LH Equity Research, LLC

Report Date: 2013-10-11 Analyst: Bill Lin lhequityresearch@outlook.com DISCLAIMER:

USE OF LH EQUITY RESEARCH, LLCS RESEARCH IS AT YOUR OWN RISK. YOU SHOULD DO YOUR OWN RESEARCH AND DUE DILIGENCE BEFORE MAKING ANY INVESTMENT DECISION WITH RESPECT TO SECURITIES COVERED HEREIN. LH EQUITY RESEARCH, LLC HAS NO POSITION IN THE SECURITIES COVERED HEREIN. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY, NOR SHALL ANY SECURITY BE OFFERED OR SOLD TO ANY PERSON, IN ANY JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL UNDER THE SECURITIES LAWS OF SUCH JURISDICTION. LH EQUITY RESEARCH, LLC HAS OBTAINED ALL INFORMATION CONTAINED HEREIN AND IN REPORTS FROM PUBLIC SOURCES, WHICH WE BELIEVE TO BE ACCURATE AND RELIABLE. HOWEVER, SUCH INFORMATION IS PRESENTED "AS IS," WITHOUT WARRANTY OF ANY KIND WHETHER EXPRESS OR IMPLIED. LH EQUITY RESEARCH, LLC MAKES NO REPRESENTATION, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, OR COMPLETENESS OF ANY SUCH INFORMATION OR WITH REGARD TO THE RESULTS TO BE OBTAINED FROM ITS USE. ALL EXPRESSIONS OF OPINION ARE SUBJECT TO CHANGE WITHOUT NOTICE, AND LH EQUITY RESEARCH, LLC DOES NOT UNDERTAKE TO UPDATE OR SUPPLEMENT THIS REPORT OR ANY OF THE INFORMATION CONTAINED HEREIN.

COMPANY: HANERGY SOLAR GROUP LTD. (00566.HK) INDUSTRY: RENEWABLE ENERGY/ SOLAR MARKET CAPITALIZATION: HK$ 35.4 BILLION

RECOMMENDATION: STRONG SELL PRICE: HK$ 1.27 TARGET PRICE: HK$ 0.04

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Executive Summary
We are valuing Hanergy Solar Group Ltd. ("Hanergy Solar", 00566.HK) based on its cash balance as of 6/30/2013, as included in its 2013 interim report and audited by Ernst & Young. The Hanergy Solar business itself is a complete fraud and worth nil. Any investor should avoid Hanergy Solar stock. In our opinion, Hanergy Solar and its controlling shareholder, Hanergy Holding Group Ltd. (Hanergy Holding) have been purposely manipulating its business and financials. In this vicious triangle, 00566.HK posted strong financial results; Hanergy Holdings realized huge capital gain from the capital market, and local governments and banks got stuck with manufacturing bases that have no prospects. It would totally be fine if this triangle had not involved a public company toying with investor s money. However, in this case, there was a clear violation of capital markets regulations and a breach of capital market integrity. Figure 1: The Vicious Triangle of Hanergy

Hanergy Solar is a complete fraud based on the following: 100% of its revenue was related-party sales to its controlling shareholder, and was heavily manipulated to achieve a gross margin of 80.5% and net margin of 69.3%. (in 1H2013) Unreasonably cheap stock arrangements to obtain the controlling position at an unfair price to the investors Technology roadmap has little competitiveness against c-Si technology Questionable and unsustainable business practice of intentionally inflating the investment to obtain more money from the local governments and banks, a practice that is even more unsustainable with the new Chinese government Questionable acquisitions with the sole purpose of being able to tell stories Solar power projects, yet another new story to tell, are unable to save the company. Materially misleading disclosure regarding the 100MW project in Qinghai There might be no accounting fraud at all, because Hanergys tricks are not merely at the accounting level. However, we suggest Ernst & Young, Hanergy Solars auditor, to resign immediately, as it is auditing an empire with no grounds. Lastly, we suggest investors to sell off Hanergy Solar stock as soon as they can.

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The Fraud Empire

The Beginning
00566.HK was formerly known as RBI Holdings, a Shenzhen-based toy manufacturer. In 2009, RBI Holdings carried out a reverse take-over in which the assets of Fujian-based Apollo Precision Ltd. became listed under the name of "Apollo Solar Energy Technology Holdings Limited" ("Apollo") and the toy manufacturing business was subsequently disposed of. Apollo was a manufacturer of amorphous silicon (a-Si) thin-film solar equipment and provider of turnkey solutions to solar module manufacturers. Headed by Mr. Hejun Li, Hanergy Holding is a multinational clean-energy power generation company. It has over 6GW of hydropower generation capacity, and 131MW of wind power generation capacity1. Hanergy Holding seems to have a great appetite for thin-film PV technology. When Hanergy came across Apollo, the dream to build a thin-film empire became more clear than ever. Since May 2010, Hanergy Holding and Apollo entered into a series of sales contract and share subscription agreements, which granted Hanergy Holding the right to purchase Apollo shares at certain predetermined price on condition that certain portion of the sales contracts were fulfilled. It is highly unusual for a customer to ask for cheap stock of its supplier under normal business practice. For example, On May 20, 2010, Apollo entered into a US$2.55 billion sales contract2 (the "2010 Sales Contract") with Hanergy Holding to provide turn-key equipment and solutions for 3 GW of production capacity. Concurrently, Apollo and Hanergy Holding entered into a principal subscription agreement (the "2010 Subscription Agreement") to subscribe 4,911,528,960 Apollo shares at HK$0.239 per share, which is 106.49% of the existing outstanding shares immediately before the agreements. On September 18, 2011, Apollo enters into an even more stunning US$5.95 billion sales contract3 (the "2011 Sales Contract") with Hanergy for 7 GW of production capacity. Accompanying this was a principal subscription agreement (the "2011 Subscription Agreement") to subscribe 18 billion of shares at HK$0.10 per share. A summary of the sales contract and share subscription agreement is listed below:

1 2

http://www.hanergy.com/newslist.do?classid=8

,filing dated 07July, 2010 http://www.hkexnews.hk/listedco/listconews/SEHK/2010/0707/LTN20100707703_C.pdf 3 , filing dated 14 November, 2011 http://www.hkexnews.hk/listedco/listconews/SEHK/2011/1114/LTN20111114010_C.pdf

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Figure 2: Summary of sales contracts and subscription agreements4

Although the investor presentation is not a legal document per se, it should be pointed out that the above page contains information that is potentially misleading in terms of closing conditions to purchase the subscription shares. First, lets summarize the key terms of the 2010 Sales Contract and the 2010 Subscription Agreement. Figure 3: Summary of the 2010 Sales Contract 2010 Tranche 1 Capacity Equipments-PECVD Equipments-PVD Price-Equipment & installation(US$) Capex per watt(US$) 1 GW 140 30 850 million 0.85 2010 Tranche 2 1 GW 140 30 850 million 0.85 2010 Tranche 3 1 GW 140 30 850 million 0.85 2010 Total 3GW 420 90 2.55 billion 0.85

Figure 4: Summary of the 2010 Subscription Agreement 2010 Tranche 1 Shares Status % of total subscription shares Price per share before adjustment(HK$) Discount at then market price Price per share after repricing(HK$)
4

2010 Tranche 2 1,473,458,688 30% 0.239

2010 Tranche 3 1,473,458,688 30% 0.239

2010 Total 4,911,528,960 100% -

1,964,611,584 Purchased @2/27/2013 40% 0.239

67.08% 0.239

67.08% 0.12

67.08% 0.10

Hanergy Investor Presentation, Page 24 http://www.hanergysolargroup.com/en/PDF/Investors.Presentation.English.pdf 4 / 28

2010 Options Shares Price per share(HK$) 602,448,000 0.72 Note: Expired and replaced with 2012 Option Agreement, 600,000,000 option granted at exercise price of HK$ 0.255

Since Hanergy Holding in fact had full control over the Agreements, the original agreements were heavily modified by a number of supplement agreements in the benefit of Hanergy Holding6. For example, the share purchase price of Tranche 2 and Tranche 3 shares were changed to HK$ 0.12 and HK$ 0.10, respectively, from the original HK$ 0.239 per share.(Highlighed in the above table). Note the incentive and action to reprice the shares when share price moves in the adverse direction Also the conditions for subscribing the shares were changed: Figure 5: Summary of closing conditions for 2010 Shares before and after supplement agreements Before Supplement Agreements 2010 Tranche 1 Shares 2010 Tranche 2 Shares 2010 Tranche 3 Shares Issuable after Hanergy Holding prepaid (50% of contract price, or HK$ 3.3 billion) for 2010 Tranche 1 Sales Contract Issuable after Hanergy Holding prepaid (50% of contract price, or HK$ 3.3 billion) for 2010 Tranche 2 Sales Contract Issuable after Hanergy Holding prepaid (50% of contract price, or HK$ 3.3 billion) for 2010 Tranche 3 Sales Contract After Supplement Agreements Issuable after Hanergy Holding paid HK$ 3.3 billion in cumulative contract price under 2010 Sales Contract Issuable after Hanergy Holding paid HK$ 5.0 billion in cumulative contract price under 2010 Sales Contract Issuable after Hanergy Holding paid HK$ 6.0 billion in cumulative contract price under 2010 Sales Contract

See the difference? With the new schedule, Hanergy Holding was entitled to all three tranches of shares as long as it paid HK$ 6.0 billion in cumulative contract price, which was approximately equal to the total contract value of 2010 Tranche 1 Sales Contract only. (Valued at US$850 million, or HK$6.6 billion). Cheaper Shares, Easier Access. This was how Hanergy Holding paved its way for a greater control and profit. Lets also look at the 2011 Agreements. Figure 6: Summary of the 2011 Sales Contract 2011 Tranche 1 Capacity Equipments-PECVD Equipments-PVD Price-Equipment installation(US$) Capex per watt(US$)
5

2011 Tranche 2 2 GW 336 48 1.7 billion 0.85

2011 Tranche 3 3 GW 504 72 2.55billion 0.85

2011 Total 7 GW 1176 168 5.95 billion 0.85

2 GW 336 48 & 1.7 billion 0.85

, filing date 10 March, 2012.

http://www.hkexnews.hk/listedco/listconews/SEHK/2012/1003/LTN201210031155_C.pdf 6 Page 40 of the filing dated 14 November, 2011 5 / 28

Figure 7: Summary of the 2011 Subscription Agreement 2011 Tranche 1 Shares Status % of total subscription shares Price per share Discount at then market price Shares Price per share Shares Price per share 6,000,000,000 Purchased @2/27/2013 33% 0.10 39.90% 2011 Tranche 2 6,000,000,000 Purchased @9/24/2013 33% 0.10 39.90% 2011 Tranche 3 6,000,000,000 33% 0.10 39.90% 2011 Total 18,000,000,000 100% -

2011 Option Agreement 1,400,000,000 0.1664 3,000,000,000 0.10

2011 Incentive Agreement

Figure 8: Summary of closing conditions for 2011 Subscription Shares7 No. of Shares 2011 Tranche 1 Shares 2011 Tranche 2 Shares 2011 Tranche 3 Shares 6,000,000,000 Closing Condition Issuable after Hanergy Holding paid HK$ 1.8 billion in cumulative contract price under 2011 Sales Contract Issuable after Hanergy Holding paid HK$ 3.6 billion in cumulative contract price under 2011 Sales Contract Issuable after Hanergy Holding paid HK$ 6.3 billion in cumulative contract price under 2011 Sales Contract

6,000,000,000

6,000,000,000

With this schedule, Hanergy Holdings was entitled to all 18,000,000,000 shares with HK$ 6.3 billion in payment, which was only half of the value of the 2011 sales contract tranche 1. As you can see, Hanergy Holding has secured the right to issue very cheap stocks at very large quantities. As of the date of this report, Hanergy Holding has acquired 61.4% of shares, and is able to potentially increase the shareholding to 74.1%. With these almost unlimited share issuances, theres essentially no protection of investors interest.

A summary of the share transaction is listed below:

Page 25 26 of filing dated 14 November, 2011 6 / 28

Figure 9: Summary of share transactions8

Total shares issued Shareholding before share subscritpion 2010 Subscription Agreement - First Tranche 2011 Hanergy Option Agreement 2011 Subscription Agreement - First Tranche 2011 Subscription Agreement - Second Tranche 2012 Hanergy Option Agreement Shareholding at 30 September 2013 2010 Subscription Agreement - Second & Third Tranches 2011 Subscription Agreement - Third Tranche 2011 Incentive Agreement 2011 Option Agreement 2012 Hanergy Option Agreement On completion of all share subscriptions and options 13,431,021,643 1,964,611,584 436,210,500 6,000,000,000

Number of share held by % holding Hanergy Group 2,723,910,465 1,964,611,584 436,210,500 6,000,000,000 9.78% 7.05% 1.57% 21.54%

Current

6,000,000,000 27,800,000 27,859,643,727

6,000,000,000 27,800,000 17,152,532,549

21.54% 0.10% 61.57%

2,946,917,376

2,946,917,376

7.13%

6,000,000,000 3,000,000,000 963,789,500 572,200,000 41,342,550,603

6,000,000,000 3,000,000,000 963,789,500 572,200,000 30,635,439,425

14.51% 7.26% 2.33% 1.38% 74.10%

On January 14, 2013, The Company changed the company name from Apollo Solar Energy Technology Holdings Limited to Hanergy Solar Group Limited . (For avoidance of doubt, we call the listed company "Hanergy Solar" and its controlling shareholder "Hanergy Holding"). By doing all of the above, Hanergy Holding "acquired" Apollo through a combination of large sales orders and subscription agreements. Having acquired a majority holding position, the next step is to make the shares increase in value. The stage is now ready for the show. Since 2012, Hanergy Holding has become the sole customer of the listed company. Analysts were once skeptical about the weak bargaining power of
8

Reproduced from page 25 of investor presentation 7 / 28

Future

Apollo against Hanergy Holding9. It turned out that their worries were completely unfounded: the gross margin increased from 62.8% in 2011 to 71.3% in 2012, and again to 80.5% in 1st half 2013. The operating results were nothing short of spectacular.

Unparalleled Margins and Crazy Valuation

For those who have little knowledge about the solar industry, Solarbuzz.com provided some interesting introductory materials10. To illustrate how amazing Hanergy is, lets compare the operating results of Hanergy to some of the largest and most well-known listed companies in the solar equipment space, including Meryer Burger11, GT Solar12, Centrotherm13, and Manz Automation14. Figure 10: Gross margin of Hanergy and its peers
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2006 Hanergy 2007 2008 2009 GT Solar 2010 2011 2012 2013H1

Meryer Burger

Centrotherm

Manz Automation

Source: Company Annual Reports While the gross margin of its peers never exceeded 60%, Hanergy had a gross margin of no less than 60% it even exceeded 80% in the most recent half year report. China, as a manufacturing country, has never been known for its R&D capabilities. How could a China-based company with no previous successful
9

MacVisit: Apollo Solar Energy Trick or Treat by Macquarie Research http://www.solarbuzz.com/going-solar/understanding 11 Meyer Burger is a leading global technology Group specializing on innovative systems and processes based on semiconductor technologies. The Groups focus is on photovoltaics (solar industry) while its competencies and technologies also cover important areas of the semiconductor and the optoelectronic industries as well as other selected high-end markets based on semiconductor materials. For more information, please visit www.meyerburger.com 12 GT Advanced Technologies Inc. is a diversified technology company with innovative crystal growth equipment and solutions for the global solar, LED and electronics industries. Our products accelerate the adoption of new advanced materials that improve performance and lower the cost of manufacturing. For more information, please visit www.gtat.com 13 Centrotherm has been developing and realizing innovative thermal solutions for over 50 years. As a leading and globally operating technology group, it offers production solutions for the photovoltaic, semiconductor and microelectronic industries. Centrotherm filed for bankruptcy in July 2012. For more information, please visit www.centrotherm.de 14 Manz AG based in Reutlingen, Germany, is a world-leading high-tech engineering company. Founded in 1987, in recent years the company has grown from an automation specialist into a supplier of production lines. For more information, please visit www.manz.com
10

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track records reasonably enjoy a significantly higher premium in gross margin than its peers in the western countries did? If the gross margin was not obvious enough, let's looks at the net margin. Figure 11: Net margin of Hanergy and its peers
80% 60% 40% 20% 0% -20% -40% -60% -80% -100% Hanergy Meryer Burger GT Solar Centrotherm Manz Automation 2006 2007 2008 2009 2010 2011 2012 2013H1

Source: Company Annual Reports The net margin is the ultimate indicator of a company's profitability. The net margins of Hanergys peers never exceeded 20%, even in the good old days in 2007-2008, and 2010-2011. Hanergy however, reported much higher net margin. Net margin is 69.3% in the most recent half year report. Lastly, we compare the market capitalization and 1H2013 revenue of Hanergy and its peers. The companies at examination here were GT Solar and Manz (peers in the equipment space), First Solar15 (leading thin-film player), Yingli Solar16, Trina Solar17, Canadian Solar18, and GCL19 (peers in the traditional c-Si world). The slope of the red line is a variation of P/S ratio. It is clear that Hanergy is
15

First Solar is a leading global provider of comprehensive photovoltaic (PV) solar systems which use its advanced module and system technology. The company's integrated power plant solutions deliver an economically attractive alternative to fossil-fuel electricity generation today. From raw material sourcing through end-of-life module recycling, First Solar's renewable energy systems protect and enhance the environment. For more information, please visit www.firstsolar.com 16 Yingli Solar(NYSE: YGE) is the world's largest photovoltaic module manufacturer in terms of shipments. With 2,450 MW of vertically-integrated annual production capacity, Yingli Green Energy's manufacturing covers the photovoltaic value chain from ingot casting and wafering through solar cell production and module assembly. Headquartered in Baoding, China, Yingli Green Energy has more than 20 regional subsidiaries and branch offices and has distributed more than 7,000 MW PV modules to customers worldwide. For more information, please visit www.yinglisolar.com 17 Trina Solar Limited (NYSE:TSL) is a global leader in photovoltaic modules, solutions and services. Founded in 1997 as a PV system integrator, Trina Solar today drives smart energy together with installers, distributors, utilities and developers worldwide. For more information, please visit www.trinasolar.com 18 Canadian Solar Inc. (NASDAQ: CSIQ) is one of the world's largest and foremost solar power companies. As a leading vertically integrated provider of solar modules, specialized solar products and solar power plants with operations in North America,South America, Europe, Africa, the Middle East, Australia and Asia, Canadian Solar has delivered more than 5GW of premium quality solar modules to customers in over 70 countries. For more information, please visit www.canadiansolar.com 19 GCL(03800.HK) is the worlds largest supplier of polysilicon and silicon wafers. For more information, please visit www.gcl-poly.com.hk 9 / 28

enjoying much higher valuation by P/S ratio, which is 5x that of First Solar. One potential explanation is that there are much higher certainty, quality, and sustainability in Hanergys revenue, is that true? Well explore that soon. Also one other thing to note is that, as of the date of this report, the market capitalization of Hanergy Solar almost equals to that of Manz, GT Solar, Yingli Solar, Trina Solar, and Canadian Solar combined. Consider the three c-Si companies annual shipment (~7GW, 20%~25% of global demand) and that of Hanergy, and youll see how impressive Hanergys valuation is. Figure 12: Market capitalization and Revenue of Hanergy and its peers (in US$ millions)
6,000 5,000 M K T C A P Hanergy 4,000 3,000 2,000 FSLR GCL

1,000 -

GT Solar Manz 200 400 600

TSL CSIQ

YGE

800

1,000

1,200

1,400

1,600

1H2013 Revenue

The Technology
Overview
There are two competing technology camps in the photovoltaic space, the c-Si and the thin-film. Most of the well-known PV manufacturers, including all the Chinese ones listed in the US such as Yingli Solar, Trina Solar, and Canadian Solar belong to the c-Si camp, which dominates the global market. First Solar and Hanergy, the company at question today, belong to the latter. Figure 13: Market Share of thin-film

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Source: NPD Solarbuzz20. Thin-film PVs share of the global PV market is expected to decline every year between
now and 2017 and will account for just 7% of new PV production in 2017, according to the latest PV Equipment Quarterly report from market research firm NPD Solarbuzz. Thin-film technologies grew from 3% of total PV production in 2000 to almost 16% in 2009; however, these technologies have seen a sharp decline in new investments since 2011.

These technologies differ in their raw material and manufacturing process. As a result, their conversion efficiencies and costs also vary. Traditionally, c-Si modules have significantly higher conversion efficiencies but also tend to be more expensive on the per watt basis when compared with thin-film modules. However, the price of c-Si decreased significantly in the past several years due to increased supply. Figure 14: The decline in c-Si module price21

Source: Marketbuzz 2013 by NPD Solarbuzz

20 21

http://www.photon.info/photon_news_detail_en.photon?id=79550 Page 23, Marketbuzz 2013 11 / 28

The c-Si module price has fallen by over 85% in the last several years, resulting from the crash of the silicon price and reduction in manufacturing cost, which made thin-film, a technology touted as the second generation technology to replace the expensive c-Si first generation technology, much less competitive in terms of pricing. The growth of and investment in thin-film also shrunk significantly in the past few years. Figure 15: Thin-film market growth and polysilicon price22

Source: GTM Research Thin-film modules are even more difficult to compete due to the low conversion efficiencies - they require a larger light absorbing area to generate the same output as c-Si modules do. When putting together a PV system, a larger surface area requirement translates to larger land, more cables, more module rackings, and more labor hours. These costs are also important factors investors consider when making decisions to choose c-Si or thin-film modules. Within the thin-film space, therere three major categories, including the a-Si adopted by Hanergy, cadmium telluride (CdTe) adopted by First Solar, and copper indium gallium selenide (CIS/CIGS) adopted by a number of start-ups. The a-Si has the lowest conversion efficiency among the three.

22

Page 4, Appendix 2 12 / 28

Figure 16: Thin film production forecast by technology23

Source: Marketbuzz 2013 by NPD Solarbuzz According to the projection by Solarbuzz, CdTe and CIS/CIGS are expected to capture most of the growth in thin film market, largely due to the position of First Solar and Solar Frontier. It also commented: With the thin-film opportunity in India under threat, a downstream project strategy may be the only option for companies such as Hanergy and Hyundai. Unable to keep up with the cost reduction in c-Si and to increase the conversion efficiency enough to compete with the major c-Si module manufacturers, numerous thin-film companies have failed in the past several years. For a summary, please refer to Appendix 1. A particular company to note here is the Switzerland-based Oerlikon Solar, the leading provider of turnkey provider of a-Si and tandem-junction thin-film technology. In fact, the equipment of phase I of the Hanergy Holdings Heyuan manufacturing base24 is from Oerlikon Solar. Oerlikon Solar has made significant progress in lowing manufacturing cost of thin-film modules25, however, the loss-making unit was disposed of by the Oerlikon group and sold to Tokyo Electron26in March 2012. Even First Solar is tapping into c-Si by start a 100MW manufacturing line for crystalline silicon cells for the residential distributed market from the end of next year with production scaling from 201527. You might argue, well First Solar is doing fine, why can't Hanergy do the same and replicate the success in China? Well talk about that shortly. But first lets take a closer look at Hanergys technology.

Implementation of Hanergys Technology

Henan Gogreen (HK.0397)

23 24 25 26 27

Page 307, Marketbuzz 2013 http://hanergy.com/propertyview.do?classid=41 http://www.pv-magazine.com/news/details/beitrag/oerlikon-produces-thin-film-silicon-modules-at-035-wp_100005288 http://www.pv-magazine.com/news/details/beitrag/oerlikon-sells-solar-business-_100005984 http://www.pv-tech.org/news/first_solar_to_manufacture_new_crystalline_silicon_line_from_end_of_2014 13 / 28

In Apollo's 2010 Annual Report, it disclosed: In February 2010, Apollo (Fujian) successfully entered into a sales and service contract with Henan Gogreen Energy Limited (Henan Gogreen) for a total contract sum of approximately RMB579,700,000. In 2010, the Group has already completed the delivery of the 100 MW automatic integrated production system for amorphous silicon/ silicon germanium alloy thin-film solar photovoltaic modules. Under the concerted effort of the clients and the Groups engineering staff, installation and trial were successfully completed as scheduled and the first batch of thin-film modules were manufactured in September this year.

Henan Gogreen was among the first (if not "the" first and only) to implement Apollo's technology. So what's the result? We looked into the annual reports of HK.0397, the parent of Henan Gogreen. Shortly after the commencement of the production, the PV market encountered a dramatic change. Henan Gogreen disclosed:

English Translation: The massive capacity expansion in 2010 led to an oversupply in the solar market in 2011, which resulted in the sharp fall in price across the industry, especially the crystalline silicon solar modules. The Group's amorphous silicon thin film solar modules were also affected, with price falling sharply due to fierce competition. In response to this change, the Group reduced the production during the year. Weak global market, low capacity utilization, coupled with European debt crisis, resulted in a poor performance in the solar industry, especially in the upper and middle stream, and this trend has already taken shape in the first half of this year. In 2012, Gogreen had to dispose the thin-film business in order to "align resources in downstream PV power generation business". Total revenue from sale of thin-film modules were: Figure 17: Revenue from thin-film modules of Gogreen HK$ '000 Revenue from sale of thin-film modules Source: Gogreen Annual Reports Buying equipment for RMB 579,700,000, and realizing HK$ 73,170,000 of revenue. This was not a good
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Y2010 -

Y2011 72,335

Y2012 835

Total 73,170

investment for Gogreen IC Energy Apollo's Annual Report in 2010 also disclosed the achievement in the international market: ...the Group has entered into a sales and technology licensing contract with a Vietnamese company for a total contract amount of US$33 million (equivalent to approximately HK$257 million), signifying its official venture into the international market for providing module production line turnkey solution, and ApolloSolar has become one of the few Chinese providers having establishment in the international market.

However, in 2011 Annual Report, it said: According to the Vietnamese Communist Party, the IC Energy built solar panel factory has a design capacity of 120MW annually with all products aimed for export. The Group has signed a contract of 30MW with IC Energy in 2010 to provide turn-key solutions and technical support for the said panel plant. However, due to the shortage of financial means and the rapid downturn of global solar industry, IC Energy has requested the company to delay the project by no more than 24 months. In view of keeping a good working relationship with our customers, the Group agreed to such a request.

There's no further mentioning of IC Energy in future disclosures by the company. That being said, there was NO prior successful implementation of Apollo (Hanergy)'s technology and equipment. Was Hanergy concerned? No. They would love to see the situation where Apollo has no third-party customer so they can freely manipulate the pricing of the equipments.

3 GW Manufacturing Capacity
Hanergy claims to be the world's largest thin film solar company, with 3 GW of production capacity28. Let's take a look at what third party data tells us:

28

http://www.hanergy.com/newslist.do?classid=8 15 / 28

Figure 18: Thin-film supplier by capacity29

Capacity in 2012 (MW)

First Solar Solar Frontier Trony 3Sun NexPower 0 255 160 128 500 1000 1500 2000 2500 960 2012

Source: Marketbuzz 2013 by NPD Solarbuzz

Figure 19: Thin-film supplier by production30

Source: GTM Research Wait, where's Hanergy? Where's 3 GW of capacity it claims to have? Shouldn't Hanergy be ranked before First Solar? Let's see, according to Hanergy's website, their factories are here:

29 30

Reproduced from Page 317, Marketbuzz 2013 Page 12, Appendix 2 16 / 28

Figure 20: Hanergy Holding manufacturing bases

Location Shuangliu, Sichuan Heyuan, Guandong Yucheng, Shandong Wujing, Jiangsu Changxing, Zhejiang Nanjing, Jiangsu Haikou, Hainan Shuangyashan, Heilongjiang Qinghai Total Source: Company website

Current Capacity(MW) 300 300 250 300 250 300 300 300 300 2600

In November 2012, Caixin, a well-respected Chinese business magazine published an article 31or Hanergy in Mist, detailing the results of an in-depth review of Hanergy Holdings manufacturing bases, and summarized the announced investment plans of Hanergy Holding as follows: Figure 21: Hanergy Holding manufacturing bases investment plans

Source: Caixin Magazine

31

http://topics.caixin.com/hanergy/ 17 / 28

Hanergy Holdings investment plans look great on paper with a total claimed investment of RMB 189 billion, or roughly US$ 31 billion. However, the realty is quite different. According to the article, most of these facilities did not in fact ramp up. As of November 2012, the date which the article was published, only two facilities were running in volume production: Shuangliu, Sichuan facility running at stated capacity. The rest, not doing so well. "First phase of the production didnt work out, and the second development phase has been halted by the government," the article cites an ex-employee of the Changxing facility. The construction of the so-claimed RMB 3.6 billion Shuangyashan facility commenced in October 2010. Almost three years later, the facility still has not started volume production. The 430-acre manufacturing facility in Haikou had less than 30 workers working when the reporter visited the site. According to a factory worker, both lines were in pilot production phase, no oversea or domestic sales have occurred, and products were temporarily used on the roofs of Hanergys facility. The fact that Hanergy's facility construction and production lag far behind the original schedule, and that most of the completed production lines are only running in pilot test runs are starting to worry the local governments, according to the article. The Haikou and Heyuan governments have either slowed or retracted the land use right applications, and are stepping on the break for loan approvals. Haikou government is even considering expelling Hanergy from the free trade zone.

Unsustainable Business Practice

There's one thing that Hanergy Holding is very good at doing - sucking cash from the local governments and banks. Hanergy achieves this by intentionally inflating the procurement price of the manufacturing equipment (from its subsidiary Hanergy Solar) and thus the total investment size, thereby increasing the investment amount from the government and the loan size from the banks, and inducing the government to provide sumptuous incentives including land and subsidies. Let's take the Haikou facility as an example. According to the website of Hainan government32, the total investment of the first phase of the Haikou facility was RMB 2.85 billion for the 250MW production capacity. Assuming a reasonable RMB 400 million spent on land and factory buildings, and the rest was on the thin-film manufacturing equipment, which was supplied by its subsidiary and the firm in question today, Hanergy Solar. This translates to about RMB 10 per watt for the manufacturing equipment, a figure that matches that of the most expensive thin-film equipment in the industry manufactured by Oerlikon, and doubled the price of US$0.85(RMB 5.1) per watt from announced sales contract with Hanergy Solar, as discussed in Figure 3. Please note: even the US$0.85 announced price was much inflated. With this simple trick, Hanergy Holding was able to inflate the total investment size by about RMB 1
32

http://www.hainan.gov.cn/data/news/2012/02/148616/ 18 / 28

billion. This helped Hanergy to secure more loans from the bank and thus reduce the capital contribution by Hanergy. An article on the website of Finance Bureau of Chongqin33 even clearly pointed out the risk of Hanergy Model to the local governments. According to the article, many local governments pressured and hoping to achieve industrial upgrading could not resist such investment plan due to its size and the renewable concept. The government of Haikou offered Hanergy attractive terms: 1,200 mu of lands at a price of RMB 100,000 per mu, as compared to market price of RMB 250,000 per mu; of the RMB 600 million registered capital, RMB 300 million was from governments interest free loan; Hanergy also received RMB 500 million government syndicated loan from Hainan government. The article continued: its unknown when Hanergy will be able to contribute tax to the Haikou government if the industry does not see significant improvements. At the end of the article, an alert was even given to the local governments: avoid being hijacked by such company! We expect that the Hanergy Model will not be able to continue with the new China governments for a number of reasons. Firstly, new local governments were not obliged to continue, or be responsible for, the investment projects initiated by their predecessors. The Suntech and LDK bankruptcy are good examples. Most contracts for manufacturing facilities projects were signed in the 2010 to 2011 time frame and most facilities started pilot production were in the 2012 to 2013 time frame. As of now, the operating results of the facilities were clear - for the new local leaders, their predecessor and Hanergy Holding have left them with lots of troubles, how will they continue to support the investments? Secondly, with the new Likonomics implemented by Chinas new premier Li Keqiang, there will be no massive fiscal or monetary incentive policies. Also, such mega projects will not be favored with the focus shifting away from GDP growth. Deleveraging is also a pillar in Likonomics, meaning the facility projects will be more difficult to secure bank loans for future capacity expansions. Without the CAPEX fueled by the government subsidies and bank loans, how could Hanergy keep up with the high revenue growth and margin? Thirdly, the Chinese government recently announced the conditions of entry for the PV industry34, which set a minimum of 12% conversion efficiency for any new a-Si manufacturing projects. The highest published conversion efficiency of a-Si module produced by Hanergy was 9.5%35, achieved in early 2011. Hanergy never disclosed achievements in efficiency since 2011, probably because they never made any progress. Also, the investor presentation implied a conversion efficiency of 10% - 12%, which means below 12%. We can therefore conclude that Hanergy Holding will not be able to make any further ramp-ups using its existing a-Si technology. Thats probably why they turned to CIGS to continue their stories.

33 34 35

http://jcz.cq.gov.cn/Html/1/czdt/gncj/2012-11-09/46784.html http://www.miit.gov.cn/n11293472/n11293832/n11293907/n11368223/n15628993.files/n15628753.pdf Page 7, investor presentation 19 / 28

The Acquisitions
Hanergy Solar acquired several CIGS manufacturers: September 26, 2012 - Hanergy Holding acquired Solibro, the CIGS division of Q-cell. The share of Solibro Research AB and related IPs were sold to Hanergy Solar for a consideration of RMB 280 million in September, 201336. January 9, 2013 - Hanergy acquired MiaSol , a California-based company. Relevant IPs were sold to Hanergy Solar for a consideration of RMB 350 million in September, 201337 July 25, 2013 - Hanergy acquired Global Solar Energy, Inc., a Tucson, Arizona based company

Hanergy repeatedly said that these acquisitions would create synergies. However, synergies would be hard to achieve if Hanergy and the acquirees all use incompatible technologies. Hanergy Solar, and hence Hanergy, has traditionally been focusing on a-Si technology, while Solibro, MiaSol , and Global Solar Energy all use CIGS technology. The two technologies use different raw materials and manufacturing processes. On the other hand, while the acquirees all use CIGS technology, MiaSol uses a roll-to-roll sputtering process, while Solibro uses a batch coevaporation process and that's "pretty much the opposite end of the spectrum, as far as CIGS deposition goes," according to MJ Shiao of GTM Researchs Solar Division. 38 Last but not least, the three acquirees were companies that failed in the fierce market competition. How could Hanergy, a company with track records in neither technological innovation nor international M&A, reasonably turn around those failures into successes? We believe that very little, if any, synergy can come out from the acquisitions, and that the sole purpose of these acquisitions is to tell stories. This is not difficult to understand considering the barriers of entry to the thin-film industry set by the Chinese government.

Project Initiatives Unable to save Hanergy

Project unable to utilize the big capacity
Hanergy Holding has set up quite a large capacity, but it does not seem to ship a lot to third-party distributors or installers (except for IKEA, to which the shipment should be less than 20 MW39 but Hanergy Holdings claims to be 383 MW40). Per our check with channels, Hanergy modules are not generally available in the marketplace. The only possible outlet is self-owned projects. Due to the quickly deteriorating products markets, a number of solar manufacturing companies have turned their attention to the solar projects. There were some advantages in the project business, for example, low barriers of entry, no technology involved, and huge return potential. But there are also traps: the laws and policies for solar project vary significantly from country to country and are subject to changes; it is basically a local business that requires deep local knowledge; it is not
36 37 38 39 40

http://www.hkexnews.hk/listedco/listconews/SEHK/2013/0902/LTN20130902026_C.pdf http://www.hkexnews.hk/listedco/listconews/SEHK/2013/0918/LTN20130918278_C.pdf http://www.greentechmedia.com/articles/read/hanergy-acquires-global-solar-energy-its-third-cigs-pv-buy One of the IKEA Beijing stores only installed 416.24kw http://www.hanergy.com/en/content/details_37_1105.html Page 35, investor presentation 20 / 28

easily scalable. According to an executive of Hanergy Solar41, Hanergy Solar will generate most of its revenue from construction and sale of solar power plant in the future. This has several implications: Firstly, the equipment sales business is no longer sustainable. The 2010 and 2011 sales contracts will never get fully executed. Secondly, there has been no mature market for the sale of solar power plant in China, both due to the uncertainty in tariff schemes and grid connection issues. The policy environment are becoming clearer, however it will still take time before the market matures. Thirdly, the modules produced by Hanergy Holding have no track records of generating electricity consistently and reliably in a working environment. Without such track records, it will be very difficult, if not impossible, for Hanergy Solar to sell any solar power plant to potential investors.

Misleading information regarding project initiatives

On September 27, 2013, Hanergy Solar announced the plan to construct a 100 MW solar project in Qinghai province and a 20 MW solar project in Xinjiang province of China42. Both power plants were set to connect to the grid on December 25, 2013. However, when we examine the filing, we found some information indicating that the 100 MW project cannot be finished and connected by December 25, 2013. The filing said:

MW 500,000
According to the filing and procedures of solar projects in China, Hanergy Solar only received a pre-approval for its Qinghai project, an approval what the industry called Lutiao. Numerous documentations, including feasibility study, environmental impact assessment, minerals impact assessment, were yet to be finished to obtain governments approval, which is necessary before the project can commence its construction. Since the above mentioned procedures usually require several months to obtain, with no evidence of them in sight, we concluded that there is 0 possibility that Hanergy will get its 100 MW Qinghai project connected by December 25, 2013.

41 42

http://finance.qq.com/a/20130924/020017.htm?stockcode=hk00566 http://www.hkexnews.hk/listedco/listconews/SEHK/2013/0924/LTN20130924028_C.pdf 21 / 28

Conclusion: Hanergy Solar is nothing but a Fraud

Built upon a series of questionable business practices, uncompetitive technologies, and an unsustainable business model, Hanergy Solar is a big bubble ready to burst any minute. Its crazy high margin, as a result of manipulation by its largest and only customer who also happens to be the controlling shareholder, distorts the reality and does not accurately reflect the operation of the business. Should one day Hanergy decides to price the equipment at their manufacturing cost, Hanergy Solars margin would take a dive from 80% to 0%. Rest assured, Hanergy would never do that because that is exactly how it was able to build and maintain this fraud empire. Hanergy Holding may not be the largest thin-film manufacturer in the world as it claims to be, but it definitely ranks one of the tops in terms creating shareholder value out nothing but thin air. We reiterate our strong sell recommendations and advise investors to sell their shares, and Ernst & Young resign immediately.

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Appendix

1. Bankruptcy of known solar manufactures (c-Si and thin-film):

http://www.greentechmedia.com/articles/read/Rest-in-Peace-The-List-of-Deceased-Solar-Companies

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We listed the more than 200 VC-funded solar startups back in 2008. We knew that we'd be writing about most of them on their way up -- as well as on their way down. Add one more solar company to the list of insolvent solar firms. It's one you may not have heard of: Concentrator Optics. The firm had received investment from Capricorn Venture Partners to build Fresnel lenses for theCPV market. Imagine approaching a VC firm with that pitch today. GTM Research forecasts 21 gigawatts of PV module manufacturing capacity coming offline by 2015 as the global market reconciles a dire supply-demand imbalance. (See PV Technology, Production and Cost Outlook: 2012-2016.) Capacity coming offline means less-efficient companies closing down. Of course there's another long list of relatively unknown Chinese companies closing down as well. Here's an incomplete list of the solar firms that have left the building -- either by closure, bankruptcy, or fire-sale acquisition: 2009 to 2010 Bankrupt, closed, acquired Advent Solar (emitter wrap-through Si) acquired by Applied Materials Applied Solar (solar roofing) acquired by Quercus Trust OptiSolar (a-Si on a grand scale) closed Ready Solar (PV installation) acquired by SunEdison Solasta (nano-coaxial solar) closed SV Solar (low-concentration PV) closed Senergen (depositing silane onto free-form metallurgical-grade Si substrates) closed Signet Solar (a-Si) bankrupt Sunfilm (a-Si) bankrupt Wakonda (GaAs) closed

2011 Bankrupt, closed EPV Solar (a-Si) bankrupt Evergreen (drawn Si) bankrupt Solyndra (CIGS) bankrupt SpectraWatt (c-Si) bankrupt Stirling Energy Systems (dish engine) bankrupt

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Acquisition, sale Ascent Solar (CIGS) acquired by TFG Radiant Calyxo (CdTe) acquired by Solar Fields from Q.cells HelioVolt (CIGS) acquired by Korea's SK Innovation National Semiconductor Solar Magic (panel optimizers) exited systems business NetCrystal (silicon on flexible substrate) acquired by Solar Semiconductor Soliant (CPV) acquired by Emcore

2012 Bankrupt, closed Abound Solar (CdTe) bankrupt AQT (CIGS) closed Ampulse (thin silicon) closed Arise Technology (PV modules) bankrupt Azuray (microinverters) closed BP (c-Si panels) exits solar business Centrotherm (PV manufacturing equipment) bankrupt CSG (c-Si on glass) closed by Suntech Day4 Energy (cell interconnects) delisted from TSX exchange ECD (a-Si) bankrupt Energy Innovations (CPV) bankrupt Flexcell (a-Si roll-roll BIPV) closed GlobalWatt (solar) closed GreenVolts (CPV) closed Global Solar Energy (CIGS) closed G24i (DSCs) bankrupt in 2012, re-emerged as G24i Power with new investors Hoku (polysilicon) shut down its Idaho polysilicon production facility Inventux (a-Si) bankrupt Konarka (OSCs) bankrupt Odersun (CIGS) bankrupt Pramac (a-Si panels built with equipment from Oerlikon) insolvent Pairan (Germany inverters) insolvent Ralos (developer) bankrupt REC Wafer (c-Si) bankrupt Satcon (BoS) bankrupt
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 Schott (c-Si) exits c-Si business Schuco (a-Si) shutting down its a-Si business Sencera (a-Si) closed Siliken (c-Si modules) closed Skyline Solar (LCPV) closed Siemens (CSP, inverters, BOS) divestment from solar Solar Millennium (developer) insolvent Solarhybrid (developer) insolvent Sovello (Q.cells, Evergreen, REC JV) bankrupt SolarDay (c-Si modules) insolvent Solar Power Industries (PV modules) bankrupt Soltecture (CIGS BIPV) bankrupt Sun Concept (developer) bankrupt

Acquisition, fire sale, restructuring Oelmaier (Germany inverters) insolvent, bought by agricultural supplier Lehner Agrar Q.Cells (c-Si) insolvent, acquired by South Korea's Hanwha Sharp (a-Si) backing away from a-Si, retiring 160 of its 320 megawatts in Japan Solibro (CIGS) Q-Cells unit acquired by China's Hanergy Solon (c-Si) acquired by UAE's Microsol Scheuten Solar (BIPV) bankrupt, then acquired by Aikosolar SolFocus (CPV) layoffs, restructuring for sale Sunways (c-Si, inverters) bought by LDK, restructuring to focus on BIPV and storage

2013 Bankrupt, closed Bosch (c-Si PV module) exits module business Concentrator Optics (CPV) bankrupt Suntech Wuxi (c-Si) bankrupt

Acquisition, sale, restructuring Diehl (Germany inverters) inverter division sold to PE firm mutares AG ISET (CIGS) moving into "microsolar" MiaSol (CIGS) acquired by China's Hanergy
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 Nanosolar (CIGS) restructuring for sale NuvoSun (CIGS) acquired by Dow Twin Creeks (kerfless Si) acquired by GT Advanced Technology Wuerth Solar (installer) business turned over to BayWa

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Appendix

2. Review and Highlights of GTM Research Report: Thin-Film 20122016

http://www.gasesmag.com/features/2012/June/G&I_June2012_Newsletter_MLEE_Final.pdf

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Review and Highlights of GTM Research Report: Thin-Film 20122016 Maggie Y.M. Lee

In last months newsletter, we briefly introduced Greentech Media/GTM Researchs latest publication, Thin Film 20122016: Technologies, Markets and Strategies for Survival. In this issue, we present our readers with an in-depth review of the report. At 321 pages, it is the fourth edition of GTM Research's update on thin-film photovoltaics (TFPV) since 2007. With detailed, accurate data, a granular examination of manufacturing costs, technology analysis, recommendations for supplier strategies, and competitive intelligence on the top 80 TFPV companies, it is a comprehensive, data-driven, and objective assessment of the solar industry segment. The reports author, MJ Shiao, a senior solar analyst at GTM Research, also held a free webinar in April to present some of the data from the report and initiate discussions on the dire circumstances surrounding thin-film manufacturers in a low-cost module market. An archive of the webinar can be found on the GTM web site. The Thin Film report is appropriate for specialists in the field and those who closely follow the PV industry, based on the assumption that the reader is already familiar with the terminology and metrics used in evaluating solar module performance and market competitiveness. Compared to GTMs Polysilicon 20122016 report that was released in January and reviewed here in the G&I February 2012 newsletter, this report is more suitable for readers with advanced understanding of the photovoltaics industry in terms of technology and economics. There are different manufacturing processes involved as thin-film absorber material is much more complex and varied than monocrystalline or multicrystalline silicon grown from chunk or granular polysilicon. In this GTM report, the thin-film materials covered are cadmium telluride (CdTe), copperindium(gallium)diselenide (CIS/CIGS), and amorphous thin-film silicon (a-TF-Si or a-Si), the three most popular types of light-absorbing material deposited in thin layers using vacuum deposition techniques. As visitors to the GTM web site and potential buyers can see from the report brochures Table of Contents, there is no executive summary. Readers are expected to spend time studying the report to take full advantage of the information included. There is, however, a concluding chapter before the company profiles at the end, which neatly recaps many items covered throughout the report. It is much more extensive than the webinar and this editor finds it effective and valuable after reading through the first 227 pages, although I am certain I would not have been able to completely appreciate the chapter otherwise. The second and third chapters on PV technologies and Materials and Manufacturing, respectively, provide very helpful and useful reviews for readers who are already familiar with basic PV technology. For those who are not, the chapters might serve together as a primer for

GTM Research: TFPV 20122016 June 2012 more thorough studies outside the realm of the report. On the other hand, the novice might find the scope of the material overwhelming. There are numerous non-GTM graphics from manufacturers to illustrate specific technologies, which appear to be potential troves of information. Unfortunately, the low resolution of some of these reproduced figures means that readers would have to obtain the original graphics from the cited sources in order to properly follow the processes described or the data presented. This is a common issue in many market reports and online publications in circulation these days. Traditionally, full service publishers with professional illustrators and graphic artists either seek high-resolution, print-quality originals or redraw this type of graphics in-house prior to publication. With the avalanche of online information widely available in the public domain, the wide adoption of desktop publishing, the disappearance of affordable resources for print publishers, and the breakneck speed of new publications from competing sources appearing every week, the quality of reproduced graphics have often lost out to quantity. Fortunately, the rest of the report is accompanied by clear, informative figures and tables prepared by the author and GTM. A selection of them is included in the following pages.

From promising star to understudy in distress Much has changed since the release of an earlier edition of the Thin Film Report in 2010, when GTM predicted that thin-film technology would dominate, with a-Si PV and CIGS production gaining meaningful market share and adequate profit margin by 2012. Incentives for investments in thin-film silicon acquired great momentum in 2007 and 2008 during the polysilicon bottleneck for two main reasons: first, unlike c-Si, feedstock (silane) utilization was insignificant, meaning that raw material availability was not much of a problem. Compared to other thin-film technologies such as CIGS and CdTe, thin-film Si was a relatively mature technology; companies like Sharp and Mitsubishi Heavy Industries had been shipping product for a few years. With ready-made manufacturing lines also offered, speculators and would-be manufacturers with little expertise were convinced that they only had to buy the equipment and turn the key to begin operation. The low barrier to entry meant a producer could cash in on the then-current boom immediately. While manufacturing costs were still higher than the sub-$1-per-watt levels proponents were claiming (aided by equipment costs of $2.50 to $3 per watt), cost pressure was low in a supply-constrained market with high c-Si prices. As a result, dozens of new players entered the market, with many purchasing turnkey equipment from vendors such as Applied Materials and Oerlikon. The situation changed dramatically in 2009 and turned for the worst in 2011. Although thin-film shipments grew from 68 MW in 2004 to 2GW in 2009 (CAGR = 97%), when it commanded 18% of the total PV market, cheap crystalline silicon (c-Si) dominated the industry from 2010 onward. While thin-film shipments continued to grow to 3.7 GW in 2011, its market share dropped to 11%. According to Shiao, skydiving polysilicon material and c-Si module prices from Chinese manufacturers have crushed margins and forced once-promising thin-film technologies and companies into crisis mode.1 A combination of the global recession, corrected polysilicon prices, and falling incentives simultaneously eliminated thin films fundamental cost advantage and diminished the ability to finance scale-up plans. Thus, many turnkey customers are now stuck at low-scale manufacturing levels and are struggling to compete with GW-scale crystalline-silicon and major thin-film manufacturers, as well. Early champions of turnkey TF-Si
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GTM Research: TFPV 20122016 June 2012 equipment, Applied Materials and Oerlikon, are no longer in the provider space. Applied Materials divested from its thin-film line in mid-2010. In February 2012, Tokyo Electron (TEL) bought Oerlikon Solar for $275 million. Roth and Rau as well as Veeco have also exited the market. Venture capital into fhin-film PV reached a height of $1.1 billion in 2008. In comparison, venture investments in CIGS reached a combined total of over $305 million in Q4 2011 and Q2 2012, albeit at depressed valuations. By the end of the Department of Energy (DOE) Loan Guarantee Program for solar projects in 2011, DOE had loaned almost $1.3 billion to solar manufacturers, of which $1.1 billion was allocated to thin-film solar manufacturers. While GTM Research forecasts global thin film production and total market value dipping below $3 billion in 2012, the report projects an up-tick in thin film demand in 2015/2016, when the total market recovers to $7.6 billion. The industry's rebound will be predicated on the continued, though muted, success of First Solar and the execution of eciency, yield, and scale roadmaps from other thin film manufactures. In particular, the report forecasts strong growth in the CIGS technology segment, forecasting production at 4 GW in 2016. In 2011, Solar Frontier established itself as a dominant supplier with roughly 400 MW of CIGS PV shipments, but companies like MiaSol and TSMC could emerge in the next few years as top thin film suppliers with cost of manufacturing approaching $0.50 per watt. Nanosolar, a CIGS manufacturer, received $20 million earlier this year from existing investors along with a new investor and at the beginning of June, it closed on another $70 million in VC funding to allow its CIGS thin-film photovoltaic factory to continue to scale and improve.2 With continued venture investments and increased interest from global industrial conglomerates on the sidelines, GTM Research predicts major acquisitions in the near future. Since the second half of 2011, bad news has dominated the thin-film PV segment. Former political darling Solyndra famously declared bankruptcy and defaulted on its $535 million DOE guaranteed loan. Several other thin film firms have rolled back manufacturing plans, including many TF-Si companies delaying capacity expansion and others like Abound Solar ceasing production for 2012 and retooling for a recovering demand market. Odersun and Uni-Solar are bankrupt, with no current prospects for acquisition or only prospecting for debt absorption without resuming production, respectively. The longer term survival of Nanosolar, MiaSol, SoloPower, Solexant, AQT in the next few years remains uncertain. Solibro/Q-Cells had net losses over $1B in 2011 while annual shipments dropped from 75 MW to 66 MW. Trony Solar saw crystalline-silicon manufacturers selling below-cost into the off-grid market, indicating that off-grid/BIPV (building integrated PV) may not be a stable outlet for thin film manufacturers. Even industry leader First Solar has had to slowly roll back its capacity, first eliminating its CIGS research division, delaying its Arizona facility, scrapping plans in Vietnam, finally closing its Germany facility, and indefinitely idling at least 280 MW in capacity at four of its industry cost-leading production lines in Malaysia. With production guidance from First Solar ranging between 1.5 GW, 1.7 GW in 2012 total production would drop by over 10% year-overyear.1 At the end of May, approximately 120 members of the current 240-person workforce were furloughed at the 230-MWAntelope Valley Solar Ranch One (AVSR1) PV power plant being built for Exelon Corporation by First Solar. There has been little progress following attempts to settle the dispute between First Solar and Los Angeles County that has put the project six weeks behind schedule. Negotiations began in early April after an LA County safety inspector

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GTM Research: TFPV 20122016 June 2012 discovered that electrical connections on the 3.7 million First Solar CdTe panels that were to be used at the site could not be approved by LA County Building and Safety officials. Thin-film PV was intended as a substitute to c-Si PV While thin-film modules have lower efficiencies than c-Si PV, it has very low cost. A key argument that Shiao emphasized throughout the report is that thin-film PV was originally intended as a low-cost alternative to expensive c-Si during the polysilicon bottleneck, when polysilicon was in severe short supply in 2007 and prices were artificially pushed to $400/kg at its peak. As a substitute product, TFPV must be evaluated in that context and there are very few (and only small) markets where TFPV is the default technology of choice.

Source: Thin Film PV 20122016: Technologies, Markets and Strategies for Survival, GTM Research

Figure 1. Thin film market growth versus polysilicon spot pricing (2003 2011) As the price of polysilicon crashed, TFPVs value proposition also went tumbling (Figure 1). Since cost is the fundamental metric of market competitiveness, cost reduction would be critical to TFPVs survival as bankable c-Si solar panels are now priced below $1/W.

Manufacturing costs determine market competitiveness In the chapter titled Manufacturing Costs and Competitiveness, the author meticulously evaluated the PV module cost structure, capital expenditure (capex), raw material costs, labor costs, effects of scale, efficiency, process yield, utilization regional trends, prices and margins, and more, with 83 figures to accompany the analysis presented over 74 pages. Of particular
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GTM Research: TFPV 20122016 June 2012 interest to G&I readers might be the section on raw material costs and capital expenditure, which would include feedstock and process gas applications, as well as related equipment. Shiao breaks down the significant cost elements of a thin-film module as follows: 1. Depreciation capital expenditure on the facility and equipment 2. Absorber Layer Feedstock raw materials for the active layer of the solar cell(s) 3. Substrate and Deposition Feedstock raw materials used to build the additional layers of solar cell(s) 4. Balance of Materials raw materials, typically commodity, that are used to build the module 5. Labor direct labor required to build the module and run the facility; does not include sales, marketing, or R&D costs that do not affect the day-to-day production operations 6. Overhead and Maintenance miscellaneous costs including utilities, plant upkeep and maintenance Summing items 2, 3, and 4 results in total raw material costs. Similarly, summing 2 6 constitutes the cash costs for the module.

Raw material costs less critical for thin-film PV Raw material costs typically account for the bulk share of thin film manufacturing cost structures (2732%, Figure 2). However, while raw feedstocks for crystalline silicon (up to 20%) are the single largest component in a crystalline silicon PV modules costs, raw materials for the actual active photovoltaic layer of a thin-fim module are typically quite small (710%) in comparison to the balance of module costs. For crystalline silicon modules, raw materials can make up approximately 71% of the total cost of the module. The absorber layer material costs are presented under categories of absorber layer thickness (in m), absorber layer volume (in cm3), absorber layer density (in g/cm3), feedstock yield (in %), feedstock usage (in kg), vendor markup (in %), and total absorber material cost in $/W. For CdTe modules, the feedstocks include cadmium telluride (CdTe) compound in either powder or granules and cadmium chloride (CdCl2) for post-deposition annealing; CIGS feedstocks include sputtering targets copper (Cu), indium (In), gallium (Ga), and selenium (Se), along with hydrogen sulfide (H2S) or hydrogen selenide (H2Se) gas for annealing; TF-Si feedstocks include silane (SiH4), cleaning gas nitrogen trifluoride (NF3) or fluorine (F2), and miscellaneous gases (dopants). Other raw materials comprise substrates or superstrates, which are made of glass coated with transparent conductive oxide (TCO) or non-coated glass, and flexible substrate made of stainless steel web; deposition layers that include buffer material cadmium sulfide(CdS) and back contact [molybdenum (Mo), silver (Ag), aluminum (Al)]; and balance of module (weatherproofing, electrical, etc.) which include encapsulant [polyvinyl butyral (PVB), ethylene vinyl acetate (EVA)], junction box and cabling, frame (aluminum), edge seal and pottants, back glass (soda-lime gass, low-iron glass), and back sheet [polyvinyl fluoride/polyvinyl difluoride (PVF/PVDF)]. GTM divides non-active layer feedstocks into two categories: materials used to create the thin-film PV material (Substrate and Processing) and the remaining materials used to protect the thin-film PV material from the elements and create a working PV module (Balance of
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GTM Research: TFPV 20122016 June 2012 Materials or BOM). Some items, such as a glass superstrate, could fit in both categories; however, since a substrate is integral to the deposition process, GTM categorizes it under Substrate and Processing. Shiao used manufacturing costs as a determining factor of market competitiveness, comparing the cost structure of a leading multicrystalline PV manufacturer against (1) First Solars Oder, Malaysia CdTe facility running at full utilization in 2012 in the report, and (2) MiaSol, a CIGS manufacturer in the webinar (Figure 2). Although overall costs are dissimilar, the cost of the multicrystalline silicon comes to about $0.82/W versus just $0.63/W for First Solar (not including stock-based compensation, warranty, and recycling). These examples serve as a benchmark for cost-structure comparisons of mature facilities.3

Source: Thin Film PV 20122016: Technologies, Markets and Strategies for Survival, GTM Research

Figure 2. Thin film vs. c-Si PV cost structures. (left) Chinese multicrystalline silicon module cost breakdown, 2012E; (right) estimated cost structure at full utilization and cost reduction opportunities, MiaSol, 2012E As shown in Figure 2, raw materials for c-Si PV amount to 71% of the total cost structure, with polysilicon as the single largest contributor (19%; non-Si material 52%) to underlying costs of the module. But for CIGS or CdTe, the material for the active layer is less than 10% of the cost, with total raw materials accounting for 57% of the total, according to the GTM Research model. In particular, CdTe feedstock contributes only 9% to the total cost structure of a CdTe panel [CdTe: $0.07 (9%); Substrate/Processing: $0.13 (16%); Balance of Materials: $0.26 (32%); Labor: $0.08 (9%); Overhead and Maintenance: $0.09 (11%); Depreciation: $0.19 (23%)], which underscores thin films limited dependency on a potentially volatile commodity metals markets. For CIGS and TF-Si, this cost component can be even lower (7% for CIGS at MiaSol). This advantage, however, can be a double-edged sword: the cost structures provide a large incentive for c-Si manufacturers to reduce silicon costs and usage, whereas thin-film technology is less reliant on raw material costs than other technologies and is not subject to the same raw material risk as c-Si. Even if indium prices doubled, CIGS module prices would only
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GTM Research: TFPV 20122016 June 2012 increase by $0.03/W. As can be seen in the example of MiaSol shown on the right side of Figure 2, thin film suppliers thus remain dependent on the balance of material commodity material costs like glass, edge sealants, and junction boxes for cost savings.

Efficiency effects on total system costs Unless new technological innovations emerge soon that would allow dramatic lowering of raw material costs, thin film manufacturers will have to rely on other levers to reduce costs. Efficiency is the most obvious cost factor, and improvements in efficiency provide a two-fold benefit: efficiency gains reduce material costs on a per-watt basis and reduce the balance-ofsystems penalty suffered by low-efficiency products. According to the Rocky Mountain Institute, balance of system (BOS) refers to all of the up-front costs associated with a PV system except the module: mounting and racking components, inverters, wiring, installation labor, financing and contractual costs, permitting, and interconnection, among others. BOS costs currently account for about half the installed cost of a commercial or utility PV system. Module price declines without corresponding reductions in BOS costs will hamper system cost competitiveness and adoption.4

Source: Thin Film PV 20122016: Technologies, Markets and Strategies for Survival, GTM Research

Figure 3. Estimated balance of system (BOS) penalty versus 14.5% efficient multi-c-Si modules As explained by Shiao in his analysis of manufacturing costs, Module efficiency affects PV system costs because of non-module costs that are either fixed for the system or are arearelated. A more efficient module will allow system developers to install more watts in a given project and usable area. Thus, the same amount of metal racking, installation labor, wiring, design and legal fees, permits, etc., will be amortized over a greater power output, reducing both
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GTM Research: TFPV 20122016 June 2012 the $/W-based upfront cost and the levelized cost of energy (LCOE). The difference in system cost due to different module efficiencies is typically referred to as a BOS penalty. In effect, low-efficiency products have to pay a BOS penalty with respect to the industry average and high-efficiency products can garner a BOS-based premium for savings passed onto the developer. The industry rule of thumb for a BOS penalty is approximately $0.05/W for every point differential in efficiency While the $0.05/W rule of thumb is useful for efficiencies in close proximity, BOS penalties are actually asymptotic and logarithmic in nature. Lowefficiency products suffer from BOS penalties at much higher rates than $0.05/W, whereas high efficiencies actually garner less than the $0.05/W. With plunging c-Si pricing coupled with incremental efficiency gains, the cost advantage of thin film manufacturing is rapidly disappearing. Module and system cost penalties as a result of lower efficiency are especially harsh below 10%, where most thin-film silicon module efficiencies lie. Figure 3 shows the resulting BOS penalties per absolute percent deviation from a 14.5% multicrystalline module a 10% efficient module would suffer from a $0.07/W-per-% penalty (equaling $0.32/W).

Capital expenditure Shiao explained that capital expenditure (capex), which manifests in the modules cost structure in the form of depreciation, has a linear relationship with module costs (Figure 4), as most manufacturers depreciate the cost of equipment over seven years. Thus, the process of calculating the depreciation costs simply results from the equation: Depreciation ($ Wdc) = Capital Expenditure ($ Wdc)/7

Source: Thin Film PV 20122016: Technologies, Markets and Strategies for Survival, GTM Research

Figure 4. The effect of capital expenses on thin film manufacturing costs

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GTM Research: TFPV 20122016 June 2012 As a result, initial capital expenditure can have a significant effect on the ultimate cost competitiveness of a manufacturer. For every $0.25/Wdc decrease in capex, the module manufacturer will see a $0.036/Wdc savings in module costs. Crystalline-silicon PV processes have more steps, but the equipment used is commodified and largely derived from the semiconductor industry. Although depreciation of c-Si capital equipment amounts to only 610% of module costs, it can account for a quarter of a fullyutilized thin-film manufacturers costs, wrote Shiao. A large supply chain of commodity manufacturing equipment for c-Si has allowed equipment costs to come down dramatically. With current global producible capacity of c-Si PV modules above 31 GW, utilization rates have fallen dramatically. However, the actual effect of low utilization on costs is limited by the relatively low capex for c-Si manufacturing. In sharp contrast to c-Si PV, TFPV manufacturing requires proprietary equipment and processes where advances and improvements are closely guarded. Resulting cost reductions are thus very limited. Capex in thin film manufacturing can easily approach and even exceed $1/W. Only industry-leading TF manufacturers have capex (minus building and facility upgrades) that can compete against multicrystalline silicon (mc-Si) capex costs. As demand markets are still in flux, expansion of scale to reduce costs may only increase cash burn while crystalline competitors continue to push product at razor-thin and even negative margins.3 Shiao also claimed that the initial capex for thin-film PV is higher (CIGS solar CEOs might dispute this claim5), and there is therefore a much bigger penalty associated with underutilizing a thin-film facility. The higher capex also hinders manufacturers ability to finance capacity expansion.

Source: Thin Film PV 20122016: Technologies, Markets and Strategies for Survival, GTM Research

Figure 5. Effect of module performance on average selling prices (ASPs) for thin-film PV
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GTM Research: TFPV 20122016 June 2012 There is thus a small window of opportunity for thin-film cost leaders. Even with performance adjustment, TF suppliers have to sell at a discount from c-Si, although less so as the efficiency gap closes and area-related BOS costs drop. Figure 5 shows the effect of TF module performance on average selling prices (ASPs). Since module efficiency directly affects (a) module production costs (i.e., amortization of BOM costs) and (b) competitive pricing (i.e., BOS penalties), thin-film suppliers have to price in BOS penalty due to lower efficiencies in order to compete with c-Si PV manufacturers. For example, a 12% efficient CIGS supplier has to charge ~$0.16/W less than c-Si competitor in order to compensate for BOS penalties. Looking back, crashing crystalline silicon module prices in 2011s weakened growth market with respect to global supply meant that thin-film PV manufacturers had to compete at costs far beyond what their roadmaps planned. Manufacturers that were caught in the middle of scaling up, like Solyndra, were suddenly caught in the tide, too late to catch the rising wave of 2010 demand explosion and trapped without cash in a rapidly deteriorating market. The current strategy for thin film suppliers is bifurcated. Small-scale suppliers are now searching desperately for price-insensitive markets and projects, where downstream integration or differentiation may be enough to secure a few projects to generate adequate cash flow and survive another year. At scale, suppliers or those ramping up are looking for a volume market where their small cost advantage can attract enough of a pipeline to production levels necessary to pay off equipment and continue to fund the improvement critical to long-term success. As traditional European feed-in-tariff (FIT) spigots are being actively scaled back, a strong focus on markets that are in active ramp-up and long-term growth markets is critical.

Source: Thin Film PV 20122016: Technologies, Markets and Strategies for Survival, GTM Research

Figure 6. Performance-adjusted thin-film ASPs versus industry best costs at full utilization, 20112016E
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GTM Research: TFPV 20122016 June 2012 The industry's focus is thus moving away from markets with heavy subsidies such as Germany and Italy to emerging markets like China, the U.S., and South America. Some thin-film manufacturers are also considering the demand markets in non-traditional markets like South America, South Africa, and Southeast Asia not out of curiosity but out of desperation1 as European demand flattens and the oversupply of cheap c-Si continues to challenge the market. The thin film landscape has historically been dominated by a few market leaders and a long tail of much smaller followers. Obviously, costs for these market leaders will be lower than the industry average. Figure 6 shows the gap between performance-adjusted ASPs and best-inmarket cost leaders in each technology, including First Solars Malaysia facility (CdTe), Solar Frontier (CIGS), and scaled Chinese Oerlikon/TEL customers (a-Si/-Si). Note that the costs shown are at full utilization: finding demand and scaling are currently the most difficult challenges.

Downstream integration as survival strategy The gross margins implied by the performance-adjusted ASPs suggest significant risk for CdTe and especially thin-film silicon even in the best of scenarios. Manufacturers of these products will definitely need to seek either a downstream integration strategy or pursue markets where they do not have to compete head-to-head with large, vertically-integrated Chinese crystalline silicon modules. Inability to compete against Tier 1 or 2 module pricing will put the manufacturer in a tenuous position where it could be quickly pushed out of the supply market. Vertical downstream integration is a key survival strategy for thin film players, especially smaller facilities, because it is easier to pursue new markets with a downstream arm and having captive demand can ensure high utilization rates. This strategy works much better with thin film manufacturers that have a corporate parent that may be able to bring financing into the project. In fact, control over project financing may be the greatest asset that struggling thin film manufacturers can offer. Thus, turnkey equipment customers like Masdar, T-Solar, Astronergy, and others can bring supplier differentiation to an otherwise non-unique product. Examples of success or survival include First Solar, Astronergy, T-Solar, ENN, Solar Frontier (i.e., Belectric JV) and Sharp (i.e., ESSE). Downstream integration can have definite benefits: it creates a sales channel for modules, which can protect shipments and margins in a highly competitive environment. It also enables overall margin expansion, since the module producer can capture the developers margin. Those in favor of this approach point to the likelihood of modules becoming increasingly commoditized in the future, transforming into a low-margin business. Shiao also noted that some thin film players are focusing on off-grid, building integrated PV (BIPV), and consumer applications, but is skeptical of this market direction because the small size of the market cannot accommodate the large number of uncompetitive TF suppliers and the fact that c-Si can participate in these markets as well. Three forecast scenarios To forecast global demand for thin-film PV in general, GTM built three scenarios: a base case representing the most likely view of industry demand and capacity utilization; a low
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GTM Research: TFPV 20122016 June 2012 scenario representing depressed demand environment for thin film products that does not necessarily reflect the global PV demand market (i.e., the perceived bankability of thin film never materializes); and a high scenario that sees faster-than-expected capacity additions most likely due to a strong global demand environment (leveling c-Si prices) coupled with an increased flow of financing into thin film capacity expansions. Under all three scenarios, thin-film PV takes a dramatic hit in 2012. In general, low c-Si prices are unlikely to disappear because of Germanys new FIT structure and a continued, aggressive expansion plan by Chinese module manufacturers. The question is no longer which companies will be forced to consolidate, but rather, how far and wide the consolidation will reach. Thin-film silicon is the most affected, contracting to a 400 MW to 1.2 GW supply market in 2013. However, GTM estimates that by 2014 growing demand for PV and the slowing of c-Si module cost reduction will help push surviving thin film suppliers into growth mode. Similarly, the period 2015-2016 could be a turning point for CdTe, in that without a disruptive efficiency breakthrough in the next few years, the cost competitiveness of CdTe could be severely diminished. However, GTM remains confident that CdTe will still maintain a significant share of the thin-film PV market based on the captive momentum of First Solar. Estimated production (in MWdc) and market value (in $ billion) for CdTe, CIGS, and TF-Si in 20102016 under all three scenarios are presented in the report. Figure 7 shows the top 10 TFPV manufacturers in 2011. Profiles of these companies as well as some 30 others are included at the end of the report. Each profile lists the company location, company URL, year founded, date of first production, technology (absorber layer) type, and best commercial efficiency for the technology. GTM includes the forecasted capacity and manufacturing cost at full utilization, as well as a half to full page write up on each company.

Source: Thin Film PV 20122016 Technologies, Markets and Strategies for Survival, GTM Research

Figure 7. Top ten thin film producers, 2011. The numbers refer to production in megawatts direct current (MWdc)

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GTM Research: TFPV 20122016 June 2012 For 2012, GTM expects First Solar, Solar Frontier, and Sharp to remain in first, second, and third positions, respectively, albeit with lower production. Trony Solar will drop from fourth position in 2011 to sixth in 2012, and then ninth in 2014. Solibro will drop from its sixth position in 2011 to tenth in 2012 and remain in place through 2014. Up and coming MiaSol will move up from eighth to seventh position in 2012. By 2014, GTM predicts MiaSol will be in third position behind First Solar and Solar Frontier. Sharp will drop to fifth position by 2014. In addition to MiaSol, Astronergy and TSMC will be new leaders emerging among the top 10 in 2014, in fourth and sixth position, respectively. Regardless of the exact production numbers, GTM expects the following trends to remain consistent: Thin film production will decrease in 2012, with the greatest hit being taken by thin- film silicon module producers struggling to keep production in line with the cost of crystalline silicon competitors. Thin film production recovers in 2013, with the exception of the thin-film silicon sector, which continues to see contraction until 2014. Thin-film silicon production, shipments, and prospects will decrease from 2012-2014 before hitting a revival in 2015, but only if committed parent companies continue to see the technology through the dark years. CdTe maintains thin film dominance until 2015, whereupon its cost-competitiveness wanes in light of efficiency gains by other technologies (e.g., CIGS). Thin-film solar will be dominated by a few manufacturers at or near GW-scale production, with a long tail of vertically-integrated or differentiated market-targeted producers, of which only a few will ship more than 100 MW annually. Thin-film market share recovers quickly to 18% share of the overall supply market. In the long term, thin-film technology will never capture more than 20% of the PV supply market. Market leaders remain the same in each scenario, with near-term leaders in First Solar, Solar Frontier, and Sharp, and emergent leaders in MiaSol, TSMC and Astronergy. In addition to the pick of winners, GTM has predictions for companies that will shutter production by the end of 2012, as well as companies that are primary and possible targets for acquisition, especially by large Asian investors looking to acquire or invest into noncommoditized solar manufacturing on the cheap. In general, a consolidating market in 2012 through 2014 will take on a different form in each technology sector. GTM believes the CIGS segment is where all the merger and acquisition activity will take place. Readers who are interested in obtaining the full report can contact GTM for more information at sales@greentechmedia.com or download the report brochure from http://www.greentechmedia.com/research/report/thin-film-2012-2016/

Maggie Lee can be reached at mlee@gasesmag.com

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GTM Research: TFPV 20122016 June 2012 1. M.J. Shiao, Thin film manufacturing prospects in the sub-dollar-per-watt market, Part 1, greentechsolar, Greentech Media, May 16, 2012; http://www.greentechmedia.com/articles/read/thin-film-manufacturing-prospects-in-the-subdollar-per-watt-market/ 2. E. Wesoff, Nanosolar Scores $70M to Keep Its CIGS PV Dream Alive, greentechsolar, Greentech Media, June 1, 2012; http://www.greentechmedia.com/articles/read/NanosolarScores-70M-to-Keep-Its-CIGS-PV-Dream-Alive/ 3. M.J. Shiao, Thin Film Manufacturing in the Sub-Dollar-Per-Watt Market: Part II, greentechsolar, Greentech Media, June 1, 2012; http://www.greentechmedia.com/articles/read/thin-film-manufacturing-in-a-sub-dollar-thewatt-market-ii/ 4. L. Bony et al, Achieving Low-Cost Solar PV: Industry Workshop Recommendations for Near-Term Balance of System Cost Reductions, Rocky Mountain Institute, September 2010, p. 5 (2010); http://rmi.org/Content/Files/BOSReport.pdf 5. E. Wesoff, M.J. Shiao, Slide Show: Is Thin-Film Solar Dead? greentechsolar, Greentech Media, April 27, 2012; http://www.greentechmedia.com/articles/read/Slide-Show-Is-ThinFilm-Solar-Dead/

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