2014, and started to consolidate JA MEMC since then.

 

b)             Investment in Datang Angli

 

In 2012 and 2013, the Group sold PV module to Shandong Angli PV technology Ltd. (“Shandong Angli”) for RMB 47.0 million (“the Receivable”). In 2015, Shandong Angli settled its liability with the Company through a debt restructuring agreement (“the Agreement”). The agreement was signed by the Company, Shandong Angli and Ningxia Angli PV technology Ltd. (“Ningxia Angli”), the related party of Shandong Angli. According to the agreement, Ningxia Angli transferred 29.16% of equity shares of Datang Angli (Lingwu) New Energy Co., Ltd. (“Datang Angli”) to the Company in exchange for the settlement of RMB 47.0 million receivable from Shandong Angli. The Group accounted for its original investment of 29.16% in Datang Angli at its fair value, amounted to RMB 39,498 under equity method because the Group has significant influence, but no voting control over Datang Angli. As the original accounts receivable balance of RMB 47.0 million from Shandong Angli was fully reserved in 2013, the Company recorded a gain of RMB 39.5 million in selling, general and administrative expenses upon the receipt of the investment in Datang Angli. The remaining RMB 7.5 million allowance for difference between the Receivable gross amount RMB 47.0 million and the RMB 39.5 million fair value of Datang Angli, was written off in 2015 against the remaining original balance (Refer to Note 6 Accounts Receivable). The Group picked up the 29.16% of the net profit generated from Datang Angli with RMB 44 and RMB 15 in 2015 and 2016 respectively.

 

c)              Investment in Lincheng

 

JA Solar PV Electric (Lincheng) Co., Ltd. (“Lincheng”), a company 100% owned by JA, was set up in 2013, for the purpose of construction of power plants. Lincheng was undertaking early stage of development of a power plant with 100 MW capacity.

 

In July 2014, JA entered into sales agreement with China Rich Energy Cooperation Ltd (“Rich Energy”). Under the agreement, Rich Energy contributed cash as the capital injection to Lincheng to acquire 80% equity interest of Lincheng.  JA deconsolidated Lincheng and starts to account for its investment of 20% in Lincheng as equity method of accounting because JA has significant influence, but does not have voting control over Lincheng since July 2014. By the end of 2014, Rich Energy has paid total cash of RMB 66,400 in full as capital injection and all necessary legal procedures related to the share ownership were finished. JA has paid total cash of RMB 16,600 in full as capital injection. In 2016, the Group and Rich Energy increased the capital injection proportionally and paid total cash of RMB 14,000 and RMB 56,000 in full respectively. The percentage of ownership remained unchanged after the capital injection.

 

In 2014, 2015 and 2016, the Group sold modules to Lincheng with the revenue of RMB 115,382, RMB 92,158 and RMB 162,516, with cost of RMB 100,002, RMB 71,993 and RMB 112,502 in the respective years. Since JA hold 20% share of Lincheng, the 20% of the unrealized profit with an amount of RMB 3,076, RMB 4,033 and RMB 10,003 in 2014, 2015 and 2016 respectively, was eliminated against the long term investment balance. The balance of long-term investment in Lincheng was RMB 15,627 and RMB 29,465 after the deduction of unrealized profit and pick-up of the 20% of the net profit generated from Lincheng with RMB 6,136 and RMB 9,841 in 2015 and 2016 respectively (2014: Nil. Lincheng was in pre-operating stage in 2014).

 

5.     Notes Receivable

 

Notes receivable represents bank drafts that are non-interest bearing and due within from two to twelve months. Such bank drafts have been arranged with third-party financial institutions by certain customers to settle their purchases from the Group. The carrying amount of notes receivable approximate its fair values. There is no allowance against notes receivable as of December 31, 2015 and 2016.

 

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Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

6.              Accounts Receivable, net

 

Accounts receivable, net, consists of accounts receivables less allowance for doubtful accounts. The following table presents the movement of the allowance for doubtful accounts:

 

 

 

As of December 31,

 

As of December 31,

 

As of December 31,

 

 

 

2014

 

2015

 

2016

 

 

 

RMB

 

RMB

 

RMB

 

Balance at beginning of the year

 

280,987

 

275,526

 

259,820

 

Allowance made during the year

 

71,104

 

87,219

 

96,298

 

Recoveries

 

(55,721

)

(91,965

)

(114,374

)

Amount written off against the allowance

 

(20,844

)

(10,960

)

(53,425

)

Balance at end of the year

 

275,526

 

259,820

 

188,319

 

 

As of December 31, 2015 and 2016, the accounts receivables balance includes RMB 47,668 and RMB 155,770 respectively, which represents subsidy portion of revenue that will be received after the Group’s power plants are listed in the Subsidy Catalogue (Note 2(p)). The Group assesses creditworthiness of customers before granting any credit terms. This assessment is primarily based on reviewing of customer’s financial statements and historical collection records, discussion with customers’ senior management, and reviewing of information provided by third parties, and the insurance company that ultimately insures the Group against customer credit default. During the year ended December 31, 2016, for sales of solar cells, the Group provided credit terms of up to 90 days to customers with good credit-worthiness as determined by the Group’s credit assessment. For sales of solar modules, which generally require a longer credit terms according to industry practice, credit terms of up to 180 days were granted to customers with good credit-worthiness. For the year ended December 31, 2014, 2015 and 2016, provisions, net of recoveries, of RMB 15,383, RMB (4,746) and RMB (18,076), respectively, were made/(reversed) against accounts receivable for estimated losses resulting from the inability of the customers to make payments as well as a few customers that had financial and operational difficulties. Recoveries of the accounts receivable balance in 2015 were mainly due to the swap of fully reserved (in 2013) accounts receivable balance from Datang Angli for equity method investment with the amount of RMB 39,498 (Refer to Note 4(b) Investment in Datang Angli) and cash collection from other customers.

 

7.              Inventories

 

Inventories consisted of the following:

 

 

 

As of December 31,

 

As of December 31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

Raw materials

 

758,032

 

941,131

 

Work-in-progress

 

121,821

 

94,164

 

Finished goods

 

780,689

 

1,425,193

 

Total

 

1,660,542

 

2,460,488

 

 

For the year ended December 31, 2014, 2015 and 2016, inventories were written down through cost of revenues by RMB 15,073, RMB 6,905 and RMB 126,570, respectively, to reflect the lower of cost or market or obsolescence.

 

In the periods presented, the Group renegotiated with certain suppliers on shipment quantities and pricing terms of long-term purchase arrangements and got positive outcome on a periodic basis, as described follows: Although the quantities under the purchase commitments of the LTAs are fixed, the Group negotiated and executed amendments for current purchases on a quarterly or monthly basis with those suppliers. As a result of such monthly or quarterly negotiations, suppliers either (i) agreed to lower the purchase price for the relevant month or quarter to a level that is close to the market price and significantly lower than the stated contract price, or (ii) agreed to deliver additional quantities to the Group for free during the relevant month or quarter in exchange for the Group’s agreement to purchase the stated quantity at the stated price under the LTAs for such month or quarter, which cumulatively resulted in the Group purchasing quantities larger than stated under the LTAs but at an average purchase price that was close to market price during such month or quarter.

 

F-27



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

7.              Inventories (continued)

 

At the end of the reporting period, the Group separately assesses the potential losses, if any, on the aforementioned LTAs taking into consideration of the factors as mentioned above, as well as additional factors, such as the renegotiation outcome in current period, contract period, historical outcome of the renegotiation with the same supplier, status of a particular LTA at the time of assessment, and other circumstances and uncertainties that may impact such assessment.

 

There was no loss provision recorded related to these long-term contracts in the years ended December 31, 2014 and 2015. For the year ended December 31, 2016, the loss provision was amounted to RMB 48,906.

 

When preparing the Group’s consolidated financial statements, the Group separately assessed, in accordance with ASC 330-10-35-17 and -18, the potential losses on the firm purchase commitments to Hemlock Semiconductor Pte. Ltd. (“Hemlock”). The Group entered into a LTA (“Original Supply Agreement”) with Hemlock in March 2011. While the Original Supply Agreement provides for purchases at fixed price and fixed quantities starting from 2013 to 2020, the Group did not make a full advance payment according to the Original Supply Agreement or accept any delivery in 2013, 2014 and 2015 due to the significant decrease of silicon price in the market and the uncertainty brought by anti-dumping and anti-subsidy investigation (the “Investigation”) against polysilicon imported from the U.S. and South Korea initiated by the Chinese Ministry of Commerce (“MOFCOM”) in recent years and MOFCOM’s ruling in 2014 that investigated products from South Korea and the United States are subject to import tariffs at different rates with the highest rate being 57%. In October 2016, the Group entered into a settlement agreement (“Settlement Agreement”) and an amended LTA (“New Supply Agreement”) with Hemlock (Refer to Note 26 Commitments and Contingencies). The New Supply Agreement provides for purchasing a certain amount of polycrystalline silicon products on a quarterly basis starting from 2016 to 2026. The Group started purchasing in 2016 according to the New Supply Agreement.

 

When preparing the consolidated financial statements for the year ended and as of December 31, 2014 and 2015, the Group considered the following factors in assessing whether it should accrue losses on long-term inventory purchase commitments to Hemlock:

 

Although the Group was in the process of renegotiating with Hemlock and no written agreement had been reached as of December 31, 2014 and 2015, both parties continued to constructively dialogue to find a mutually satisfactory solution.

 

The Group had been able to renegotiate with other suppliers with similar terms to get positive outcome, and the Group had history of renegotiating similar contacts with the same suppliers, and

 

The Group assessed whether there would be loss on firm purchase commitments by applying a methodology similar to that used in the lower of cost or market evaluation with respect to inventory. In assessing the potential loss provision for 2014 and 2015, the Group used the stated contract price, volume under the Original Supply Agreement with Hemlock as the major assumption to perform the analysis. A comprehensive analysis for estimated net realizable value of the saleable finished goods, after considered all estimated costs which include conversion costs, shipping costs, costs for build-up, fees for breakage, and third party processing costs, was lower than market selling price of finish goods as of December 31, 2014 and 2015.  Even though the purchase price as stated in the Original Supply Agreement was higher than market price of polysilicon (i.e. raw material), in applying the lower of cost or market principle, the net realizable value after considering estimated costs to convert those polysilicon into saleable finished goods was higher than its carrying amount (after deducting selling costs) as of December 31, 2014 and 2015.

 

Upon the reach of the New Supply Agreement in October 2016, the Group assessed the potential loss provision under the New Supply Agreement. The Group considered the factor of declining average selling prices of finished goods, the plan to build a new manufacturing facility overseas to utilize polysilicon to be purchased from Hemlock, and the contract price, volume under the New Supply Agreement with Hemlock as the major assumption to perform the same comprehensive analysis as prior years.  Due to the fact that the new manufacturing wafer facility overseas is under construction, the Group has planned to externally process and sell the polysilicon during the period of construction of the new wafer facility. The estimated net realizable value of the polysilicon for resale is lower than its carrying amount as of December 31, 2016 and a loss provision is estimated accordingly for the polysilicon committed to be purchased from Hemlock before the planned period when the new facility is put into use.

 

Based on all the aforementioned factors, the Group concluded that no loss provision under the Original Supply Agreement with Hemlock should be provided as of December 31, 2014 and 2015 and loss provision amounted to RMB 48,906 under the New Supply Agreement with Hemlock should be provided as of December 31, 2016.

 

8.              Advances to suppliers

 

In order to better manage the Group’s unit costs and to secure adequate and timely supply of polysilicon and silicon wafers during the periods of shortages of polysilicon and silicon wafer supplies, the Group entered into a number of multi-year supply agreements in amounts that were expected to meet the Group’s anticipated production needs. As a condition to the Group receiving the raw materials under those agreements, and in line with industry practice, the Group was required to, and had made advances for all, or a portion, of the total contract price to the Group’s suppliers, which are then offset against future purchases. Typically, the supply agreements are subject to price negotiations with the suppliers based on market prices. The Group has made advances to suppliers where the Group has committed to purchase minimum quantities under some of the supply agreements.

 

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Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

8.              Advances to suppliers (continued)

 

Advances to suppliers to be offset against future purchases of which the Group expects to take delivery of the inventory after the next twelve months are classified as non-current assets in the Company’s Consolidated Balance Sheet as at year end dates.

 

The Group does not require collateral or other security against its advances to related or third party suppliers. As a result, the Group’s claims for such prepayments would rank only as an unsecured claim, which exposes the Group to the credit risks of the suppliers. Also, the Group may not be able to recover all unutilized advances to suppliers if the Group does not purchase the minimum quantities or is unable to negotiate or renegotiate acceptable prepayment, quantities, prices and delivery terms with these suppliers, or unforeseen events impair the ability of suppliers to deliver raw materials.

 

As of December 31, 2015 and 2016, outstanding prepayments, net of any allowance, made to individual suppliers in excess of 10% of total prepayments to suppliers are as follows:

 

 

 

As of December
31,

 

As of December
31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

Supplier A (third party)

 

229,586

 

143,962

 

Supplier B (third party)

 

106,799

 

50,200

 

Supplier C (third party)

 

43,011

 

38,591

 

 

The following table presents the movement of the allowance for advances to supplier:

 

 

 

As of December
31,

 

As of December
31,

 

As of December
31,

 

 

 

2014

 

2015

 

2016

 

 

 

RMB

 

RMB

 

RMB

 

Balance at beginning of the year

 

72,327

 

129,307

 

125,799

 

Allowance made during the year *

 

63,331

 

1,045

 

 

Recoveries

 

(6,351

)

 

 

Written off *

 

 

(4,553

)

(105,082

)

Balance at end of the year

 

129,307

 

125,799

 

20,717

 

 

The Group continually assesses the credit quality of its suppliers and the factors that affect the credit risk. Given all circumstance and available evidence as of December 31, 2016, management assesses the risk that the Company is not able to fully utilize the remaining advance payment balance is remote and therefore no further provision was made against remaining advance payment balance as the balance was considered recoverable. Recoveries represent cash received or product delivered subsequently.

 


* As of December 31, 2014, full provision of RMB 63,331 was provided against the prepayment made to Hemlock under the Original Supply Agreement, as management could not conclude that such amount is recoverable. As of December 31, 2016, the Company wrote off this reserve against the asset, with no income statement impact, due to the settlement of Hemlock dispute (Refer to Note 26 Commitments and Contingencies). In addition, a supplier named General Silicon Solar Energy Electricity (Kunshan) Ltd. was closed as a result of bankruptcy in 2016. Full provision of RMB 35,839 and the gross balance of the prepayment were written off as of December 31, 2016.

 

F-29



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

9.              Other current assets

 

Other current assets consisted of the following:

 

 

 

As of December 31,

 

As of December 31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

Input value-added tax recoverable

 

327,304

 

395,198

 

Value-added tax refund from export sales

 

8,500

 

707

 

Prepaid input VAT & customs duty for import machinery and materials

 

9,508

 

49,226

 

Prepaid expenses

 

11,390

 

30,513

 

Foreign exchange forward contract instruments

 

960

 

 

Deposit receivable

 

50,618

 

66,784

 

Current portion of land use rights (Refer to Note 14 Prepaid land use rights)

 

10,063

 

12,155

 

Others

 

30,217

 

33,142

 

 

 

448,560

 

587,725

 

 

For the year ended December 31, 2015, a write-off of RMB 19,078 was made against deposits resulting from the cease of bidding of some projects. There is no such situation for the years ended December 31, 2014 and 2016.

 

10.   Property, plant and equipment, net

 

Property, plant and equipment, net, consisted of the following:

 

 

 

As of December 31,

 

As of December 31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

Buildings

 

1,778,328

 

1,918,209

 

Furniture, fixtures and office equipment

 

101,686

 

113,349

 

Motor vehicles

 

29,709

 

31,183

 

Machinery and equipment

 

4,960,915

 

5,889,645

 

Leasehold improvements

 

355,009

 

387,006

 

Total

 

7,225,647

 

8,339,392

 

Less: accumulated depreciation

 

(3,254,222

)

(3,776,730

)

Subtotal

 

3,971,425

 

4,562,662

 

Construction-in-progress

 

393,923

 

656,839

 

Property, plant and equipment, net

 

4,365,348

 

5,219,501

 

 

As of December 31, 2016, JA Zhabei pledged its buildings with the net book value of RMB 79,040 to secure a short-term bank borrowing of RMB 200,000 from Industrial Bank; JA Jinglong pledged its buildings with the net book value of RMB 238,501 to secure a short-term bank borrowing of RMB 34,685 and a long-term bank borrowing of RMB 70,000 from Industrial and Commercial Bank of China; JA Yangzhou pledged its buildings with the net book value of RMB 26,017 to secure a short-term bank borrowing of RMB 10,000 from China Construction Bank. JA Yangzhou pledged its buildings with the net book value of RMB 66,824 to secure a short-term bank borrowing of RMB 39,000 from China Construction Bank; JA Lianyungang pledged its buildings with the net book value of RMB 95,011 to secure a short-term bank borrowing of RMB 90,784 from China Construction Bank; JA Hefei Technology pledged its building, machinery and equipment, and construction in progress with the net book value of RMB 712,200 to secure a long-term entrusted loan of RMB 1,440,000 from Hefei High-Tech Industrial Development Zone Management Co., Ltd.

 

In December 2015, the Group sold certain newly purchased equipment (“leased assets”) with carrying amount of RMB 44,350 to a third party (the “purchaser-lessor”) for cash consideration of RMB 41,808 and simultaneously entered into a three-year contract to lease back the leased assets from the purchase-lessor. Pursuant to the terms of the contract, the Group is required to make lease payment to the purchaser-lessor quarterly for over 3 years and is entitled to obtain the ownership of these equipment at a nominal price upon the expiration of the lease. The lease is classified as capital lease (Refer to Note 16 Other long term liabilities).

 

F-30



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

10.            Property, plant and equipment, net (continued)

 

For the years ended December 31, 2014, 2015 and 2016, total interest capitalized was RMB 38,053, RMB 25,094 and RMB 29,279, respectively.

 

Depreciation expense was RMB 672,855, RMB 759,611 and RMB 823,340 for the years ended December 31, 2014, 2015 and 2016, respectively, and is recorded in manufacturing overhead, selling, general and administrative expenses, research and development expenses.

 

For the year ended December 31, 2016, the Group disposed machinery and equipment with the net book value of RMB 119,120, resulting a loss of RMB 117,582, and purchased new equipment for upgrade of production line to increase the production efficiency.

 

The Group evaluates long-lived assets for impairment if events or changes in circumstances indicated that the carrying value of such assets may not be recoverable. No impairment loss occurred in the year ended December 31, 2014, 2015 and 2016.

 

11.            Intangible assets, net

 

Intangible assets, net, consisted of the following:

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

 

 

 

RMB

 

RMB

 

RMB

 

 

As of December 31, 2015

 

 

 

 

 

 

 

 

Technical know-how

 

9,000

 

(9,000

)

 

 

Customer relationship

 

3,191

 

(2,606

)

585

 

 

Purchased software and others

 

26,491

 

(14,842

)

11,649

 

 

 

 

38,682

 

(26,448

)

12,234

 

 

As of December 31, 2016

 

 

 

 

 

 

 

 

Technical know-how

 

9,000

 

(9,000

)

 

 

Customer relationship

 

3,191

 

(3,191

)

 

 

Purchased software and others

 

29,013

 

(17,300

)

11,713

 

 

 

 

41,204

 

(29,491

)

11,713

 

 

 

 

Amortization expense was RMB 2,427, RMB 2,312 and RMB 3,043 for the years ended December 31, 2014, 2015 and 2016, respectively, and is recorded in manufacturing overhead, selling, general and administrative expenses, research and development expenses.

 

Amortization expense of the existing intangible assets for each of the next five years will be approximately RMB 1,933.

 

12.       Income taxes

 

Cayman Islands and British Virgin Islands

 

The Company is a tax exempt company incorporated in the Cayman Islands. Under the laws of Cayman Islands, the Company is not subject to tax on income or capital gain. The Company’s subsidiary established in the British Virgin Islands is tax exempt under the laws of British Virgin Islands, and accordingly, is not subject to tax on income or capital gain.

 

F-31



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

12.            Income taxes (continued)

 

People’s Republic of China

 

The Corporate Income Tax (“CIT”) Law enacted by the National People’s Congress of China stipulated that FIEs and domestic companies would be subject to CIT at a uniform rate of 25%.

 

In accordance with the CIT Law, a company is entitled to a preferential income tax of 15% if qualifying as an Advanced and New Technology Enterprise (“ANTE”). The preferential tax rate, once being approved by the relevant government authorities, is subject to renewal every three years. However, a company that enjoys the preferential income tax rate should perform self-assessment to ensure it maintains the required qualification during those three years. In November 2010, JA Hebei was recognized as an ANTE under the CIT Law and is entitled to the preferential income tax of 15% from 2010 to 2012. In March 2014, JA Hebei was again recognized as an ANTE under the new CIT Law and is entitled to the preferential income tax of 15% from 2013 to 2015. In November 2016, JA Hebei was once more recognized as an ANTE and is entitled to the preferential income tax of 15% from 2016 to 2018. In August 2011, JA Yangzhou was recognized by the Chinese government as an ANTE and is entitled to the preferential income tax of 15% from 2011 to 2013. In August 2014, JA Yangzhou was again recognized as an ANTE under the new CIT Law and is entitled to the preferential income tax of 15% from 2014 to 2016. In November 2011, JA Lianyungang was recognized by the Chinese government as an ANTE and is entitled to the preferential income tax of 15% from 2011 to 2013. In October 2014, JA Lianyungang was again recognized as an ANTE under the new CIT Law and is entitled to the preferential income tax of 15% from 2014 to 2016. JA Fengxian was recognized as an ANTE and is entitled to the preferential income tax of 15% from 2011 to 2013. JA Fengxian has chosen to complete the above mentioned 2+3 holiday for the overlapping period of 2011 and 2012. In September 2014, JA Fengxian was again recognized as an ANTE under the new CIT Law and is entitled to the preferential income tax of 15% from 2014 to 2016. JA Wafer R&D was recognized by the Chinese government as an ANTE and is entitled to the preferential income tax of 15% from 2012 to 2014. In 2015, JA Wafer R&D’s recognition as an ANTE expired. In November 2016, JA Wafer R&D was again recognized as an ANTE and is entitled to the preferential income tax of 15% from 2016 to 2018. In October 2016, JA Hefei Technology was recoginized as an ANTE under the CIT Law and is entitled to the preferential income tax of 15% from 2016 to 2018.

 

The Group’s solar power plants are entitled to a three-year tax exemption from CIT starting from the year in which revenue is first generated from sale of electricity, and a 50% CIT reduction, effectively 12.5%, for the succeeding three years thereafter for the income generated from investing and operating in the qualified public basic infrastructure projects according to the CIT Law (“three-year tax exemption and three-year 50% CIT reduction”). The CIT tax rate for these project entities will increase to 25% upon the expiration of such term. JA Dunhuang started generating revenue from sale of electricity since 2015 and is entitled to the three-year tax exemption and three-year 50% CIT reduction from 2015 to 2020. Jiuzhou Xinjiang, Lincheng Jingneng, JA Linzhou, JA Datong, JA Hefei Electric., JA Yanchi, JA Jarud, JA Chifeng started generating revenue from sale of electricity since 2016 and is entitled to the three-year tax exemption and three-year 50% CIT reduction from 2016 to 2021.

 

F-32



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

12.       Income taxes (continued)

 

On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 or after will be exempt from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT at a rate up to 10% (lower rate is available under the protection of tax treaties). As a result, if any dividends are declared out of the cumulative retained earnings as of December 31, 2007, they should be exempt from WHT. In 2012, JA Hebei declared dividends of RMB 107,804 out of the cumulative retained earnings as of December 31, 2007 to JA BVI, which was exempt for WHT. JA Yangzhou, as requested by the local tax bureau, declared dividends of RMB 210,637 out of the earnings after January 1, 2008 to JA BVI in order to meet the capital injection requirement for JA Yangzhou. Pursuit to Circular 1, the appropriation of dividend for reinvestment purpose is subject to 10% WHT, amounting to RMB 21,064, which was paid and recorded as income tax expenses for the year ended December 31, 2012. Excluding JA Yangzhou’s dividend appropriation requested by the local tax bureau, the Group intends to indefinitely reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Undistributed earnings as of December 31, 2015 and 2016 are considered to be indefinitely reinvested, and therefore, no deferred tax liability was recognized. Cumulative undistributed earnings of the Company’s PRC subsidiaries intended to be permanently reinvested totaled RMB 3,871,442 and RMB 5,248,874 and the amount of the unrecognized deferred tax liability on the permanently reinvested earnings was RMB 387,144 and RMB 524,887 as of December 31, 2015 and 2016.

 

Hong Kong SAR

 

No income tax provision has been made for JA Hong Kong and JA International in any period, as the entities did not have assessable profits subject to Hong Kong Profit Tax at the rate of 16.5% for the years presented.

 

United States

 

JA USA is subject to US federal statutory tax rate of 35% and also subject to the state of California income tax rate of 8.84%. The state income tax paid is deductible for US federal income tax.

 

European Countries

 

JA GmbH is incorporated in Germany and is subject to effective income tax rate of 29.55% which consists of 15% corporate income tax plus a solidarity surcharge of 5.5% on corporate income tax and a trade income tax rate of 13.72%.

 

Japan

 

JA Japan is subject to Japanese corporate income tax rate of 35.64%.

 

Australia

 

JA Australia is subject to Australia corporate income tax rate of 30%.

 

Malaysia

 

JA Malaysia is subject to Malaysia corporate income tax rate of 24%.

 

The tax expense comprises:

 

 

 

For the year
ended

 

For the year
ended

 

For the year
ended

 

 

 

December 31,
2014

 

December 31,
2015

 

December 31,
2016

 

Current tax

 

(189,622

)

(253,980

)

(207,645

)

Deferred tax

 

116,232

 

96,648

 

84,344

 

 

 

(73,390

)

(157,332

)

(123,301

)

 

F-33



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

12.       Income taxes (continued)

 

Components of deferred tax assets consisted of the following:

 

 

 

As of December
31,

 

As of December
31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

Deferred tax assets:

 

 

 

 

 

Temporary differences:

 

 

 

 

 

Amortization of intangible assets

 

610

 

510

 

Accrued warranty costs

 

80,900

 

94,856

 

Accrued expenses

 

49,819

 

52,550

 

Net loss carried forward

 

232,599

 

251,862

 

Depreciation of property, plant and equipment

 

123,937

 

127,221

 

Inventory write-down

 

10,470

 

34,461

 

Allowance for doubtful accounts

 

67,071

 

30,650

 

Allowance for advance to suppliers

 

17,684

 

3,108

 

Impairment loss on property, plant and equipment and project assets

 

84,663

 

58,969

 

Accrued interest

 

45,507

 

 

Government grant for the acquisition of land use rights and property, plant and equipment

 

40,354

 

28,216

 

Timing difference for revenue recognition of retainage contract

 

48,683

 

50,376

 

Unrealized profit

 

45,462

 

75,352

 

Others

 

6,097

 

9,744

 

Deferred tax assets

 

853,856

 

817,875

 

Deferred tax liabilities:

 

 

 

 

 

Temporary differences:

 

 

 

 

 

Capitalized interest

 

(34,868

)

(24,399

)

Deferred tax liabilities

 

(34,868

)

(24,399

)

Less: valuation allowance

 

(483,649

)

(373,793

)

Deferred tax assets-net

 

335,339

 

419,683

 

 

Deferred tax assets are analyzed as:

 

 

 

As of December
31,

 

As of December
31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

Current

 

139,143

 

138,080

 

Non-Current

 

231,064

 

306,002

 

 

 

370,207

 

444,082

 

 

 

 

 

 

 

Deferred tax liability are analyzed as:

 

 

 

 

 

Current

 

 

 

Non-Current

 

(34,868

)

(24,399

)

 

 

(34,868

)

(24,399

)

 

 

335,339

 

419,683

 

 

F-34



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

12.       Income taxes (continued)

 

The following table presents the movement of the valuation allowance for deferred tax assets:

 

 

 

As of December 31,

 

As of December 31,

 

As of December 31,

 

 

 

2014

 

2015

 

2016

 

 

 

RMB

 

RMB

 

RMB

 

Balance at beginning of the year

 

683,341

 

456,925

 

483,649

 

Allowance made during the year

 

40,619

 

119,448

 

128,605

 

Reversals and utilization

 

(267,035

)

(92,724

)

(214,860

)

Written off

 

 

 

(23,601

)

Balance at end of the year

 

456,925

 

483,649

 

373,793

 

 

The Group has made some portion of valuation allowance against its net deferred tax assets. The Group evaluates a variety of factors in determining the amount of the valuation allowance, including its earnings history, the tax holiday period, the existence of taxable temporary differences, and near-term earnings expectations. Future reversal of the valuation allowance will be recognized upon the earlier of when the benefit is realized or when it has been determined that it is more likely than not that the benefit will be realized through future earnings. Certain valuation allowance was reversed and utilized in 2015 and 2016 when certain subsidiaries generated sufficient taxable income to utilize the deferred tax assets in the current year. Furthermore, a portion of valuation allowance was reversed in 2015 and 2016 due to the expected utilization of deferred tax assets in the future. Valuation allowance of RMB 61,722 and RMB 147,630 was reversed for the years ended December 31, 2015 and 2016 respectively, based on the expected future profitability of the Company’s subsidiaries with the remainder of the reversal a result of current year utilization.

 

Reconciliation between the provision for income tax computed by applying the statutory CIT and the Group’s effective tax rate:

 

 

 

For the year ended

 

For the year ended

 

For the year ended

 

 

 

December 31, 2014

 

December 31, 2015

 

December 31, 2016

 

PRC enterprise income tax

 

25

%

25

%

25

%

Effect of permanent differences:

 

 

 

 

 

 

 

Share based compensation and other permanent difference

 

4.50

%

2.78

%

2.59

%

Effect of tax holiday (1)

 

(8.35

)%

(7.54

)%

(8.38

)%

Difference of tax rates of subsidiaries outside of China (2)

 

(0.08

)%

(0.25

)%

(5.43

)%

Effect of tax rate change (3)

 

24.30

%

(3.06

)%

9.54

%

Withholding tax for dividend distribution

 

%

%

0.23

%

Intra-group investment disposal income subject to tax

 

12.28

%

%

1.31

%

Valuation allowance

 

(43.54

)%

3.46

%

(10.23

)%

 

 

14.11

%

20.39

%

14.63

%

 


(1)              Effect of tax holiday is mainly due to certain subsidiaries are entitled ANTE with a preferential income tax of 15%.

 

(2)              Change of effect of difference of tax rates of subsidiaries outside of China is mainly due to impact from change in fair value generated from warrants and exchange gain or loss in JA Cayman, which is not subject to income tax.

 

(3)                Change of tax rate decreased from 24.30% in 2014 to (3.06%) in 2015 is due to the different enacted tax rate used in the calculation of deferred tax assets in 2015 for one subsidiary (JA Wafer R&D) to reflect the increase of tax rate due to ANTE recognition expires in 2015, which resulted in the addition of previously disclosed deferred tax asset benefit (gross amount). Deferred tax assets for this subsidiary have been fully provided for valuation allowance in both 2015 and 2014. Change of tax rate increased from (3.06%) in 2015 to 9.54% in 2016 is due to the different enacted tax rate used in the calculation of deferred tax assets in 2016 for two subsidiaries (JA Wafer R&D and JA Hefei Technology) to reflect the decrease of tax rate due to their recognition as ANTE, which resulted in the reduction of previously disclosed deferred tax asset benefit (gross amount). Deferred tax assets for one subsidiary (JA Wafer R&D) have been fully provided for valuation allowance in both 2016 and 2015.  The corresponding reversal of valuation allowance has been included in the line of valuation allowance.

 

F-35



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

12.       Income taxes (continued)

 

Aggregate amount and per share effect of the tax holiday are as follows:

 

 

 

For the year
ended

 

For the year
ended

 

For the year
ended

 

 

 

December 31,
2014

 

December 31,
2015

 

December 31,
2016

 

The aggregate amount of effect

 

43,405

 

58,194

 

70,653

 

Per share effect-basic

 

0.18

 

0.24

 

0.30

 

Per share effect-diluted

 

0.18

 

0.24

 

0.30

 

 

13.       Other assets

 

Other assets consisted of the following:

 

 

 

As of December 31,

 

As of December 31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

Input value-added tax recoverable for solar power plants (1)

 

 

196,543

 

Long-term deposits

 

 

27,433

 

Total

 

 

223,976

 

 


(1) As of December 31, 2015, input value-added tax recoverable for solar power plants was RMB 89,986 and was included in current assets (Refer to Note 9 Other current assets). As of December 31, 2016, input value-added tax recoverable for solar power plants was RMB 237,307, with RMB 196,543 included in non-current assets and RMB 40,764 in current assets (Refer to Note 9 Other current assets). The input value-added tax recoverable was classified as current and non-current assets based on management's best estimation of the expected utilization in the next twelve months as of the balance sheet date.

 

F-36



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

14.  Prepaid land use rights

 

The prepaid land use rights of the Group represented prepaid operating lease payments in obtaining land use rights in the PRC for a period of 40 or 50 years.

 

 

 

As of December
31,

 

As of December
31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

Cost

 

491,638

 

600,904

 

Less: accumulated amortization

 

(53,082

)

(64,541

)

Net book value

 

438,556

 

536,363

 

 

 

 

 

 

 

Current portion of prepaid land use rights (recorded in other current assets)

 

10,063

 

12,155

 

Non-current portion of prepaid land use rights

 

428,493

 

524,208

 

Total

 

438,556

 

536,363

 

 

As of December 31, 2016, the Group pledged its land use right with the net book value of RMB 24,914 to secure a short-term bank borrowing of RMB 90,784 from China Construction Bank; the Group pledged its land use right with the net book value of RMB 70,765 to secure a long-term bank borrowing of RMB 70,000 from Agriculture Bank of China; the Group pledged its land use of right with the net book value of RMB 204,823 to secure a long-term entrusted loan of RMB 1,440,000 from Industrial and Commercial Bank of China.

 

F-37



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

15. Borrowings

 

 

 

As of December 31,

 

As of December 31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

Short-term

 

2,194,957

 

2,912,867

 

Long-term, current portion

 

238,400

 

525,255

 

Subtotal

 

2,433,357

 

3,438,122

 

Long-term

 

2,461,017

 

2,701,438

 

Total

 

4,894,374

 

6,139,560

 

 

These loans are borrowed from various financial and non-financial institutions and all of them are for working capital and capital expenditure purpose. The borrowings outstanding as of December 31, 2015 and 2016 bore a weighted average interest rate of 5.70% and 4.64% per annum, respectively. The interest rates of unsecured short-term bank borrowings with principal amounts of RMB 1,880,277 and RMB 1,793,919 as of December 31, 2015 and 2016, respectively, ranged from 1.23% to 6.16% with a weighted average interest rate of 4.79% for 2015 and from 0.60% to 5.70% with a weighted average interest rate of 3.96% for 2016.

 

There were no short-term bank borrowings secured by restricted cash as of December 31, 2015. The interest rate of short-term bank borrowings secured by restricted cash with principal amounts of RMB 321,172 as of December 31, 2016 was 2.55% in 2016.

 

The interest rate of short-term bank borrowings secured by land use right, buildings, project assets, equity interest and related party with principal amount of RMB 307,468 and RMB 797,776 as of December 31, 2015 and 2016, ranged from 4.00% to 7.00% with a weighted average interest rate of 6.05% for 2015 and ranged from 1.90% to 6.09% with a weighted average interest rate of 4.77% for 2016.

 

The interest rate of unsecured long-term bank borrowings with principal amounts of RMB 429,229 and RMB 906,662 as of December 31, 2015 and 2016, respectively, ranged from 1.65% to 6.60% with a weighted average interest rate of 6.04% for 2015 and from 1.00% to 6.60% with a weighted average interest rate of 5.36% for 2016.

 

The interest rate of long-term bank borrowings secured by buildings, machineries and equipment, construction in progress, land use right, project assets, equity interest and restricted cash with principal amount of RMB 2,137,400 and RMB 2,320,031 as of December 31, 2015 and 2016, respectively, ranged from 1.65% to 7.01% with a weighted average interest rate of 6.28% for 2015 and from 2.20% to 7.01% with a weighted average interest rate of 5.14% for 2016.

 

There was no borrowing from non-financial institution as of December 31, 2016. There was a short-term and long-term borrowing from the non-financial institution—Huaneng Tiancheng Financing Lease Co., Ltd.(“Huaneng Tiancheng”) with principal amount of RMB 7,212 and RMB 132,788, secured by all the equity interest in Lincheng Jingneng as of December 31, 2015 whose interest rate is 7.10%. The borrowing from Huaneng Tiancheng was repaid in 2016.

 

The borrowings have 2-month to 182-month terms and expire at various times. The unused lines of credit were RMB 1,395,376, which were available as of December 31, 2016.

 

Interest incurred for borrowings for the years ended December 31, 2014, 2015 and 2016 amounted to RMB 267,718, RMB 274,476 and RMB 319,210 respectively, of which RMB 38,053, RMB 29,931 and RMB 36,828 was capitalized in the cost of property, plant and equipment and project assets.

 

F-38



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

15.   Borrowings (continued)

 

As of December 31, 2016, the short-term bank borrowing of RMB 200,000 from Industrial Bank is secured by its buildings with the net book value of RMB 79,040; the short-term bank borrowing of RMB 90,784 from China Construction Bank is secured by its building with the net book value of RMB 95,011 and its land use right with the net book value of RMB 24,914; the short-term bank borrowing of RMB 80,000 from Huaxia Bank is secured by Yangzhou JA Property Co., Ltd.; the short-term bank borrowing of RMB 39,000 from China Construction Bank is secured by the building in JA Yangzhou with the net book value of RMB 66,824; the short-term bank borrowing of RMB 34,685 from Industrial and Commercial Bank of China is secured by the building with the net book value of RMB 238,501 in Shanghai Jinglong Solar Technology Co., Ltd., or Shanghai Jinglong; the short-term bank borrowing of RMB 50,000 from Shanghai Pudong Development Bank is secured by Donghai District Longhai Property Co., Ltd. (“Longhai Property”); the short-term bank borrowing of RMB 292,561 from Ping An Bank is secured by all of the equity interests in JA Yangzhou; the short-term bank borrowing of RMB 746 from 77 Bank is secured by its project assets with the net book value of RMB 894; the short-term bank borrowing of RMB 10,000 from China Construction Bank is secured by the building in JA Yangzhou with the net book value of RMB 26,017. The long-term entrusted loan of RMB 1,440,000 with Hefei High-Tech Industrial Development Zone Management Co., Ltd. is secured by buildings, machineries and equipment and construction in progress with the net book value of RMB 712,200 and land use rights with net book value of RMB 204,823 owned by JA Hefei Technology and all of the equity interests in JA Hefei Technology; the long-term bank borrowing of RMB 70,000 from Agriculture Bank of China is secured by its buildings with the net book value of RMB 238,501 and its land use right with the net book value of RMB 70,765, respectively; the long-term bank borrowing of RMB 546,000 from Industrial and Commercial Bank of China is secured by its project assets with the net book value of RMB 574,014; the long-term bank borrowing of RMB 250,500 from Industrial and Commercial Bank of China is secured by its project assets with the net book value of RMB 194,919; the long-term bank borrowing of RMB 13,531 from 77 Bank is secured by its project assets with the net book value of RMB 894.

 

There are three subsidiaries whose borrowing agreements include the restrictive financial covenants. For JA Hebei, the borrowing of RMB 194,000 from China Construction Bank should meet the criteria: 1) the gearing ratio should be no more than 55%; 2) the current ratio should be no less than 1.3; 3) the quick ratio should be no less than 1.1; 4) the external guarantee should be no more than 45% of net asset.

 

For JA Dunhuang, the borrowing of RMB 546,000 from Industrial and Commercial Bank of China should meet the criteria: 1) the percentage of bad debt provision in account receivable do not keep increase in two consecutive months; 2) the overdue accounts receivable for one customer is no more than 45% of the accounts receivable for this customer.

 

For JA Xingtai, the borrowing of RMB 90,000 from China Construction Bank should meet the criteria: 1) the gearing ratio should be no more than 80%; 2) the current ratio should be no less than 0.8; 3) the quick ratio should be no less than 0.5.

 

As of December 31, 2016, those three subsidiaries are in compliance with the financial covenants from the borrowing agreements.

 

Future principal repayments on the long-term borrowings are as follows:

 

Year ending December 31,

 

RMB

 

2017

 

525,255

 

2018

 

992,643

 

2019

 

1,053,623

 

2020

 

86,243

 

Thereafter

 

568,929

 

Total

 

3,226,693

 

 

F-39



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

16.  Other long term liabilities

 

The breakdown of other long term liabilities is as below:

 

 

 

As of December 31,

 

As of December 31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

Government grant (1)

 

250,122

 

248,146

 

Long term payables for purchase of property, plant and equipment

 

87,664

 

 

Capital lease (2)

 

29,003

 

429,651

 

Other

 

6,004

 

6,637

 

Total

 

372,793

 

684,434

 

 


(1) Government grants are recognized where there is reasonable assurance that the grant will be received and all attached conditions will be complied with.

 

Grant relating to cash subsidies received by the Group’s entity in the PRC from various level of government authorities. The government subsidies are granted from time to time at the discretion of the relevant government authorities. Cash subsidies have no defined rules and regulations to govern the criteria necessary for companies to enjoy the benefits and are recognized as other income when received and when all conditions for their receipt have been satisfied.

 

Grants for the acquisition of land use right and property, plant and equipment are recorded as long-term liabilities and amortized to other income over the amortization period, which represents the depreciable life of the related PP&E. Government grants received related to property, plant and equipment are classified as investing cash inflows on the Company’s consolidated cash flow statements. Government grants received related to land use right are classified as operating cash inflows on the Company’s consolidated cash flow statements just as company expenditures for land use rights are classified as operating cash outflows. The Group received government grant related to property, plant and equipment and land use rights of RMB 45,300, RMB 230 and RMB 27,976 during the years ended December 31, 2014, 2015 and 2016, respectively. As of December 31, 2015 and 2016, long-term liability balance of RMB 250,122 and RMB 248,146 was related to government grant for the acquisition of land use rights and property, plant and equipment, respectively and is being amortized over a weighted average life of 189 months as of December 31, 2016.

 

The Group recorded RMB 32,078, RMB 35,555 and RMB 39,281 as other income for the years ended December 31, 2014, 2015 and 2016, respectively, among which RMB 27,376, RMB 28,380, and RMB 29,953 are related to the amortization of government grant.

 

(2) For the year ended December 31, 2015, the Group sold certain newly purchased equipment (“leased assets”) with carrying amount of RMB 44,350 to a third party (the “purchaser-lessor”) for cash consideration of RMB 41,808 and simultaneously entered into a three-year contract to lease back the leased assets from the purchase-lessor. Pursuant to the terms of the contract, the Group is required to pay to the purchaser-lessor quarterly lease payment over 3 years and is entitled to obtain the ownership of these equipment at a nominal price upon the expiration of the lease. The lease is classified as capital lease. As of December 31, 2015, RMB 12,805 is recognized as other payable (Refer to Note 17 Other payables to third parties) and RMB 29,003 is recognized as other long term liability to the purchaser-lessor according to the contract term.

 

For the year ended December 31, 2016, the Group sold certain modules and equipment (“leased group”) with carrying amount of RMB 374,907 to a third party (the “purchaser-lessor”) for cash consideration of RMB 481,252 and simultaneously entered into a three-year or ten-year contract to lease back the leased assets from the purchase-lessor. Pursuant to the terms of the contract, the Group is required to pay to the purchaser-lessor lease payment over 3 or 10 years and is entitled to obtain the ownership of these equipment at a nominal price upon the expiration of the lease. The lease is classified as capital lease. As of December 31, 2016, RMB 57,889 is recognized as other payable (Refer to Note 17 Other payables to third parties) and RMB 429,651 is recognized as other long term liability to the purchaser-lessor according to the contract term. The above asset transactions did not qualify as sale-leaseback transactions.

 

As of December 31, 2015 and 2016, the gross amount of the equipment and module and related depreciation recorded under capital lease were as follows:

 

 

 

As of December 31,

 

As of December 31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

 

 

 

 

 

 

Equipment and module

 

41,808

 

500,389

 

Less: accumulated depreciation

 

(348

)

(10,726

)

Net Value

 

41,460

 

489,663

 

 

As of December 31, 2016, future minimum payments required under non-cancellable capital lease are:

 

 

 

RMB

 

Year ended December 31,

 

 

 

2017

 

82,732

 

2018

 

73,892

 

2019

 

141,639

 

2020

 

48,848

 

2021

 

47,607

 

Thereafter

 

210,861

 

Total minimum lease payments

 

605,579

 

Less: Amount representing interest

 

(118,039

)

Present value of net minimum lease payments

 

487,540

 

Current portion

 

57,889

 

Non-current portion

 

429,651

 

 

F-40



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

17.    Other payables to third parties

 

Other payables consisted of the following:

 

 

 

As of December
31,

 

As of December
31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

Payables for project assets

 

187,230

 

354,709

 

Payables for purchase of property, plant and equipment

 

198,450

 

330,277

 

Payable to non-controlling interests of Ningjin Songgong (Refer to Note 1 Organization and principal activities)

 

 

133,364

 

Trade finance (1)

 

 

99,656

 

Payable for contract termination costs (2)

 

 

83,244

 

Logistic charges

 

50,833

 

74,662

 

Capital lease (Refer to Note 16 Other long term liabilities)

 

12,805

 

57,889

 

Reserve for purchase commitments (Refer to Note 7 Inventories)

 

 

48,906

 

Payables for land use rights

 

30,000

 

30,000

 

Deposits

 

21,162

 

26,639

 

Miscellaneous tax payables

 

53,275

 

27,835

 

Interest (3)

 

303,380

 

 

Others

 

37,138

 

56,436

 

Total other payables

 

894,273

 

1,323,617

 

 


(1) In November 2016, the Group sold goods to a third party and simultaneously entered into a contract to buy back these goods at same price with premium. The amount is to be paid off on a half-year basis till November 2017. The transaction does not qualify as a sale-buyback transaction and is accounted for as financing transaction.

 

(2) The Company terminated business relationship with one of its business partner through termination of contract in 2016. The total charge for the contract termination cost was RMB 99,635, which is scheduled to be paid on quarterly basis till December 2017. The Company has paid RMB 16,391 as of December 31, 2016.

 

(3) The interest was accrued for late payment based on terms of the Original Supply Agreement with Hemlock. For the years ended December 31, 2014 and 2015, the Group accrued late payment interest of RMB 93,797 and RMB 123,524 respectively. As of December 31, 2015, the total accrued interest was RMB 303,380. In 2016, the total interest of RMB 303,380 was reversed with the resolution of the Group’s dispute with Hemlock (Refer to Note 26 Commitments and Contingencies).

 

F-41



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

18.  Accrued expenses

 

Accrued expenses consisted of the following:

 

 

 

As of December
31,

 

As of December
31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

Interest

 

85,034

 

75,711

 

Logistic charges

 

34,638

 

45,307

 

Professional service fees

 

40,468

 

42,601

 

Testing fee

 

38,785

 

40,923

 

Tax

 

20,919

 

24,782

 

Commission fee

 

17,309

 

22,685

 

Utilities

 

1,281

 

5,719

 

Rental fee

 

6,507

 

1,292

 

Others

 

22,231

 

23,635

 

Total accrued expenses

 

267,172

 

282,655

 

 

19.  Accrued warranty cost

 

The movement of Group’s accrued warranty costs for solar module is summarized below:

 

 

 

As of December
31,

 

As of December
31,

 

As of December
31,

 

 

 

2014

 

2015

 

2016

 

 

 

RMB

 

RMB

 

RMB

 

Beginning balance

 

158,897

 

251,740

 

380,132

 

Warranty provision

 

92,843

 

128,392

 

153,082

 

Warranty utilization

 

 

 

 

Ending balance

 

251,740

 

380,132

 

533,214

 

 

20.  Share-based compensation

 

As of December 31, 2016, the Company had two share-based compensation plans, which is described below.

 

On August 18, 2006, the shareholders of the Company approved the 2006 Stock Incentive Plan (the “2006 Plan”), which permits the grant of share options and shares to its eligible recipients for up to 8,656,000 ordinary shares plus a number of ordinary shares equal to 10% of any additional share capital of the Company issued following the effective date of the 2006 Plan. The Group believes that such awards better align the interests of its employees with those of its shareholders.

 

F-42



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

20.  Share-based compensation (continued)

 

On June 30, 2014, the shareholders of the Company approved the 2014 Stock Incentive Plan (the “2014 Plan”). Under the 2014 Plan, the Company may grant options to purchase 10% of its total issued and outstanding shares as of the date when the board approves the 2014 Plan; provided that, the shares reserved in the award pool shall be increased automatically if and whenever the unissued shares reserved in the award pool accounts for less than 1% of the total then issued and outstanding shares, as a result of which increase the shares unissued and reserved in the award pool immediately after each such increase shall equal to 10% of the then issued and outstanding shares.  The Group believes that such awards better align the interests of its employees with those of its shareholders. In general, the plan administrator determines or the evidence of the award specifies, the vesting schedule for each option grant.

 

a)   Options

 

The Company did not grant any ordinary share option during the years ended December 31, 2015 and 2016.

 

The Group recognized a pre-tax charge of RMB 14,544, RMB 8,865 and RMB 2,253 (included in selling, general, and administrative expenses and manufacturing overhead, of which RMB 3, RMB nil and RMB nil was capitalized in the cost of inventory as of December 31, 2014, 2015 and 2016, respectively), for the years ended December 31, 2014, 2015 and 2016 associated with the expensing of stock options, respectively.

 

No option grants were made for the years ended December 31, 2015 and 2016. The weighted-average grant-date fair value of options granted during the year ended December 31, 2014 was US$ 1.88. The amounts reversed associated with options forfeited were RMB 774, RMB 895 and RMB 682 for the years ended December 31, 2014, 2015 and 2016, respectively.  The total income tax benefit recognized in the income statement for share-based compensation arrangements was nil for the periods.

 

The Group used the forfeiture rate of 10.05%, 11.12% and 12.71% respectively for the years ended 2014, 2015 and 2016.

 

As of December 31, 2014, 2015 and 2016, there was RMB 13,781, RMB 4,362 and RMB 233 of total unrecognized compensation cost related to non-vested share-based employees arrangements granted under the Plan, respectively. The cost is expected to be recognized over a remaining weighted-average period of 3 months.

 

The Company expects to issue new shares to satisfy share option exercises.

 

These options will become fully vested upon a change in control or on any date at the discretion of the plan administrator. The fair value of option grant is estimated on the date of grant using the Black-Scholes-Merton model with the following assumptions for options granted to employees during the year ended December 31, 2014:

 

 

 

For the year ended

 

For the year ended

 

For the year ended

 

 

December 31, 2014

 

December 31, 2015

 

December 31, 2016

Average risk-free rate

 

1.80%~2.01%

 

 

Weighted average expected option life

 

6years

 

 

Volatility rate

 

56.22%~100.06%

 

 

Dividend

 

 

 

 

(1)   The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant.

 

(2)   The average expected option life is based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. Currently, it is based on the simplified approach.

 

(3)   The Company has no history or expectation of paying dividends on its ordinary shares.

 

(4)   The Company chose to use the historical volatility and implied volatility of a basket of comparable publicly-traded companies for a period equal to the expected term preceding the grant date.

 

F-43



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

20.  Share-based compensation (continued)

 

The following table summarizes information with respect to share options outstanding on December 31, 2016:

 

 

 

Shares

 

Weighted
Average
Exercise
Price (US$)

 

Weighted
Average
Remaining
Contractual Life
(Year)

 

Intrinsic
Value (US$,
in thousands)

 

Outstanding at December 31, 2013

 

2,581,550

 

4.79

 

6.40

 

612

 

Granted

 

3,660,000

 

1.88

 

 

 

Forfeited

 

(296,500

)

2.21

 

 

 

Exercised

 

(268,750

)

1.37

 

 

 

Outstanding at December 31, 2014

 

5,676,300

 

3.21

 

7.59

 

279

 

Granted

 

 

 

 

 

Forfeited

 

(516,800

)

3.02

 

 

 

Exercised

 

(140,000

)

1.37

 

 

 

Outstanding at December 31, 2015

 

5,019,500

 

3.24

 

6.58

 

172

 

Granted

 

 

 

 

 

Forfeited

 

(103,000

)

1.84

 

 

 

Exercised

 

 

 

 

 

Outstanding at December 31, 2016

 

4,916,500

 

3.27

 

5.58

 

 

Exercisable at December 31, 2016

 

3,911,500

 

3.62

 

5.17

 

 

 

The total intrinsic value of options exercised during the years ended December 31, 2014, 2015 and 2016 was $186, $100 and nil, respectively.

 

b)    Restricted share units (“RSU”)

 

RSUs are commitments made to issue ordinary shares at the time that each underlying RSU vests. The RSUs are not legally issued ordinary shares nor do they comprise outstanding ordinary shares and therefore, do not give their holders voting or dividend rights.

 

Upon vesting, the shares will be issued by the Company.

 

The following table summarizes information with respect to RSUs outstanding on December 31, 2016:

 

 

 

Shares

 

Weighted Average
Fair Value (US$)

 

Nonvested at December 31, 2013

 

1,016,110

 

4.95

 

Granted

 

90,000

 

1.99

 

Vested

 

(85,000

)

5.11

 

Forfeited

 

(62,500

)

5.52

 

Nonvested at December 31, 2014

 

958,610

 

4.62

 

Granted

 

 

 

Vested

 

(267,500

)

2.50

 

Forfeited

 

 

 

Nonvested at December 31, 2015

 

691,110

 

4.82

 

Granted

 

 

 

Vested

 

 

 

Forfeited

 

 

 

Nonvested at December 31, 2016

 

691,110

 

4.82

 

 

F-44



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

20.  Share-based compensation (continued)

 

For RSUs, the Company recognized a pre-tax charge of RMB 1,737, RMB 540 and RMB nil (included in selling, general, and administrative expenses) for the years ended December 31, 2014, 2015 and 2016, respectively. Unrecognized compensation expense related to the RSUs as of December 31, 2014, 2015 and 2016 were RMB 536, RMB nil and RMB nil, respectively. The fair value of shares vested during the years ended December 31, 2014, 2015 and 2016 was RMB 1,000, RMB 1,945 and RMB nil, respectively.

 

21.  Foreign currency forward contracts

 

The Group, as a result of its global operating and financing activities, is exposed to changes in foreign currency exchange rates which may adversely affect its results of operations and financial position. The Group uses foreign currency forward contracts to hedge the exposure to foreign currency risk, primarily the EUR, GBP, USD and JPY. The purpose of the Group’s foreign currency derivative activities is to protect the Group from the risk that the RMB net cash flows resulting from forecasted foreign currency-denominated transactions will be negatively affected by changes in exchange rates. The Group uses foreign currency forward contracts to offset changes in the amount of future cash flows associated with certain third-party sales expected to occur within the next 12 months.

 

The Group accounts for derivative instruments pursuant to ASC 815, Derivatives and Hedging, as amended and interpreted, and recognizes all derivative instruments as either assets or liabilities at fair value in other assets or other liabilities in the Consolidated Balance Sheets. The recognition of gains or losses resulting from changes in the values of those derivative instruments is based on the use of each derivative instrument. The Group has evaluated various factors and determined whether there is effectiveness with respect to certain foreign currency forward contracts and whether these foreign currency forward contracts qualified for foreign currency cash flow hedge accounting. When the company formally designates a contract as a hedge and the hedging relationships are highly effective, the effective portion of the gain or loss on the derivative cash flow hedges is recorded in accumulated other comprehensive income, net of tax, until the underlying hedged transaction is recognized in the consolidated income statements. The ineffective portion of cash flow hedges, if any, is recognized in income immediately. The effectiveness of designated hedging relationships is tested and documented on quarterly basis. Gains or losses on those foreign currency forward exchange contracts which do not qualify for hedge accounting are recognized in change in fair value of derivatives in the Consolidated Statements of Operations and Comprehensive Income. During the year ended December 31, 2014, the Group entered into foreign currency forward contracts with a notional amount of EUR 75,164, GBP 171, USD 25,917 and JPY 922,031. During the year ended December 31, 2015, the Group entered into foreign currency forward contracts with a notional amount of EUR 26,686 and JPY 6,684,725. During the year ended December 31, 2016, the Group entered into foreign currency forward contracts with a notional amount of JPY 7,291,508. As of December 31, 2014, the Group had outstanding foreign currency forward contracts with notional amounts of EUR 22,284 and JPY 384,584. As of December 31, 2015, the Group had outstanding foreign currency forward contracts with notional amounts of JPY 1,846,515. As of December 31, 2016, there was no outstanding foreign currency forward contract.

 

The gain/(loss) from the change in the fair value on the effective portion of derivative cash flow hedges, which is recorded in accumulated other comprehensive income, net of tax, was RMB nil for the years ended December 31, 2014, 2015 and 2016. The gain/(loss) from the change in the fair value on those foreign currency forward exchange contracts not qualifying for hedge accounting, which is recorded in change in fair value of derivatives, was RMB 10,470 , RMB 4,440 and RMB (22,037) for the years ended December 31, 2014, 2015 and 2016, respectively (Refer to Note 27 Fair value measurements).

 

F-45



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

21.  Foreign currency forward contracts (continued)

 

The following table displays the outstanding notional balances and the estimated fair value of the Group’s foreign currency forward contracts as of December 31, 2015 and 2016:

 

 

 

As of December 31,

 

As of December 31,

 

As of December 31,

 

As of December 31,

 

 

 

2015

 

2015

 

2016

 

2016

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

 

 

Notional Amount

 

Estimate fair value

 

Notional Amount

 

Estimate fair value

 

Foreign currency forward contracts not designated as hedging instruments, recorded in other current assets

 

100,741

 

960

 

 

 

 

22.  Issuance of ordinary shares and warrants

 

On August 14, 2013, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with a single institutional investor, Capital Ventures International (the “Investor”), to issue in a registered direct offering an aggregate of US$ 24 million (RMB equivalent 147,998) for 15,228,425 ordinary shares, US$0.0001 par value per share, of the Company (“Ordinary Shares”), represented by 3,045,685 American Depositary Shares (each, an “ADS”) at a price of US$7.88 per ADS.  The offering price is 94% of the volume-weighted average price of the Company’s ADSs on August 13, 2013 (i.e. US$ 8.383 per ADS per Bloomberg on August 13, 2013).  The offering resulted in net proceeds of RMB 128,529, after deducting the placement fees and offering expenses.

 

Series A and B Warrants

 

In conjunction with the ordinary share offering, the Company also issued to the Investor Series A-1 Warrant, Series A-2 Warrant, Series A-3 Warrant, and Series B Warrant (“Warrants”) to acquire up to 12,724,164 ordinary shares (or 2,544,833 ADSs), 12,724,164 ordinary shares (or 2,544,833 ADSs), 12,724,164 ordinary shares (or 2,544,833 ADSs), and 50,896,656 ordinary shares (or 10,179,332 ADSs), respectively.

 

The Series A-1 warrant to purchase ordinary shares can be exercised on or prior to the date that is three months after the date it is issued at an initial exercise price of US$1.886 per ordinary share (equivalent to an exercise price of US$9.43 per ADS), subject to anti-dilution adjustments with respect to issuances of ordinary shares, options or convertible securities, or the modification of issued options or convertible securities. The Series A-2 warrant to purchase ordinary shares can be exercised on or prior to the date that is six months after the date it is issued at an initial exercise price of US$1.886 per ordinary share (equivalent to an exercise price of US$9.43 per ADS), subject to anti-dilution adjustments with respect to issuances of ordinary shares, options or convertible securities, or the modification of issued options or convertible securities. The Series A-3 warrant to purchase ordinary shares can be exercised on or prior to the date that is nine months after the date it is issued at an initial exercise price of US$1.886 per ordinary share (equivalent to an exercise price of US$9.43 per ADS), subject to anti-dilution adjustments with respect to issuances of ordinary shares, options or convertible securities, or the modification of issued options or convertible securities.

 

F-46



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

22   Issuance of ordinary shares and warrants (continued)

 

The Series B warrant to purchase up ordinary shares represented by ADSs at an initial exercise price of US$2.18 per ordinary share (equivalent to an exercise price of US$10.90 per ADS), subject to anti-dilution adjustments with respect to issuances of ordinary shares, options or convertible securities, or the modification of issued options or convertible securities, and subject to reset on the date that is nine months after the date it is issued. The Series B Warrant being offered is exercisable on the date that is one day after the one-year anniversary of the date on which it is issued and expires on the date that is two years after the date on which the Series B Warrant is first exercisable.

 

At any time after the issuance of warrants, the holders of the warrants shall be entitled to participate in such distribution to the same extent that the Holder would have participated therein if the Holder had held the number of Ordinary Shares and/or ADSs, as applicable, acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation). The holders of the warrants are entitled to receive any dividends paid or distributions made, except with respect to share dividends covered by the anti-dilution adjustment provision of the warrant, to the holders of our ordinary shares to the extent the holders of each warrant would have participated if such holders held a number of shares, acquirable upon exercise of such warrant.

 

In November 2013, February 2014, and May 2014, the Series A-1 Warrant, Series A-2 Warrant and Series A-3 Warrant, respectively, were exercised in full at the price of US$ 9.43 per ADS. The fair value of warrant liability for Series A-1 Warrant, Series A-2 Warrant and Series A-3 Warrant on respective warrant exercise date was RMB 35,693, RMB 2,797 and RMB 3,530, respectively, which was reclassified to additional paid-in- capital upon exercises. The Series B warrant was expired on August 16, 2016.

 

In accordance with ASC subtopic 815-10, the warrants are deemed legally detachable and separately exercisable from the ordinary shares and thus accounted for as a freestanding instrument. As the warrants are denominated in US Dollar, yet the Company’s functional currency is RMB, warrants are not considered indexed to the Company’s own stock. Accordingly, the warrants are liability derivatives which need to be fair valued on day one and mark to market subsequently at each reporting period end, with the fair value gain or loss arising from the re-measurement recognized in the Consolidated Statements of Operations and Comprehensive Income.

 

On the transaction date, the sales proceeds are first allocated to the warrant based on the warrants’ full fair value of RMB 172,916 and the residual amount of the sales proceeds is allocated to the ordinary shares. The fair value of the warrants in excess of net proceeds of the equity offering of RMB 44,396, was charged to retained earnings as a deemed dividend due to this portion is a benefit transferred from existing shareholders to the new investor. Such amount charged as deemed dividend on the transaction date and is an adjustment to net loss available to attributable to JA Solar Holdings for basic and diluted EPS calculation, as an effective dividend from existing ordinary shareholders. For the year ended December 31, 2014, 2015 and 2016, RMB 74,014, RMB 39,593 and RMB 70,882 of gain, respectively, was recognized based on a subsequent change in fair value of the warrants in the Company’s Consolidated statements of Operations and Comprehensive Income.(Note 27)

 

The series A-1, A-2, A-3 and B warrants are participating securities because they had contractual rights to share in the profits but not losses of the Company. For the years ended December 31, 2014 and 2015, the computation of basic earnings per share using the two-class method was applicable as the Company was making profit in year 2014 and 2015. For the year ended December 31, 2016, there was no impact for the computation of basic earnings per share due to the expiration of the Series B Warrants.

 

F-47



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

23.  Mainland China contribution plan and profit appropriation

 

a)    China contribution plan

 

Full-time employees of the Group in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations require the Group to accrue for these benefits based on certain percentage of the employees’ salaries. However, the Group is not responsible for meeting any obligations under the plan. The total contribution for such employee benefits was RMB 104,719, RMB 127,860 and RMB 128,481 for the years ended December 31, 2014, 2015 and 2016, respectively.

 

b)    Statutory reserves

 

Pursuant to laws applicable to entities incorporated in the PRC, the subsidiaries in the PRC should make appropriations from after-tax profit to non-distributable reserve funds. These reserve funds include the following: (i) a general reserve, (ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. The subsidiaries in the PRC are required to transfer at least 10% of their profit after taxation (as determined under accounting principles generally accepted in the PRC (“PRC GAAP”) at each year-end)  to the general reserve fund until the reserve balance reaches 50% of their respective registered capital. The appropriations to other funds are at the PRC subsidiaries’ discretion. These reserve funds can only be used for specific purposes of enterprises expansion, staff bonus, and welfare and not distributable as cash dividends.

 

The general reserves made by the Group’s PRC subsidiaries in 2014, 2015 and 2016 were RMB 26,657, RMB 116,337 and RMB 112,609, respectively.

 

c)     Restricted capital

 

The following paid-in-capital amounts are unavailable for distribution as nominal dividends to the Company:

 

Legal Entity

 

Paid-in Capital restricted

JingAo Solar Co., Ltd.

 

RMB

2,600,000

Shanghai JA Solar Technology Co., Ltd.

 

RMB

521,451

Shanghai JA Solar PV Technology Co., Ltd.

 

USD

20,000

JA Solar Technology Yangzhou Co., Ltd.

 

USD

260,000

Jing  Hai  Yang  Semiconductor  Materials  (Donghai)  Co., Ltd.

 

RMB

714,483

JA Yangzhou PV Technology Co., Ltd.

 

RMB

68,270

Shanghai Jinglong Solar Technology Co., Ltd.

 

RMB

180,000

Donghai JA Solar Technology Co., Ltd.

 

RMB

50,000

JA (Hefei) Renewable Energy Co., Ltd.

 

USD

15,000

Hefei JA Solar Technology Co., Ltd.

 

RMB

1,440,000

Solar Silicon Valley Electronic Science and Technology Co., Ltd.

 

RMB

283,829

JA Solar Investment (China) Co., Ltd.

 

USD

55,000

Dunhuang JA Solar Power Development Co., Ltd.

 

RMB

321,000

JA Solar PV Technology Co., Ltd.

 

RMB

61,107

JA Solar PV Electric (Shexian) Co,. Ltd.

 

RMB

9,000

Aiyouen Power Electric (Yinchuan) Co,. Ltd.

 

RMB

26,000

JA Solar PV Electric (Baotou) Co,. Ltd.

 

RMB

15,500

Beijing JA Solar PV Technology Co., Ltd.

 

RMB

330,000

JA Solar PV Electric (Huanghua) Co,. Ltd.

 

RMB

5,000

JA Solar PV Electric (Yanchi) Co,. Ltd.

 

RMB

12,500

JA New Energy Development (Hebei) Co., Ltd.

 

RMB

10,000

Jingsheng Agricultural Technology (Renxian) Co., Ltd.

 

RMB

3,700

JA Solar PV Electric (Hoboksar) Co., Ltd.

 

RMB

10,000

JA Solar PV Electric (Laiwu) Co., Ltd.

 

RMB

3,600

JA Solar New Energy Electric (Chifeng) Co., Ltd.

 

RMB

66,000

JA New Energy (Xilinhaote) Co., Ltd .

 

RMB

1,000

JA Solar PV Electric (Wulanchabu) Co., Ltd.

 

RMB

500

Jingneng New Energy Development (Kangbao) Co., Ltd.

 

RMB

1,000

JA Solar PV Electric (Ninglang) Co., Ltd.

 

RMB

500

Jingneng New Energy Development (Lincheng) Co., Ltd.

 

RMB

80,000

JA Solar PV Electric (Jarud) Co., Ltd.

 

RMB

30,000

Jingneng New Energy Development (Renxian) Co., Ltd.

 

RMB

58,000

JA Solar Technology (Karamay) Co., Ltd.

 

RMB

5,000

JA Solar PV Electric (Linzhou) Co., Ltd .

 

RMB

57,800

JA Solar PV Electric (Datong) Co., Ltd.

 

RMB

100,000

JA Solar PV Electric (Hefei) Co., Ltd.

 

RMB

17,100

JA Solar PV Electric (Lingshi) Co., Ltd.

 

RMB

100

JA Solar (Xingtai) Co., Ltd.

 

RMB

296,008

Yangzhou JA PV Technology Co., Ltd.

 

RMB

200,000

JA Solar (Kangbao) Co., Ltd.

 

RMB

23,100

JA Solar (Zhangjiakou) Co., Ltd.

 

RMB

54,500

Donghai County Jiulong Hot Spring Club Co., Ltd

 

RMB

35,000

Baodi JA Solar PV Technology (Tianjin) Co., Ltd.

 

RMB

150

Baodi Huading Agriculture Development (Tianjin) Co., Ltd.

 

RMB

7,380

Jiuzhou Fangyuan New Energy (Yichang) Co., Ltd.

 

RMB

120,000

Jiuzhou Fangyuan New Energy (Xinjiang) Co., Ltd.

 

RMB

120,000

Lepu New Energy (Binzhou) Co., Ltd.

 

RMB

1,000

Jingneng Solar PV Electric (Daqing) Co., Ltd.

 

RMB

700

Jingneng New Energy Development (Ningjin) Co., Ltd.

 

RMB

100

Jingsheng Agriculture Technology (Ningjin) Co., Ltd.

 

RMB

200

JA Solar (Chaoyang) Electric Co., Ltd.

 

RMB

500

JA Solar New Energy Development (Cixian) Co., Ltd.

 

RMB

800

Other JA PV Electric companies

 

RMB

2,000

 

F-48



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

24.  Earnings per share

 

Basic and diluted net earnings per share for the years ended December 31, 2014, 2015 and 2016 are calculated as follows:

 

 

 

Year ended
December 31,
2014

 

Year ended
December 31,
2015

 

Year ended
December 31,
2016

 

 

 

RMB

 

RMB

 

RMB

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to JA Solar Holdings

 

423,771

 

623,713

 

683,699

 

Fair value of warrants in excess of net proceeds of equity offering

 

 

 

 

Allocation of net income to participating warrant holder

 

(77,174

)

(107,828

)

 

Numerator for basic earnings per share

 

346,597

 

515,885

 

683,699

 

Dilutive effect of:

 

 

 

 

 

 

 

Add back allocation to participating warrant holder (1) 

 

4,336

 

 

 

Excluding portion of fair value gain (2)

 

(16,716

)

 

 

Numerator for diluted earnings per share

 

334,217

 

515,885

 

683,699

 

Denominator:

 

 

 

 

 

 

 

Denominator for basic loss per share - weighted average ordinary shares outstanding

 

242,192,859

 

243,506,821

 

234,290,842

 

Dilutive effect of share options and RSUs*

 

363,633

 

238,100

 

111,610

 

Dilutive effect of warrants*

 

306,592

 

 

 

Denominator for diluted loss per share

 

242,863,084

 

243,744,921

 

234,402,452

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

1.43

 

2.12

 

2.92

 

Diluted earnings per share

 

1.38

 

2.12

 

2.92

 

 


(1) Net income has been adjusted to participating Series A-3 Warrant and Series B Warrant holder based on their respective rights to share in dividends in 2014.

(2) The fair value gain represents the change in fair value of Series A-3 Warrant, which is deducted from income (numerator) in calculating diluted earnings per share. Series A-3 Warrant has dilutive effect as its exercise price of US$ 9.43 per ADS is less than average stock price during the period it was outstanding.

 

* Potentially dilutive share options and RSUs totaling 2,856,278, 3,437,510 and 4,391,000 in 2014, 2015 and 2016 were not included in the calculation of dilutive earnings per share in 2014, 2015 and 2016 because of their anti-dilutive effect.

 

* Potentially dilutive warrants 52,569,971, 50,896,656 and nil in 2014, 2015 and 2016 were not included in the calculation of dilutive earnings per share in 2014, 2015 and 2016 because of their anti-dilutive effect. Series B Warrant is anti-dilutive as the exercise price of US$ 10. 90 per ADS is higher than average stock price during the years ended December 31, 2014 and 2015. Series B Warrants expired on August 16, 2016 and there was no impact for the computation of EPS as of December 31, 2016.

 

F-49



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

25  Related party transactions

 

a)                                             Amounts due to related parties consisted of the following:

 

 

 

As of December 31,

 

As of December 31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

Short-term:

 

 

 

 

 

Payables to Hebei Jinglong Industry and Commerce Group Co., Ltd. (“Hebei Jinglong”)

 

3,904

 

133,318

 

Payables to Jing Wei Electronics Co., Ltd. (“Jing Wei”)

 

39,785

 

114

 

Payables to Xingtai Jinglong Electronics and Materials Co., Ltd. (“Xingtai Jinglong”)

 

63,766

 

120,423

 

Payables to Heibei Ningjin Songgong Electronics Co., Ltd. (“Songgong Electronics”)

 

92,709

 

133,860

 

Payables to Yangguang Guifeng Electronics Co., Ltd. (“Yangguang Guifeng”)

 

32,914

 

77,567

 

Payables to Ningjin Saimei Ganglong Electronics Co., Ltd. (“Saimei Ganglong”)

 

32,574

 

56,761

 

Payables to Hebei Jinglong Fine Chemical Co., Ltd. (“Fine Chemical”)

 

14,183

 

761

 

Payables to Hebei Jinglong Sunshine Equipment Co., Ltd.

 

46,563

 

47,257

 

Payables to Ningjin Jingxing Electronic Material Co., Ltd.

 

27,152

 

2,428

 

Payables to Taicang Juren Photovoltaic Materials Co., Ltd. (“Taicang Juren”)

 

 

37,392

 

Others

 

35,358

 

23,495

 

Total amounts due to related parties

 

388,908

 

633,376

 

 


b)   Amounts due from related parties consisted of the following:

 

 

 

As of December 31,

 

As of December 31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

Advance to related party suppliers, net

 

 

 

 

 

Advances to Hebei Jinglong

 

39,194

 

24,962

 

 

 

 

 

 

 

Accounts receivable from related party customers, net

 

 

 

 

 

Receivables from JA Solar PV Electric (Lincheng) Co,. Ltd. (“Lin Cheng”)

 

35,320

 

1,065

 

Receivables from Hebei Jinglong

 

18,011

 

60,634

 

Receivables from Jing Wei

 

5,282

 

 

Receivables from Xingtai Jinglong

 

16,079

 

56

 

Receivables from Songgong Electronics

 

87,641

 

50,070

 

Receivables from Yangguang Guifeng

 

748

 

1,252

 

Receivables from Jing Xing

 

197

 

14,354

 

Receivables from others

 

5,197

 

2,350

 

 

 

 

 

 

 

Amount due from related parties:

 

 

 

 

 

Loan to Yangzhou JA Property Co., Ltd. (“Yangzhou Property”)

 

40,000

 

40,085

 

Loan to Longhai Property

 

 

15,025

 

Amount due from Songgong Electronics

 

 

16,452

 

Amount due from others

 

5,654

 

1,947

 

 

 

 

 

 

 

Long-term:

 

 

 

 

 

Advances to Hebei Jinglong

 

26,757

 

 

 

 

 

 

 

 

Total amounts due from related parties

 

280,080

 

228,252

 

 

F-50



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

25.  Related party transactions (continued)

 

c)                   Transactions with Hebei Jinglong

 

Wafer supply

 

In July 2006, the Group entered into a master long-term supply contract (the “Jinglong Long-term Supply Contract “) with Hebei Jinglong for the supply of silicon wafers. Hebei Jinglong is owned by the shareholders of the largest shareholder of the Company, Jinglong Group Co., Ltd. (“Jinglong BVI”), and thus, is a related party of the Company. Mr. Baofang Jin, our executive chairman, owns 78.45% equity interests in Hebei Jinglong and 32.96% in Jinglong BVI. The Jinglong Long-term Supply Contract had an initial term of four and half years, from July 2006 to December 2010, which automatically extended for another three years until the end of 2013. The Group has also entered into various short-term supply contracts with Hebei Jinglong for the supply of silicon wafers (together with the Jinglong Long-term Supply Contract the “ Jinglong Supply Contracts “). Under the Jinglong Supply Contracts, Jinglong Group has agreed to supply the Group with silicon wafers at prevailing market prices with a reasonable discount and under prepayment arrangements. The Group has entered into various supplemental agreements to the Jinglong Supply Contracts to specify certain performance terms, including amendment of prepayment amounts and their utilization. The prepayment and delivery terms under the existing Jinglong Long-term Supply Contract had been revised subsequently in August 2007, September 2008, and February 2009.

 

The Group reviewed the contracts under ASC 815, Derivatives and Hedging, and ASC 810, Consolidation, and determined that they don’t contain an embedded derivative nor would the supplier contracts cause the supplier to be a variable interest entity.

 

Due to the reorganization of Jinglong Group, Hebei Jinglong disposed its wafer production business in the middle of 2014. The Group didn’t purchase silicon wafers from Jinglong Group since 2014.

 

Unused prepayments were RMB 70,145, RMB 65,951 and RMB 24,962 at December 31, 2014, 2015 and 2016, respectively, and were recorded in advances to related party supplier in the consolidated balance sheet. The unused prepayment was deducted by the rental fee according to the supplemental agreements signed every quarter.

 

Outsourcing service

 

The Group outsourced wafer processing services to Hebei Jinglong, who helped the Group turn polysilicon into wafers. The outsourcing service fee was RMB 320, RMB nil and RMB nil for Hebei Jinglong for the years ended December 31, 2014, 2015 and 2016 respectively. Hebei Jinglong changed its business and the Group outsourced wafer processing service to the subsidiaries of Hebei Jinglong since the middle of 2014 (Refer to Note 25(d) Transactions with other related parties).

 

Leasing

 

The Group leases properties from Hebei Jinglong and another related party under operating lease agreements. The Group incurred rental expenses under operating lease agreements to Hebei Jinglong in the amounts of RMB 47,352, RMB 52,614 and RMB 39,914 for the years ended December 31, 2014, 2015 and 2016, respectively.

 

F-51



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

25.  Related party transactions (continued)

 

d)                  Transactions with other related parties

 

 

 

For the year ended
December 31, 2014

 

For the year ended
December 31, 2015

 

For the year ended
December 31, 2016

 

 

 

RMB

 

RMB

 

RMB

 

Sales of products

 

 

 

 

 

 

 

Lincheng

 

115,382

 

92,158

 

162,516

 

Subsidiaries of Hebei Jinglong

 

73,215

 

34,337

 

20,888

 

Total

 

188,597

 

126,495

 

183,404

 

 

 

 

 

 

 

 

 

Purchase of products

 

 

 

 

 

 

 

Subsidiaries of Hebei Jinglong

 

1,079,882

 

1,015,077

 

2,192,553

 

Taicang Juren

 

 

 

158,639

 

Others

 

 

 

7,223

 

Total

 

1,079,882

 

1,015,077

 

2,358,415

 

 

 

 

 

 

 

 

 

Processing service received

 

 

 

 

 

 

 

Subsidiaries of Hebei Jinglong

 

14,735

 

8,438

 

110,972

 

Total

 

14,735

 

8,438

 

110,972

 

 

 

 

 

 

 

 

 

Purchase of equipment and building

 

 

 

 

 

 

 

Subsidiaries of Hebei Jinglong

 

2,543

 

 

2,621

 

Yangzhou Property

 

77,398

 

 

 

Total

 

79,941

 

 

2,621

 

 

 

 

 

 

 

 

 

Sales of equipment

 

 

 

 

 

 

 

Subsidiaries of Hebei Jinglong

 

 

 

3,722

 

Total

 

 

 

3,722

 

 

 

 

 

 

 

 

 

Provide entrusted loan

 

 

 

 

 

 

 

Yangzhou Property

 

40,000

 

40,000

 

40,000

 

Songgong Electronics

 

 

 

15,000

 

Longhai Property

 

 

 

15,000

 

Total

 

40,000

 

40,000

 

70,000

 

 

 

 

 

 

 

 

 

Provide Guarantee

 

 

 

 

 

 

 

Songgong Electronics

 

 

 

260,000

 

Saimei Ganglong

 

 

 

50,000

 

Total

 

 

 

310,000

 

 

 

 

 

 

 

 

 

Receive Guarantee

 

 

 

 

 

 

 

Hebei Jinglong

 

672,047

 

581,714

 

561,116

 

Yangzhou Property

 

80,000

 

80,000

 

80,000

 

Longhai Property

 

 

 

50,000

 

Total

 

752,047

 

661,714

 

691,116

 

 

F-52



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

25.    Related party transactions (continued)

 

As of December 31, 2016, the Group provided guarantees to Songgong Electronics and Saimei Ganglong for short-term borrowings with principal of RMB 260,000 and RMB 50,000, respectively, the Group provided no guarantees to related parties while as of December 31, 2014 and 2015. No amounts have been accrued as a loss contingency related to this guarantee because payment by the Group is not probable. The fair value of the guarantee as of December 31, 2016 was not material. In addition, in June 2013, the Group provided an entrustment loan to Yangzhou Property with a principal of RMB 40,000, with an annual interest rate of 6.6% and was due for repayment in one year.  In 2014, the repayment date for the entrustment loan was extended to June 8, 2015. In 2015, the repayment date for this loan is extended to June 10, 2016 with interest rate of 7%. And in 2016, the repayment date for this loan is extended to June 10, 2017 with interest rate of 7%. In August 2016, the Group provided an entrustment loan to Longhai Property with a principal of RMB 15,000, with an annual interest rate of 5.36%. In October 2016, the Group provided an entrustment loan to Songgong Electronics with a principal of RMB 15,000, with an annual interest rate of 5.36%. In 2014, the Group purchased a block of building from Yangzhou Property for a consideration of RMB 77,398, which was based on the fair value of the building. In 2015 and 2016, there were no such transactions. Meanwhile, the Group received guarantees from Yangzhou Property for a short-term borrowing with a principal of RMB 80,000, RMB 80,000 and RMB 80,000 in 2014, 2015 and 2016, respectively. The Group received guarantees from Longhai Property for a short-term borrowing with a principal of RMB nil, RMB nil and RMB 50,000 in 2014, 2015 and 2016, respectively.

 

The Group considers that these transactions were at market with prices comparable to other similar transactions with unrelated third parties.

 

26.  Commitments and Contingencies

 

a)     Supplier contract

 

In order to better manage the Group’s unit costs and to secure adequate and timely supply of polysilicon and silicon wafers during the periods of shortages of polysilicon and silicon wafer supplies, the Group entered into a number of multi-year supply agreements in amounts that were expected to meet the Group’s anticipated production needs. As a condition to its receiving the raw materials under those agreements, and in line with industry practice, the Group was required to, and has made prepayments for all, or a portion, of the total contract price to the suppliers, which are then offset against future purchases. The Group has completed re-negotiating certain of its supplier arrangements and is currently in the process of re-negotiating the remaining prepayment obligations with its suppliers.

 

Set out below are the Group’s fixed obligations under these multi-year contracts including “take or pay” arrangements.

 

Obligations under Multi-year Supply Agreements, including “Take or Pay” Supply Agreements

 

The Group’s multi-year supply agreements with some suppliers are structured as fixed price and quantity “take or pay” arrangements which allow the supplier to invoice the Group for the full stated purchase price of polysilicon or silicon wafers the Group is obligated to purchase each year, whether or not the Group actually purchases the contractual volume. In the years ended December 31, 2014 and 2015, the Company failed to perform purchase obligations of RMB 507 million and RMB 877 million, respectively, under a take-or-pay supply agreement with Hemlock. The Group and Hemlock signed a new multi-year supply agreement in October 2016, structured to purchase a certain amount of polycrystalline silicon products on a quarterly basis with “take or pay” supply agreements. While its take-or-pay arrangements pursuant to certain LTAs are characterized as unconditional purchase commitments which require disclosure under ASC 440-10-50-2 and 4, a separate assessment is performed to determine whether losses should be accrued on those inventory purchase commitments in accordance with ASC 330-10-35-17 to 18 (Refer to Note 2(g) Inventories and Note 7 Inventories).

 

In addition to the “take or pay” supply agreements, the Group has also entered into other multi-year supply agreements to purchase fixed volumes of polysilicon or silicon wafers from certain suppliers. Under these agreements, the purchase price is to be periodically adjusted based on prevailing market price or relevant energy price index. Purchases made under “take or pay” agreements amounted to RMB 1,581,048, RMB 1,929,867 and RMB 2,200,230 for the years ended December 31, 2014, 2015 and 2016, respectively. The Group’s future obligations under multi-year supply agreements, including “take or pay” supply agreements are as follows:

 

F-53



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

26.  Commitments and Contingencies (continued)

 

 

 

“Take or pay”
supply
agreements

 

Total

 

 

 

(in RMB)

 

(in RMB)

 

Twelve Months Ending December 31

 

 

 

 

 

2017

 

1,199,583

 

1,199,583

 

2018

 

856,581

 

856,581

 

2019

 

836,186

 

836,186

 

Total

 

2,892,350

 

2,892,350

 

 


* includes only purchase commitments with fixed or minimum price provisions.

 

In addition, the Group has also entered into other supply agreements with variable price provisions, under which the Group will purchase a certain amount of polycrystalline silicon products on a quarterly basis. The Group has committed to purchase polysilicon and silicon wafers with the quantity of 48,750 metric tons and 900 million pieces respectively during 2017 to 2026, which are with variable price provisions and not included in the above table.

 

Outstanding supplier advances made to suppliers with whom the Group has entered into “take or pay” arrangements amounted to RMB 341,447 and RMB 182,553 as of December 31, 2015 and 2016, respectively.

 

If the Group fails to meet the obligations, including purchase quantity commitments, under the amended agreements and are unable to further renegotiate the terms of these multi-year supply agreements, the Group may be forced to forfeit certain prepayment amounts and be subject to claims or other disputes which could materially and adversely affect the Group’s results of operations, and financial position.

 

b)    Litigation regarding the long-term supply contract with Hemlock

 

The Group entered into the Original Supply Agreement with Hemlock in March 2011 and the agreement is structured as fixed price and quantity “take or pay” arrangement from 2013 to 2020. Under the Original Supply Agreement, the Group is required to make the advance payments and purchase a contracted minimum volume of polysilicon at predetermined fixed prices and in accordance with a pre-determined schedule, commencing January 1, 2013. Due to significant decrease of silicon price in the market and uncertainties brought by high anti-dumping and anti-subsidy tariff imposed after the supply contract was signed, the Group believes performance of the contract is commercially unreasonable and therefore, it did not make full advance payment and accept any delivery in 2013, 2014 and 2015. Although the Group was in the process of renegotiating with Hemlock and no written agreement had been reached as of December 31, 2014 and 2015, both parties continued to constructively dialogue to find a mutually satisfactory solution. In this regard, the Group, while concluding as noted above that accrual for the minimum purchases was not required, did accrue interest for the late payment according to the Original Supply Agreement term based on the fact that the Group did not order the minimum purchase and accept delivery and the Group did not make full advance payments as required. On March 31, 2015, Hemlock gave notice to the Group to terminate the Original Supply Agreement with immediate effect. Hemlock stated that the reason for the termination was an alleged breach of the supply contract by the Group and demanded that the Group pay US$921 million, which comprised of the remaining advance prepayments, take-or-pay for the period from 2013 to 2020 and the financial penalty for the late payments till March 31, 2015. After the notice was received, management had several runs of negotiation with Hemlock. Due to the fact that no written agreement has been reached as of December 31, 2014 and 2015, the Group continued to assess whether there would be loss on firm purchase commitments under Original Supply Agreement by applying a methodology similar to that used in the lower of cost or market evaluation with respect to inventory, and concluded that no loss provision under the Original Supply Agreement with Hemlock is required as of December 31, 2014 and 2015 (Refer to Note 7 Inventory). As of December 31, 2014 and 2015, full provision with the amount of RMB 63,331 (US$10.35 million) was provided against the prepayment balance to Hemlock under the long-term supply contract, and a total interest for late payment with the amount of RMB 303,380 was accrued as of December 31, 2015.

 

On April 18, 2016, the Group was served with court papers for a lawsuit brought by Hemlock against JA Yangzhou in the Supreme Court of the State of New York on January 20, 2015. Hemlock claimed damages in an amount to be proved at trial, of not less than US$921 million. After the court papers were received, the Group accelerated the negotiation with Hemlock and signed the Settlement Agreement and the New Supply Agreement with Hemlock in October 2016. According to the Settlement Agreement, Hemlock agrees not to commence any civil action against the Group in relation to the Original Supply Agreement signed in March 2011 unless the Group breaches the New Supply Agreement. Under the New Supply Agreement, the Group is required to purchase a certain amount of solar grade polycrystalline silicon products from Hemlock per quarter until October 31, 2026. After detailed assessment, the Group expects to fulfill the obligation under the New Supply Agreement. Thus, no contingent liability has been recorded as of December 31, 2016, and the total amount of accrued late payment interest of RMB 303,380 was reversed for the year ended December 31, 2016.

 

F-54



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

26.  Commitments and Contingencies (continued)

 

c)    Operating lease commitments

 

As of December 31, 2016, the Group has several operating lease agreements to lease certain assets, including offices, dormitory and land. These non-cancelable operating leases expire from February 2017 to December 2020, with rental fees that approximates market rents.

 

Future minimum obligations for operating leases are as follows:

 

 

 

(in RMB)

 

2017

 

64,246

 

2018

 

43,146

 

2019

 

41,726

 

2020

 

510

 

Total

 

149,628

 

 

Rent expense under all operating leases was RMB 61,950, RMB 74,275 and RMB 78,255, for the years ended December 31, 2014, 2015 and 2016, respectively.

 

d)    Capital expenditure

 

As of December 31, 2016, the Group had contracted for capital expenditure on machinery and equipment of RMB 891,509.

 

27.  Fair value measurements

 

ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Group. Unobservable inputs are inputs that reflect the Group’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. As such, fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

·                      Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Group has the ability to access.

 

·                      Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly.

 

·                      Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Group will measure fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and currency rates. Following is a description of the valuation techniques that the Group uses to measure the fair value of assets and liabilities that the Group measures and reports on its balance sheet at fair value on a recurring basis.

 

F-55



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

27.  Fair value measurements (continued)

 

Short-term financial instruments: The Group’s short-term financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable and payable, notes receivable, short-term borrowings, and accrued expenses. The cost approximates the fair value because of the short maturity period.

 

Long-term borrowings: The fair value is based on the amount of future cash flows associated with each debt instrument discounted at the Group’s current borrowing rate for similar debt instruments of comparable terms. The carrying values of the long-term borrowings approximate their fair values as all the long-term borrowings carries variable interest rates which approximate rates currently offered by the Group’s bankers for similar debt instruments of comparable maturities.

 

Derivative assets and liabilities.  The Group’s derivative assets and liabilities consist of embedded foreign currency derivatives in the Group’s sales and purchase contracts denominated in currencies other than Renminbi or the functional currency of the counterparty, the capped call transactions denominated in USD, embedded derivatives underlying convertible notes, foreign currency forward contract instruments and warrants derivatives . Since its capped call transactions, embedded derivatives underlying convertible notes and warrants derivatives are not traded on an exchange, they are valued using valuation models. Management is responsible for determining these fair values and considered a number of factors including valuations. The capped call transactions are valued using the Black Scholes Option Pricing Model. The embedded derivatives underlying convertible notes and warrants derivatives are bifurcated using the “with or without” approach. As there are interrelationships among the embedded derivatives, they are valued using a Monte Carlo simulation. Interest rate yield curves, foreign exchange rates, stock price, volatility, expected term, risk-free rate and fundamental change event probabilities are the significant inputs into these valuation models. The inputs used in the valuation of the capped call transactions are observable in active markets over the terms of the instruments the Group holds, and accordingly, the Group classifies these valuation techniques as Level 2 in the hierarchy. In regards to the embedded derivatives underlying convertible notes and warrants derivatives, fair value was determined using a “with and without” approach which was based on both Level 2 and Level 3 inputs. The Group determined that the Level 3 input, that is the fundamental change event probabilities, is significant to the overall fair value measurement. The Group considered the effect of its own credit standing and that of its counterparties in its valuations of its derivative financial instruments. The Group entered into foreign currency forward contracts that are designated as cash flow hedges of exchange rate risk related to forecasted foreign currency denominated sales. The Group’s financial instrument counterparties are high-quality commercial banks with significant experience with such instruments.  Fair values of the Group’s forward contracts are determined using significant other observable inputs (Level 2 fair value measurements), and are based on the present value of expected future cash flows considering the risks involved and using discount rates appropriate for the duration of the contracts.

 

F-56



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

27.  Fair value measurements (continued)

 

Recurring change in fair value

 

As of December 31, 2015, information about inputs into the fair value measurements of the Group’s assets and liabilities that are measured at fair value on a recurring basis in periods subsequent to their initial recognition is as follows:

 

 

 

Fair Value Measurements at Reporting Date Using

 

Description

 

Balance as of
31 December
2015

 

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Foreign exchange forward contract instruments

 

960

 

 

960

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivatives liabilities - warrants

 

(71,237

)

 

 

 

 

(71,237

)

 

As of December 31, 2016, there is no asset and liability that are measured at fair value on a recurring basis in periods subsequent to their initial recognition.

 

Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3 valuation)

 

A summary of changes in Level 3 warrant derivatives for the year ended December 31, 2015 was as follows:

 

Balance at December 31, 2014

 

(105,785

)

Unrealized gain included in change in fair value of warrant derivatives

 

39,593

 

Exchange loss

 

(5,045

)

Balance at December 31, 2015

 

(71,237

)

 

A summary of changes in Level 3 warrant derivatives for the year ended December 31, 2016 was as follows:

 

Balance at December 31, 2015

 

(71,237

)

Unrealized gain included in change in fair value of warrant derivatives

 

70,882

 

Exchange loss

 

355

 

Balance at December 31, 2016

 

 

 

F-57



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

27.  Fair value measurements (continued)

 

Change in fair value of derivatives

 

The Change in fair value of derivatives recognized in earnings, excluding embedded derivatives underlying convertible notes repurchased which are recognized in buyback gain, was as follows:

 

 

 

For the year ended

 

For the year ended

 

For the year ended

 

 

 

December 31, 2014

 

December 31, 2015

 

December 31, 2016

 

Derivatives liabilities - warrants

 

74,014

 

39,593

 

70,882

 

Foreign exchange forward contracts not designated as hedging instruments

 

10,470

 

4,440

 

(22,037

)

 

 

84,484

 

44,033

 

48,845

 

 

28.  Segment information and operations by geographic area

 

In accordance with FASB ASC 280-010-50-22, the Group considers the financial information reviewed by our CODM or otherwise regularly provided to the CODM, to identify its operating segment and the measures of profit or loss and total assets for each segment. The specific items or accounts included in the measure of segment profit or loss reviewed by our CODM or are otherwise regularly provided to the CODM are: revenue from external customer, intersegment revenue, gross profit/(loss), interest income and expenses, and income/(loss) before income taxes.

 

The basis of accounting for recording revenue from external customer, intersegment sales and corresponding cost of revenues, interest income and expenses, and income/(loss) before income taxes is in conformity with the accounting policies used in the consolidated financial statements, and such segment financial information is prepared and disclosed in accordance with aforementioned accounting basis, is on the same basis by which the Company reports internally to its CODM.

 

The intersegment revenues from the sale of solar modules from manufacturing segment to solar projects segment were recorded based on amounts charged to the solar projects segment, which are generally determined using fair market price charged to independent third party customers. The corresponding cost of revenues related to intersegment revenues is recorded based on the actual costs of revenues incurred by the solar product manufacturing segment.

 

The Group’s operating segments have certain of their own dedicated administrative and corporate key functions, such as accounting, administration, procurements, marketing and human resource. Costs for these functions are recorded and included in the respective selling, general and administrative costs for each of our segment.

 

F-58



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

28.  Segment information and operations by geographic area (continued)

 

With the growth of business of electricity generation in 2015, the CODM began to operate and manage its business by two segments — manufacturing segment and solar projects segment. The following table set forth the results of operations of the segments and reconciliation with consolidated results of operations for the years ended December 31, 2014, 2015 and 2016:

 

 

 

Year Ended December 31, 2016

 

 

 

RMB

 

 

 

Manufacturing

 

Solar projects

 

Elimination*

 

Total

 

Revenues—third parties

 

15,580,576

 

156,300

 

 

15,736,876

 

Revenues—intersegment

 

974,835

 

 

(974,835

)

 

Gross profit— third parties

 

2,225,215

 

68,326

 

 

2,293,541

 

Gross profit—intersegment

 

213,663

 

 

(213,663

)

 

Depreciation, depletion, and amortization expense

 

(837,842

)

(74,857

)

 

(912,699

)

Interest expense

 

(215,675

)

(68,659

)

 

(284,334

)

Interest income

 

18,509

 

341

 

 

18,850

 

Income/(loss) before income taxes

 

1,106,227

 

(49,653

)

(213,663

)

842,911

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

16,421,270

 

3,633,553

 

(1,023,567

)

19,031,256

 

 

 

 

Year Ended December 31, 2015

 

 

 

RMB

 

 

 

Manufacturing

 

Solar projects

 

Elimination*

 

Total

 

Revenues—third parties

 

13,461,181

 

64,226

 

 

13,525,407

 

Revenues—intersegment

 

263,332

 

 

(263,332

)

 

Gross profit— third parties

 

2,258,099

 

34,490

 

 

2,292,589

 

Gross profit—intersegment

 

59,599

 

 

(59,599

)

 

Depreciation, depletion, and amortization expense

 

(771,986

)

(25,685

)

 

(797,671

)

Interest expense

 

(218,759

)

(30,623

)

 

(249,382

)

Interest income

 

25,321

 

250

 

 

25,571

 

Income/(loss) before income taxes

 

880,393

 

(48,992

)

(59,599

)

771,802

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

15,318,101

 

1,277,414

 

(289,612

)

16,305,903

 

 

 

 

Year Ended December 31, 2014

 

 

 

RMB

 

 

 

Manufacturing

 

Solar projects

 

Elimination*

 

Total

 

Revenues—third parties

 

11,295,523

 

 

 

11,295,523

 

Revenues—intersegment

 

690,593

 

 

(690,593

)

 

Gross profit— third parties

 

1,756,495

 

 

 

1,756,495

 

Gross profit—intersegment

 

175,704

 

 

(175,704

)

 

Depreciation, depletion, and amortization expense

 

(685,345

)

 

 

(685,345

)

Interest expense

 

(229,665

)

 

 

(229,665

)

Interest income

 

28,169

 

44

 

 

28,213

 

Income/(loss) before income taxes

 

701,363

 

(5,619

)

(175,704

)

520,040

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

14,193,590

 

791,884

 

(501,696

)

14,483,778

 

 


*Elimination refers to (1) the elimination of revenue and profit from the sale of solar modules from manufacturing segment to solar project segment; (2) the elimination of unsettled receivables from manufacturing segment and unsettled payables from solar projects segment resulting from the above sales of solar modules.

 

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Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

28.  Segment information and operations by geographic area (continued)

 

The following table summarizes the Group’s net revenues generated from different geographic locations:

 

 

 

Year Ended December 31,

 

 

 

2014

 

2015

 

2016

 

 

 

RMB

 

RMB

 

RMB

 

China

 

3,741,732

 

5,819,828

 

8,080,921

 

Outside China:

 

 

 

 

 

 

 

Japan

 

3,852,572

 

2,437,507

 

1,401,243

 

Rest of the world

 

3,701,219

 

5,268,072

 

6,254,712

 

Total outside China

 

7,553,791

 

7,705,579

 

7,655,955

 

Total net revenue

 

11,295,523

 

13,525,407

 

15,736,876

 

 

The Group’s long-lived fixed assets with an amount of RMB 637,508 were located in Malaysia, and the rest are substantially located in China.

 

29. Certain risks and uncertainties

 

a)      Major customers

 

For the year ended December 31, 2014, 2015 and 2016, there is one customer located in Japan accounting for 28.8% , 12.5% and 4.0% of total revenue, respectively.

 

Accounts receivable from the 3 customers with the largest receivable balances represents 23% and 20% of the balance of accounts receivable at December 31, 2015 and 2016, respectively. As of December 31, 2016, the largest outstanding account receivable balance accounted for 10.8% of total accounts receivable balance and no other customer occupied over 10% of total accounts receivable balance. The Group performs ongoing credit evaluations of its customers’ financial condition whenever deemed necessary and generally does not require collateral. The Group maintains an allowance for doubtful accounts based upon the expected collectability of all accounts receivable, which takes into consideration an analysis of historical bad debts, specific customer creditworthiness and current economic trends.

 

b)      Concentrations of credit risk

 

Financial instruments that potentially subject the Group to significant concentrations of credit risk consist principally of cash and cash equivalent, accounts receivables and advances to suppliers.

 

The Group places its cash and cash equivalents with high quality financial institutions in the PRC, US, Hong Kong, Japan and Malaysia and limits the amount of credit risk from any single institution. China does not have an official deposit insurance program, nor does it have an agency similar to The Federal Deposit Insurance Corporation (FDIC) in the United States. However, the Group believes that the risk of failure of any of these PRC banks is remote. Bank failure is extremely uncommon in China and the Group believes that those Chinese banks that hold the Company’s cash, cash equivalents and long term time deposit are financially sound based on public available information.

 

The Group is also exposed to the credit and financial risks of its suppliers to which the Group made advances. The Group’s financial condition and results of operations may be materially affected if the suppliers fail to meet their obligations of supplying silicon materials according to the contractually agreed schedules.

 

c)      Foreign currency risk

 

The RMB is not a freely convertible currency. The PRC State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market. The Group’s aggregate amount of cash and cash equivalents denominated in RMB amounted to RMB 1,798,414 and RMB 1,693,543 as of December 31, 2015 and 2016, respectively.

 

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Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

30.   Ordinary shares

 

The holders of ordinary shares in the Company are entitled to one vote per share and to receive ratably such dividends, if any, as may be declared by the board of directors of the Company. In the event of liquidation, the holders of ordinary shares are entitled to share ratably in all assets remaining after payment of liabilities. The ordinary shares have no preemptive, conversion, or other subscription rights.

 

31. Share repurchase

 

On November 17, 2014, the board of directors of the Company approved US$90 million share repurchase program, which provided authorization to purchase up to US$90 million worth of our outstanding ADSs. During the year ended December 31, 2015, the Company repurchased 14,855,815 shares at a cost of US$22,441 (RMB 139,753). When the shares are repurchased for retirement, the excess of cost over par value is charged entirely to retained earnings/(accumulated deficit).

 

32.  Subsequent events

 

The Group has performed an evaluation of subsequent events through the date the consolidated financial statements were issued.

 

33.  Restricted net assets

 

Relevant PRC laws and regulations permit PRC companies to pay dividends only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations.  Additionally, the Company’s subsidiaries can only distribute dividends upon approval of the shareholders after they have met the PRC requirements for appropriation to statutory reserve. The statutory general reserve fund requires annual appropriations of 10% of net after-tax income should be set aside prior to payment of any dividends. As a result of these and other restrictions under PRC laws and regulations, the PRC subsidiaries and affiliates are restricted in their ability to transfer a portion of their net assets to the Company either in the form of dividends, loans or advances, which restricted portion amounted to approximately RMB 10,315,253 or 159.7% of the Company total consolidated net assets as of December 31, 2016. Even though the Company currently does not require any such dividends, loans or advances from the PRC subsidiaries and affiliates for working capital and other funding purposes, the Company may in the future require additional cash resources from its PRC subsidiaries and affiliates due to changes in business conditions, to fund future acquisitions and developments, or merely declare and pay dividends to or distributions to the Company’s shareholders, and if applicable, to the non-controlling interest.

 

34.  Additional information — condensed financial statements of the Company

 

The separate condensed financial statements of JA Solar Holdings Co., Ltd. as presented below have been prepared in accordance with Securities and Exchange Commission Regulation S-X Rule 5-04 and Rule 12-04 and present the Company’s investments in its subsidiaries under the equity method of accounting as prescribed in ASC 323. Such investment is presented on the separate condensed balance sheets of the Company as “Investments in subsidiaries.” The condensed financial information of JA Solar Holdings Co., Ltd. has been presented for the period from January 1, 2014 to December 31, 2016.

 

The subsidiaries did not pay dividend to the Company for the period presented.

 

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Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

Except as disclosed in the consolidated financial statements as presented above, the Company did not have any significant contingency, commitment, long term obligation, or guarantee as of December 31, 2016.

 

 

 

For the year
ended
December 31,
2014

 

For the year
ended
December 31,
2015

 

For the year
ended
December 31,
2016

 

 

 

RMB

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

Total operating expenses

 

(38,940

)

(65,233

)

(4,546

)

Loss from operations

 

(38,940

)

(65,233

)

(4,546

)

Change in fair value of derivatives

 

74,014

 

39,593

 

70,882

 

Share of income from subsidiaries

 

380,263

 

509,243

 

449,078

 

Foreign exchange gain

 

6,596

 

140,110

 

168,285

 

Other income

 

1,838

 

 

 

Income before income taxes

 

423,771

 

623,713

 

683,699

 

Net income

 

423,771

 

623,713

 

683,699

 

Net income attributable to JA Solar Holdings

 

423,771

 

623,713

 

683,699

 

Comprehensive income

 

423,771

 

623,713

 

683,699

 

 

F-62



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

 

 

December 31,

 

December 31,

 

 

 

2015

 

2016

 

 

 

RMB

 

RMB

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

1,070

 

165

 

Total current assets

 

1,070

 

165

 

Investments in subsidiaries

 

3,458,210

 

3,274,607

 

Amount due from subsidiaries

 

2,684,130

 

3,313,761

 

Total assets

 

6,143,410

 

6,588,533

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Other payables to subsidiaries and employees

 

131,424

 

 

Accrued and other liabilities

 

30,144

 

30,285

 

Derivatives liabilities - warrants

 

71,237

 

 

Total current liabilities

 

232,805

 

30,285

 

Long-term amount due to subsidiaries

 

90,910

 

97,118

 

Total liabilities

 

323,715

 

127,403

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity :

 

 

 

 

 

Ordinary shares (US$0.0001 par value; 500,000,000 shares authorized, 237,853,602 shares issued and outstanding as of December 31, 2015 and December 31, 2016)

 

176

 

176

 

Additional paid-in capital

 

5,649,304

 

5,651,557

 

Retained earnings

 

194,167

 

877,866

 

Accumulated other comprehensive loss

 

(23,952

)

(68,469

)

Total shareholders’ equity

 

5,819,695

 

6,461,130

 

Total liabilities and shareholders’ equity

 

6,143,410

 

6,588,533

 

 

F-63



Table of Contents

 

JA SOLAR HOLDINGS CO., LTD.

 

Notes to Consolidated Financial Statements

(In thousands, except share and per share data)

 

 

 

For the year
ended December
31, 2014

 

For the year
ended December
31, 2015

 

For the year
ended December
31, 2016

 

 

 

RMB

 

RMB

 

RMB

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net Income

 

423,771

 

623,713

 

683,699

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Share-based compensation expense

 

4,985

 

3,681

 

420

 

Share of income from subsidiaries

 

(380,263

)

(509,243

)

(449,078

)

Change in the fair value of derivatives

 

(74,014

)

(39,593

)

(70,882

)

Exchange income

 

(11,636

)

(150,686

)

(168,270

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Decrease in other current assets

 

1,374

 

2,257

 

 

(Decrease)/increase in other payables to subsidiaries and employees

 

(1,424

)

10

 

(6,374

)

Increase in accrued and other liabilities

 

7,843

 

18,690

 

141

 

Net cash used in operating activities

 

(29,364

)

(51,171

)

(10,344

)

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Loans repayment by subsidiaries

 

244,772

 

37,206

 

9,416

 

Net cash provided by investing activities

 

244,772

 

37,206

 

9,416

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

2,171

 

1,196

 

 

Proceeds from short-term loan from subsidiaries

 

 

125,050

 

 

Proceeds from issuance of ordinary shares upon exercise of warrants

 

286,747

 

 

 

Repurchase of ADS

 

 

(139,753

)

 

Repayment of long-term loan from subsidiaries

 

(509,571

)

(1,583

)

 

Net cash used in financing activities

 

(220,653

)

(15,090

)

 

Effect of exchange rate changes on cash and cash equivalents

 

175

 

902

 

23

 

Net decrease in cash and cash equivalents

 

(5,070

)

(28,153

)

(905

)

Cash and cash equivalents at the beginning of the year

 

34,293

 

29,223

 

1,070

 

Cash and cash equivalents at the end of the year

 

29,223

 

1,070

 

165

 

 

F-64