LDK Solar Co., Ltd. - Asia Europe Clean Energy (Solar) Advisory Co ...

polysilicon prices will decline in the long run, we expect that our manufacturing costs as a percentage of our
cost of goods sold will become more significant. Since our inception, we have taken a series of measures to
reduce our manufacturing costs, through increased production scale, improved production yield, using
automatic sorting equipment to reduce wafer breakage, and more skilled manufacturing personnel following
their initial learning curve. If we fail to continue to reduce our manufacturing costs, our profitability will be
adversely affected.
Pricing of our products
Our wafer prices are based on a variety of factors, including global market wafer prices, supply and
demand conditions in China, which is our largest market, and the terms of our customer contracts, including
sales volumes and the terms on which certain customers supply us with polysilicon. We price our wafers on a
per-piece basis. According to Photon Consulting, wafer prices on a per-watt basis are expected to decline in
the next few years due to increased production efficiencies, expected increases in global polysilicon supplies
and declines in polysilicon prices, and increased wafer production capacity in our industry, and we expect the
average selling price of our wafers to decline in 2007 and thereafter. If wafer prices decline and we are unable
to lower our costs in line with the price decline, whether through manufacturing larger ingots or thinner
wafers, or through technological advances, our gross margins would be adversely affected. In addition, as a
part of our geographic expansion strategy, we plan to significantly expand our overseas sales in 2007 and future
years to target the top 20 solar cell and module manufacturers in the world to strengthen our long-term
customer base. The current prevailing international market price for solar wafers is lower than the prevailing
PRC market price. As a result, our increase in overseas sales may reduce our gross margin in the near term.
Net Sales
We derive revenues primarily from the sale of multicrystalline wafers. We also sell a small number of
monocrystalline wafers. We provide wafer processing services to customers who supply silicon materials
and/or multicrystalline or monocrystalline ingots to us for processing into wafers. The silicon materials we sell
include multicrystalline ingots as well as silicon scraps. In the year ended December 31, 2006, our net sales
were generated almost entirely from the sale of wafers, which accounted for 97.2% of our net sales. Sale of
silicon materials and wafer processing services accounted for 2.4% and 0.4%, respectively, of our net sales
during the year ended December 31, 2006. During the three months ended March 31, 2007, approximately
83.5% of our net sales were generated from sales of multicrystalline wafers and 7.4% from sales of
monocrystalline wafers. Sales of silicon materials and wafer processing services accounted for 3.2% and 5.9%,
respectively, of our net sales during the three months ended March 31, 2007. We expect that sales of
multicrystalline wafers will continue to account for a majority of our net sales for the foreseeable future. We
also expect that our net sales will increase as we expand our production capacity to meet the market demand.
Our net sales are affected by our unit sales volume and average selling prices. We currently make most of
our sales to customers through non-exclusive, short-term purchase order arrangements. Increased sales on a
contract rather than spot market basis are likely to lead to a reduction in average selling prices. We have
entered into long-term sales arrangements with some of our major customers, including CSI, Solarfun,
Solland Solar and Suntech. We have also entered into sales arrangements with BP Solar, E-Ton, GE Energy,
Motech, Q-Cells and other customers. In the year ended December 31, 2006, our top five customers
accounted for 70.2% of our net sales. Suntech and Solarfun contributed 39.7% and 13.9%, respectively, of our
net sales for the same period. During the three months ended March 31, 2007, our top five customers
accounted for 56.8% of our net sales. Suntech and Solarfun contributed 18.3% and 9.7%, respectively, of our
net sales for the three-month period. Chinalight contributed 13.6% of our net sales for the three-month period
ended March 31, 2007. We do not have long-term arrangements with Chinalight and our sales to Chinalight
have been based on short-term sales contracts and monthly and quarterly purchase orders.
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