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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

FOR THE TRANSITION PERIOD FROM                       TO                        

DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT . . . . . . . . . . . . . . . . . . .

Commission file number: 001-34609

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

*Not for trading, but only in connection with the registration of American Depositary Shares.

** Expired on January 25, 2014 unexercised.

Securities registered or to be registered pursuant to Section 12(g) of the Act. None

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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None

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:

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 transaction 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 corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes   o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

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

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

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CHINA HYDROELECTRIC CORPORATION

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INTRODUCTION

This annual report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise noted, the asset and liability accounts have been translated from Renminbi to U.S. dollars using the middle rates promulgated by People’s Bank of China at the balance sheet dates, and income and expense items have been translated using the average of the middle rates promulgated by People’s Bank of China during the applicable period. We make no representation that the Renminbi amounts referred to in this annual report could have been or could be converted into U.S. dollars at any particular rate or at all. See “Item 3—A. Selected Consolidated and Other Financial and Operating Data—Exchange Rate Information”.

Unless the context otherwise requires, references in this annual report to:

·                  “years” are to calendar years and, where the context requires, our fiscal year;

·                  our “hydroelectric power projects” are to the power projects and, where the context requires, the operating companies which owns the projects;

·                  “we,” “us,” “our company,” “our,” “CHC” and “China Hydroelectric” are to China Hydroelectric Corporation and its subsidiaries. For SEC reporting purposes, China Hydroelectric Corporation is the successor company to our predecessor company, Binglangjiang. Certain financial and operating data presented in this annual report reflect the results of operations of Binglangjiang from April 25, 2007, the date we acquired Binglangjiang;

·                  “shares” or “ordinary shares” are to our ordinary shares, par value $0.001 per share;

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

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

·                  “RMB” or “Renminbi” are to the legal currency of China and “US$”, “U.S. dollars” or “$” refers to the legal currency of the United States;

·                  “effective tariff” are to gross revenues, which are revenues not netted for VAT or other applicable business surcharges, if any, recorded in the relevant period, divided by the quantity of electricity sold in such period;

·                  “effective utilization rate” are to the quantity of electricity sold in the relevant period expressed as a percentage of installed capacity for electricity generation in such period;

·                  “Yuanping” are to the Yuanping Hydroelectric power project, which is located in Pingnan County, Ningde City, Fujian province; and

·                  “Yuheng” are to the Yuheng Hydroelectric power project, which is located in Pingnan County, Ningde City, Fujian province.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements that relate to our current expectations and views of future events. These forward-looking statements are contained principally in the items entitled “Information on the Company,” “Risk Factors,” “Operating and Financial Review and Prospects,” “Financial Information” and “Quantitative and Qualitative Disclosures About Market Risk.” These statements relate to events that involve known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, these forward-looking statements can be 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. These forward-looking statements include, among other things, statements relating to:

·                  our business strategies and plan of operations;

·                  our ability to acquire productive hydroelectric companies and assets;

·                  our capital expenditure and funding plans;

·                  our operations and business prospects;

·                  our dividend policy;

·                  estimates of production of and tariffs applicable to our hydroelectric power projects;

·                  projects under development, construction and planning;

·                  the regulatory environment for the power industry in general and the level of policy support for renewable energy; and

·                  future developments in the PRC hydropower industry.

These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond our control. In addition, these forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance. Actual outcomes may differ materially from the information contained in the forward-looking statements as a result of a number of factors, including, without limitation, the risk factors set forth in “Risk Factors” and the following:

·                  supply and demand changes in the electric power markets;

·                  changes in electricity tariffs in the regions in which we operate;

·                  our production and transmission capabilities;

·                  availability of sufficient and reliable transmission resources;

·                  our relationship with, and other conditions affecting, the power grids we service;

·                  risks inherent to hydroelectric power production, in particular hydrological conditions, as well as changes in geologic conditions and equipment failure;

·                  weather conditions or catastrophic weather-related damage;

·                  competition, in particular increased supply of power generated by renewable energy resources available to the power grids we service;

·                  our plans and objectives for future operations and expansion or consolidation;

·                  the effectiveness of our cost-control measures;

·                  inflationary trends and interest rate changes;

·                  the effects of changes in currency exchange rates;

·                  environmental laws, including those directly affecting our operations, and those affecting our customers’ demand for electricity;

·                  changes in political, economic, legal and social conditions in China, including the PRC government’s specific policies with respect to investment in the hydroelectric and power industries, economic growth, inflation, foreign exchange and the availability of credit; and

·                  our liquidity and financial condition.

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The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. 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 and the documents that we reference in this annual report and have filed as exhibits to this annual report, completely and with the understanding that our actual future results or performance may be materially different from what we expect.

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PART I.

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

A. Selected Financial Data

The following tables present our selected historical consolidated financial information. Our selected consolidated statements of comprehensive income data for the years ended December 31, 2011, 2012 and 2013 and the selected consolidated balance sheet data as of December 31, 2012 and 2013 have been derived from our audited consolidated financial statements and the related notes included elsewhere in this annual report, which have been audited by Ernst & Young Hua Ming LLP, an independent registered public accounting firm. Our selected consolidated statements of comprehensive income data for the years ended December 31, 2009 and 2010 and selected consolidated balance sheet data as of December 31, 2009, 2010, and 2011 were derived from our audited consolidated financial statements, which are not included in this annual report. Our audited consolidated financial statements is prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. Historical results are not necessarily indicative of the results of operations to be expected for future periods.

You should read this information together with “Item 5. Operating and Financial Review and Prospects” and the consolidated and other financial statements and the related notes of our company.

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(1)         See “Item 5. Operating and Financial Review and Prospects—Results of Operations of our Company—EBITDA from continuing operations, as adjusted” for a reconciliation of this non-GAAP number.

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(1)       For our company, operating data given are for our period of ownership of the hydroelectric power projects during the years indicated, excluding Yuanping and Yuheng, which are discontinued operation as of all years indicated.

(2)       Our aggregate installed capacity information presented includes, as of December 31, 2009, the installed capacity of Shapulong, Banzhu, and Wangkeng, as of December 31, 2009, the installed capacity of Wangkeng, as of December 31, 2010, the installed capacity of Wangkeng, Jinlong, Jintang and Jinwei, although as of such respective dates, our equity interest in Shapulong, Banzhu, Wangkeng, Jinlong, Jintang and Jinwei were 50.0%, 90.0%, 90.0%, 55.0%, 74.0% and 74.0% respectively. We acquired the remaining 10.0% interest in Banzhu in March 2009, the remaining 50.0% interest in Shapulong in August 2009 and the remaining 10.0% interest in Wangkeng in January 2011. Our aggregate installed capacity for the year ended December 31, 2009, 2010, 2011, 2012 and 2013, respectively, reflects installed capacity by our operating projects, excluding Yuanping and Yuheng, which are discontinued operation as of all years indicated.

(3)       Electricity sold for the year ended December 31, 2009, 2010, 2011, 2012 and 2013 reflects electricity sold by all our operating projects, excluding Yuanping and Yuheng, which are discontinued operation as of all years indicated.

(4)       See Exhibit 15.1 to this Annual Report on Form 20-F for the details of the calculation of effective tariff. Effective tariff for the year ended December 31, 2009, 2010, 2011, 2012 and 2013, respectively, reflects contributions from all our projects excluding Yuanping and Yuheng, which are discontinued operations as of all years indicated.

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Exchange Rate Information

Our financial statements and other financial data included in this annual report are presented in U.S. dollars. Our business and operations are primarily conducted in China through our PRC subsidiaries. The functional currency of our PRC subsidiaries is RMB and their revenues and expenses are denominated in that currency. Unless otherwise noted, the asset and liability accounts have been translated from RMB to U.S. dollars using middle rates published by the People’s Bank of China, or the PBOC, at the balance sheet dates, and income and expense items have been translated using the average of the middle rates published by the PBOC during the applicable period. We make no representation that any RMB or U.S. dollar amounts referred to in this annual report 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. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in our shareholders’ equity. The PRC government imposes controls 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, 2014, the noon middle rate was RMB6.1591 to $1.00.

The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated.

Source: People’s Bank of China

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Our business and operations are subject to various risks, many of which are beyond our control. If any of the risks described below actually occurs, our business, prospects, financial condition or results of operations could be materially and adversely affected.

Risks Relating to our Company and the PRC Hydroelectric Power Industry

Our liquidity position poses risk to our operations.

As of December 31, 2013, we had a working capital deficiency of approximately $66.5 million. Due to our working capital deficiency, our independent registered public accountant has stated in its report dated April 21, 2014 with respect to our financial statements as of and for the year ended December 31, 2013 that these circumstances raise substantial doubt about our ability to continue as a going concern. We are currently seeking to raise funds through various means as described below. Our ability to continue as a going concern is dependent upon obtaining the necessary financing to meet our current and future liquidity needs.

Management has been closely monitoring our costs and intends to restrict such costs to those expenses that are essential to our operations. Management has been actively pursuing various means of securing additional financing. However, we cannot make any assurances that our cost reduction efforts will be effective or that any additional financing will be completed on a timely basis, on acceptable terms or at all. In the event that we fail to raise funds sufficient to meet our liquidity needs, we may be forced to substantially curtail our operations or otherwise take measures that would materially and adversely affect our business, results of operations and business prospects.

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Our financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. Should the going concern assumption not be appropriate and we are not able to realize our assets and settle our liabilities, commitments and contingencies in the normal course of operations, adjustments would be required to our consolidated financial statements to the amounts and classifications of assets and liabilities, and these adjustments could be significant.

We have a limited operating history which provides limited reference for you to evaluate our ability to achieve our business objectives.

We were formed in July 2006 as a Cayman Islands exempted company with limited liability without any operating business. We currently have a total of twenty-five operating hydroelectric power projects from continuing operations. Our financial condition, results of operations and our future success will, to a significant extent, depend on our ability to continue to acquire, retain and, develop hydroelectric power projects throughout China and to achieve significant economies of scale. Our company has a limited operating history and is subject to the risks and uncertainties associated with early stage companies. Accordingly, you will have a limited basis on which to evaluate our ability to achieve our business objectives. We cannot assure you that more acquisitions can be consummated on terms favorable to us or at all, or that if we achieve those acquisitions we will be able to operate our expanded business profitably. Due to restrictions on bank lending imposed by the PRC government in 2011, we have been experiencing difficulty in obtaining financing from our principal banks, and, as part of our effort to seek funding from other sources, we entered an Equity Purchase and Sale Agreement to sell the Yuanping hydroelectric power project in December 2011 and the disposal date was March 2, 2012, which was the date we lost effective control over Yuanping, and the sale transaction was completed on the same date. We entered into a Share Transfer Agreement to sell the Yuheng hydroelectric power project in October 2012, the disposal date was October 31, 2012, which was the date we lost effective control over Yuheng. The sale transaction was completed in April 2013. Although we generally intend to minimize sales of our operating assets, we may need to sell additional hydroelectric power projects in the future. If we fail to achieve our business objectives, then we may not be able to realize our expected revenue growth, maintain our existing revenue levels or operate at a profit. Even if we do realize our business objectives, our business may not be profitable in the future.

Our business is dependent upon hydrological conditions, which may from time to time result in conditions that are unfavorable to our business operations.

Our hydroelectric power generating prospects are dependent upon hydrological conditions prevailing from time to time in the broad geographic regions in which our existing and future hydroelectric power projects are located. There can be no assurance that the water flows at our existing and future sites will be consistent with our expectations, or that climatic and environmental conditions will not change significantly from the prevailing conditions at the time our projections were made. Water flows vary each year, and depend on factors such as rainfall, snowfall, rate of snowmelt and seasonal changes. Based on decades of hydrology recordkeeping by government and other organizations for the provinces where we have projects situated, as well as engineering studies prepared during the project design phase, we believe that over time, while annual precipitation levels will typically be above or below average, such variations will mostly likely average out. However, our existing and future hydroelectric power projects may be subject to substantial variations in climatic and hydrological conditions which may reduce water flow and thus our ability to generate electricity. While we have selected and will continue to select our hydroelectric power projects for acquisition in part on the basis of their projected outputs, the actual water flow required to produce those outputs may not exist or be sustained. For example, overall utilization at our hydroelectric power projects in 2013 was lower than the overall utilization in 2012 due to lower levels of precipitation, which has affected our results of operations in 2013. If hydrological conditions result in droughts or other conditions that negatively affect our existing or proposed hydroelectric generation business, our results of operations may be materially and adversely affected.

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We have encountered and may continue to encounter difficulties in pursuing our acquisition strategy and have sold and may continue to sell operating assets, which would result in us being dependent upon our current or remaining portfolio of hydroelectric power projects and having limited revenue growth potential.

Our ability to implement our acquisition strategy depends on a number of factors, in particular, our ability to maintain our current portfolio of hydroelectric power projects, identify suitable acquisition targets, and reach agreements with sellers for acceptable consideration and on commercially reasonable terms and secure financing necessary for completing future acquisitions. There is no guarantee that we have the ability to pursue acquisition opportunities we identify in the future or the ability to maintain our current portfolio of power projects. In 2013, we did not acquire any additional hydroelectric power projects, nor do we currently anticipate any major asset purchase in at least the short term. Due to restrictions on bank lending imposed by the PRC government, we did not proceed with two acquisitions as planned in 2011 and entered into agreements to sell Yuanping hydroelectric power project in December 2011 and Yuheng hydroelectric power project in October 2012, respectively, to help meet our liquidity needs. The disposal date of Yuanping was March 2, 2012, which was the date we lost effective control over Yuanping. The sale transaction was completed on the same date. The disposal date of Yuheng was October 31, 2012, which was the date we lost effective control over Yuheng. The sale transaction was completed in April 2013. We cannot assure you that we will not need to sell additional operating assets. In addition, if we decide to make additional acquisitions in the future, we believe identifying and acquiring projects on reasonable terms may be more difficult as domestic and international competitors seek to acquire small hydroelectric power projects in China. Furthermore, depending on factors such as the national monetary policy and the credit market environment in China, in the event that we are in a position to pursue acquisitions in the future, we may not be able to secure financing for additional acquisitions.

If we need to sell additional operating assets or we are unable to acquire suitable hydroelectric power projects in China, we will continue to remain dependent upon our existing or remaining hydroelectric power projects. This may:

·                  result in our dependence upon the performance of our existing operating plants;

·                  result in our dependence upon electricity sales in the existing geographical areas;

·                  subject us to increased risks associated with drought or other natural disasters in the existing geographical areas we operate; and

·                  limit our ability to grow our revenues and to obtain the benefits of scale that we anticipate.

We may need additional funding to accomplish our growth strategy and to meet our operational needs and may be unable to raise capital or borrow money on terms favorable to us or at all, which could increase our financing costs, dilute the ownership interests our existing shareholders, affect our business operations or force us to delay, reduce or abandon our growth strategy.

Despite the sales of the Yuanping and Yuheng Hydroelectric power projects, our long-term growth strategy remains to acquire and develop additional hydroelectric power projects in China and expand those projects with potential for expansion. To successfully implement this growth strategy, we will need to raise additional funds. In addition, we may need to raise additional funds to meet our liquidity and other operational needs. Our ability to arrange financing and the cost of such financing are dependent on numerous factors, including but not limited to:

·                  general economic and capital market conditions;

·                  the availability of credit from banks or other lenders;

·                  investor confidence in us; and

·                  the continued performance of our hydroelectric power projects.

We cannot predict if our operations will generate sufficient annual cash flows to fund our capital investment requirements. If and when that does not occur, we will be required to finance our cash needs through public or private equity offerings, bank loans or other debt financing, or otherwise. We intend to increase our levels of debt financing to optimize our capital structure. There can be no assurance that international or domestic financing for future power plant acquisitions, development and expansion of existing hydroelectric power projects will be available on terms favorable to us or at all, which could force us to delay, reduce or abandon our growth strategy, increase our financing costs, or both.

Additional funding from debt financings, if available at all, may make it more difficult for us to operate our business because we would need to make principal and interest payments on the indebtedness and may be obligated to abide by restrictive covenants contained in the debt financing agreements, which may, among other things, limit our ability to make business and operational decisions and pay dividends.

Furthermore, raising capital through public or private sales of equity or securities convertible in equity to finance acquisitions or expansion or meet our liquidity and other business needs could cause earnings or ownership dilution to your shareholding interests in our company. We cannot assure you that we will not pursue sale of our ADSs or ordinary shares or securities convertible into our ordinary shares that would be highly dilutive to our existing shareholders.

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We cannot assure you that we can obtain bank loans on terms acceptable to us or at all.

In 2011, the PRC government, as part of its effort to reduce inflation, implemented a monetary policy that severely limited the amounts that banks could lend. As a result, we experienced difficulty in borrowing from our principal banks, although we were able to meet our liquidity needs at the end of 2011 through negotiations to extend the term of certain current obligations, several smaller loans with one-year terms, an exercise of warrants by a stockholder and the sale of the Yuanping hydroelectric power project. In 2013, the bank lending market in China has improved. While our ability to borrow remains somewhat challenging, we have been able to secure a total of $52.2 million through borrowings from banks and non-financial institutions in 2013. The sale of the Yuheng hydroelectric power project also helped us to meet our liquidity needs at the end of 2013. It is unclear what the PRC government’s monetary policy will be in 2014. We cannot assure you that we can obtain bank financing on terms acceptable to us or at all in the future or that we will be able to meet our liquidity needs through bank loans whether it is due to changes in the PRC’s monetary policy or otherwise.

The operation of our hydroelectric power projects and customer demand for our power may be vulnerable to disruptions caused by natural and man-made disasters, which may materially and adversely affect our results of operations.

Our hydroelectric power projects could be required to cease operating in the event of a drought, and to cease operating or even be damaged in the event of a flood. Water supply to our hydroelectric power projects and the projects themselves are vulnerable to natural disasters including, but not limited to, earthquakes, storms, tornadoes and floods, as well as disasters caused by human actions such as terrorist attacks, military conflicts and other deliberate or inadvertent actions which may affect the availability of water supplies or water flow to our hydroelectric power projects. For example, in 2013, a severe flood in Sichuan province hit our Liyuan hydroelectric power project causing damage to the tailrace concrete apron, spillway gates, power generation plant, auxiliary equipment, and the 35KV substation. We recorded a net asset impairment loss of $3.5 million, reflecting the insurance recovery of $0.6 million we received in 2013. We are still assessing the total asset loss caused by such flood and working with the insurance company to determine how much of the total loss can be recovered. Our hydroelectric power projects located in Yunnan province, Sichuan province and Fujian province are all in areas of relatively high seismic risk as compared to other areas of China. Such disasters are unpredictable and can significantly damage our access to water supply and power plant equipment as well as the property of our consumers. Under such circumstances, market demand for power in general may be significantly and adversely affected, reducing the need for the electricity we produce, and we may be unable to continue operation of our plants or to produce the level of electricity we expect. The insurance coverage we maintain may not be adequate to compensate us for all damages and economic losses which may arise in connection with these disasters. Such disruption to our operations could materially and adversely affect our results of operations.

Greenfield projects and projects under construction present substantial development, construction, start-up and partnership risks, which could materially and adversely affect our results of operations, financial condition and growth prospects.

Greenfield projects and projects under construction, present substantial development risk. The development and construction of hydroelectric power projects is time-consuming and complex and requires significant capital investment. In connection with the development and construction of hydroelectric power projects, we will seek to obtain government permits and approvals, land purchase or leasing agreements, equipment procurement and construction contracts, operation and maintenance agreements, and sufficient equity capital and debt financing. Factors that may impair our ability to develop and construct hydroelectric power projects include:

·                  inability to obtain financing on satisfactory terms or obtain any financing at all;

·                  delays in obtaining various regulatory approvals, licenses or permits from different governmental authorities at different levels, including permission for the construction and operation of the hydroelectric power project itself, the environmental permits and permits to use the relevant land;

·                  shortages or increases in the cost of equipment, materials or labor;

·                  adverse weather conditions, which may delay the completion of hydroelectric power projects or substations, or natural disasters, accidents or other unforeseen events;

·                  unforeseen engineering, design, environmental or geological problems;

·                  opposition of local interests;

·                  strikes and labor disputes; and

·                  adverse changes in the PRC regulatory environment.

Any of these factors may cause delays in completion of hydroelectric power projects and may increase the cost of contemplated projects. If we are unable to complete the projects contemplated, the costs incurred in connection with such projects may not be recoverable. Even if we complete these projects, as a result of project delays, cost overruns, changes in market circumstances or other reasons, we may not be able to achieve the intended economic benefits or demonstrate the commercial viability of these projects, which may materially and adversely affect our results of operations, financial condition and growth prospects.

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In addition, the commencement of operations at a newly constructed hydroelectric power project involves many risks, including start-up problems, the breakdown or failure of equipment or processes, performance below expected or contracted levels of output or efficiency and problems with the construction of new supporting infrastructure, such as grid transmission equipment. While manufacturers’ warranties are generally obtained for limited periods relating to each project and its equipment in varying degrees, and construction contractors may guarantee certain performance levels, subject to the payment of liquidated damages, the proceeds of such warranties or performance guarantees, if any, may not be adequate to cover lost revenues or increased costs and expenses associated with equipment problems during project start-up. We also may develop projects with local development partners, which expose us to risks associated with our partners’ failure to retain development rights, obtain permits and approvals required for the development of a project or perform their management, construction or financing obligations. Realization of any of these risks could materially and adversely affect our results of operations, financial condition and growth prospects.

On October 22, 2009, we entered into a capital injection agreement with Henan Lantian Group to subscribe for a 79.0% equity interest in Henan Wuyue Storage Power Generation Co., Ltd. (“Wuyue”), which owns the right to develop a pumped storage hydropower project of 1,000 megawatts in Henan province. Pursuant to the agreement, we completed the first capital injection of RMB32.5 million ($4.8 million) on March 23, 2010. In September 2010, we signed a framework agreement with China Guangdong Nuclear Energy Development Co. Ltd. (“Guangdong Nuclear”) for the equity transfer of a controlling interest of Wuyue. Under the framework agreement, subject to the completion of definitive documents, completion of due diligence and receipt of required governmental and other approvals in the PRC, we would transfer a 51.0% equity interest in Wuyue to Guangdong Nuclear, in exchange for which Guangdong Nuclear agreed to fund its proportionate share of the on-going development costs of the project. The framework expired on December 31, 2011, and the project has been largely at a standstill since 2009. We expect the project will continue to be at a standstill and has no intention to make further investments. As a result, we recognized impairment loss of Wuyue’s construction in progress for $11.6 million in 2011. The impairment loss attributable to the company’s shareholder is $5.0 million in 2011. No impairment loss of Wuyue’s construction in progress was recognized as of December 31, 2012 and 2013.  There can be no assurance that we will not in the future pursue other greenfield projects that would eventually turn out to be unsuccessful.

We derive our revenues solely from the sale of hydroelectric power electricity and each of our projects typically has only one customer. Any prolonged disruption to the demand for hydropower or termination of a customer relationship may cause our revenues to decrease significantly.

We derive revenues solely from the sale of electricity generated by hydroelectric power projects, and most of our power is sold to one of two national power grids. If for any reason the national power grids reduce or eliminate their purchases of hydropower, whether due to the emergence of a cheaper renewable energy source, withdrawal of government policy support for the dispatch of renewable energy or a severe drop in the PRC’s demand for power, we may not have alternative customers readily available to us. Without alternative sources of income, our revenues would decrease significantly should a reduction in demand for hydropower or lack of customers continue for a prolonged period.

Failure to renew the power purchase agreement could result in a reduction or complete loss of revenues from the hydroelectric power project, which would have a materially adverse effect on our revenues, results of operations and net cash used in operating activities.

Our power purchase agreements with the local grids to which our hydroelectric power projects are connected generally have terms of one to five years. Some of these agreements provide for automatic renewal while others do not. If we should be unable to renegotiate a power purchase agreement with the local grid, it is unlikely we would be able to obtain alternative customers for the power generated by the project, as only one grid is available to each hydroelectric power project and there are no neighboring industrial sites ready to take up the power.

Assumptions applied to our investment analyses and feasibility studies may not be accurate, and thus our actual return on investments, operational results, and overall growth may be materially and adversely affected.

In performing investment analysis and feasibility studies for our acquisition and development targets, we consider factors such as: (i) demand for power and growth potential in the province where the hydroelectric power projects is located, (ii) increase in power generation capacity in the locality, (iii) the average tariff of hydroelectric power projects of similar types and capacity, (iv) quality of transmission systems to the local power grids, (v) facilities and technology at the power plant and (vi) ability to retain existing debt financing for the plant or obtain new financing. However, much of the information we rely on in preparing these analyses is provided by the sellers of the plants. With the rapid development of the PRC hydroelectric power industry in recent years, there is some increased risk of plants being built based on inaccurate or incomplete technical data. As a result, the assumptions we use to perform our internal investment analyses and feasibility studies may not be accurate or complete. If any one of our observations or assumptions, or a combination thereof, proves to be inaccurate, then our estimated returns on investments, operational results and our overall growth may be materially adversely affected.

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The operations of our hydroelectric power projects may be adversely affected by the failure of key equipment, civil structures or transmission systems, which could result in lost revenues, increased maintenance costs and our owing damages to our customers for lost revenues.

The breakdown of generation equipment or failure of other key equipment or of a civil structure in one or more of our hydroelectric power projects could disrupt the generation of electricity and result in revenues being lower than expected. Further, any breakdown or failure of one or more of our transmission systems could disrupt transmission of electricity by a power plant to the power grid. We have in the past experienced an equipment breakdown at two of our hydroelectric power projects, resulting in temporary suspensions of electricity generation and distribution. Repair of such breakdowns may take one or two days or up to a month, depending on the nature of the problem and availability of spare parts. In addition, if the problem is related to the grid, we will not be able to dispatch our power until the grid carries out the necessary repairs. A portion of the generation facilities that we have acquired, or may acquire in the future, were, or may have been, constructed many years ago. Older generating equipment may require significant capital expenditure to keep it operating efficiently. Such equipment is also likely to require periodic upgrading and improvement. Breakdown or failure of one of our plants also may prevent us from performing under the applicable power sales agreement which, in certain situations, could result in termination of the agreement or incurring liability for liquidated damages. These events may reduce our ability to generate power, resulting in loss of revenues and increased maintenance costs.

Our power generating operations may be adversely affected by operational risks, which may result in uninsured losses.

Operating hydroelectric power projects involves many risks and hazards which may be beyond our control and could cause significant business interruptions, personal injuries and property or environmental damage, and could increase power generating costs at affected hydroelectric power projects for an unknown duration. These risks include but are not limited to:

·                  failure of power transmission systems;

·                  unexpected maintenance or technical problems;

·                  human error;

·                  failure of our mechanical, software or monitoring systems; and

·                  industrial accidents.

The occurrence of any of these events, and the consequences resulting from them, may not be covered adequately or at all by our insurance policies. We do not currently carry any third-party liability insurance, business interruption insurance or insurance covering environmental damage arising from accidents on our property or relating to our operations. See “Information on the Company—Insurance”. Uninsured losses incurred or payments we may be required to make may have a material adverse effect on our results of operations and financial condition.

Our operations may be interrupted by realization of unexpected risks or difficulties in integrating acquired businesses, which could interrupt our existing business and materially and adversely affect our results of operations.

Our continued growth and ability to leverage our management expertise depend on the successful implementation of our acquisition strategy. We cannot assure you that any particular acquisition will produce the intended benefits. For instance, if we fail to integrate an acquired project into our operations successfully, or the synergies expected from an integration ultimately fail to materialize, then our existing business operations may be interrupted. We may have as a result expended significant management time, capital and other resources to the transaction, which interrupted our existing business operations.

Risks which may be incurred through acquisitions include, but are not limited to:

·                  potential construction or engineering problems which may expose us to severe economic loss or legal liabilities and require substantial expenditure from us to remediate;

·                  unforeseen or hidden liabilities, including exposure to legal proceedings, associated with newly acquired companies;

·                  failure to generate sufficient revenues to offset the costs and expenses of acquisitions;

·                  potential impairment losses and amortization expenses relating to goodwill and intangible assets arising from any of such acquisitions, which may materially reduce our net income or result in a net loss; and

·                  possible contravention of Chinese regulations applicable to such acquisitions.

Any one or a combination of the above risks could interrupt our existing business and materially adversely affect our results of operations.

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On-grid tariffs are set based on regulatory guidance, actual supply of electricity to a power grid and regional demand for electricity, and changes in these factors may materially and adversely affect our results of operations.

All our electricity sales are to power grids and such sales are subject to on-grid tariffs. Since April 2001, the Chinese government has gradually implemented an on-grid tariff setting mechanism based on the actual costs of power projects as well as the average costs of comparable power projects that were constructed during the same period within the same provincial power grid.

This on-grid tariff setting mechanism was intended to replace the old mechanism for setting on-grid tariffs for planned output. Based on our experience, the determination of such average costs usually takes into consideration such factors as:

·                  construction costs, which vary according to the installed capacity of the individual power projects;

·                  operating and administrative expenses;

·                  maintenance and repair costs of power projects; and

·                  interest expense on outstanding debts.

Based on the factors listed above, we receive lower tariffs in comparison to thermal power projects because we have (i) minimal fuel costs and (ii) lower operating and capital construction costs. Any future reductions in our tariffs, which is considered unlikely at least in the short term given the existing shortage in electric power generation capacity in China and the desire of the central government to reduce the adverse environmental problems caused by thermal power projects, or inability to obtain higher tariffs, for example, to cover any increased costs we may have to incur, as a result of the on-grid tariff-setting mechanism or a change to such on-grid tariff-setting mechanism may adversely affect our revenues and profits. In some regions we negotiate annually with the local grid operators the on-grid tariff for our power before applying to the government for approval of the tariff, while in other regions the tariff is set by agreement between the power grid and the government.

In addition, the price for electric power sold to end consumers is fixed in China because the sales price of electricity is uniformly formulated by the National Development and Reform Commission. Thus, we must estimate the price at which the National Development and Reform Commission will allow power grids to sell electricity and set our prices so that, from the power grids’ perspective, their cost for our electricity is acceptable when considered with the costs of other power producers on the grid. Thus, although our on-grid tariffs are lower than those for thermal power projects, the tariff levels we obtain from local grids may still be impacted by changes in the cost of generating thermal power and actual regional demand for power. In addition, if demand for electricity rises beyond expectations, then we cannot raise our prices accordingly to benefit from the increased demand. If actual sales prices are significantly below our estimates for such sales prices, then our financial condition and results of operations may be materially and adversely affected.

If less than all of the electricity we generate is dispatched by the grids, our future revenues will be reduced.

Our profitability depends, in part, upon each of our hydroelectric power projects generating electricity at a level sufficient to meet or exceed the planned generation agreed with our local dispatch company, which in turn will be subject to local demand for electric power and dispatching to the grids by the dispatch centers of the local grid companies.

The dispatch of electric power generated by a power project is controlled by the dispatch centers of the applicable grid companies pursuant to a dispatch agreement with us and pursuant to governmental dispatch regulations. In each of the markets in which we operate, we compete against other power projects for power sales, and dispatch is allocated based on actual demand from the grid. No assurance can be given that the dispatch centers will dispatch the full amount of the planned generation of our power projects. A reduction by the dispatch centers in the amount of electric power dispatched relative to our hydroelectric power projects’ planned generation could have a material adverse effect on our power generation and thus reduce our revenues. To date, however, other than external factors described elsewhere, such as limitations on transmission capacity in several instances, the only situation we have experienced when the dispatch centers accept less than the full amount of the power capable of being generated by our power projects is during brief periods of particularly heavy precipitation when our projects and others generate more power than the grids can physically accept and transmit. This occurs notwithstanding regulatory requirements that grids accept all power generated by renewable energy sources.

Compliance with environmental regulations can be costly, and we may become subject to further environmental compliance requirements in connection with our operations, which could materially and adversely affect our results of operations and financial condition.

We are required to comply with PRC national and local regulations regarding environmental protection for the construction and operation of our hydroelectric power projects. For all of our existing hydroelectric power projects, we have applied for all the environmental permits that are necessary under current PRC laws and regulations to conduct our business, but have not obtained some of the environmental permits from the relevant governmental authorities yet. Furthermore, to the extent that our existing hydroelectric power projects may have been in compliance with PRC environmental protection laws and regulations at the time they were constructed, we cannot assure you that the PRC government will not require retroactive application of current laws and regulations to such old plants. Compliance with environmental regulations can be very expensive, and non-compliance with these regulations may result in adverse publicity, potentially significant monetary damages and fines and suspension of our business operations. In addition, if more stringent regulations are adopted in the future, the costs of compliance with these new regulations could be substantial. If we fail to comply with any future environmental regulations, we may be required to pay substantial fines, suspend production or even cease operations. We do not carry any insurance for damages resulting from failure to comply with environmental regulations.

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Our business and business prospects rely in part on policy support from the PRC government, and our financial condition and results of operations may be materially and adversely affected if we lose such support.

National, provincial and local governments in China support the expansion of hydroelectric power, which eases the approval process for facility acquisition, construction and financing. Under the PRC Renewable Energy Law, Catalogue for the Guidance of Foreign Investment Industries, the Twelfth Five-year Plan of the Development of Renewable Energy Resources and other relevant laws, expansion of both large and small-scale hydroelectric power production is one of the priorities for the development of the nation’s power supply, and foreign investment in the sector is encouraged. We currently enjoy several types of government support, including policy support for local grids to purchase all the power we generate and lower levels of VAT levied on small hydropower production in some provinces where we have operations. If for any reason, such as development of new energy production technologies or migration to other renewable energy sources, China removes such policy support, our financial condition and results of operations may be materially and adversely affected.

Competition in the PRC power industry may increase, and our results of operations and growth prospects may be materially and adversely affected if we are unable to compete effectively.

We compete in the Chinese domestic market with other PRC power generation companies. The five biggest power companies in China, namely, China Huaneng Group, China Datang Group, China Huadian Group, China Guodian Group and China Power Investment Group, collectively operated 46.8% of China’s total power generation installed capacity by the end of 2013, according to the State Electricity Regulatory Commission. These power companies and a number of other power producers have substantially greater financial, infrastructure or other resources than we do. We may also face competition from new entrants to the hydropower industry having business objectives similar to ours, including venture capital and private equity funds, leveraged buyout funds, and other operating businesses that may offer more advanced technological capabilities or that have greater financial resources. The ability of our competitors to access resources that we cannot access may prevent us from acquiring additional hydropower projects in strategic locations or from increasing our generating capacity. There is also increasing competition among operating power projects for increases in dispatched output, higher on-grid tariffs and land use rights. If we are unable to compete successfully, our growth opportunities to increase generating capacity may be limited and our revenue and profitability may be adversely affected. In recent years, the ongoing reform of the PRC power industry has included experimental programs to set on-grid tariffs through competitive bidding among thermal power projects. The tariffs determined by competitive bidding may be lower than the pre-approved tariffs for planned output. In the future, competitive bidding may extend to hydroelectric power projects and further increase price competition among domestic power generation companies. We cannot assure you that increased competition in the future will not have a material adverse effect on our results of operations and growth prospects.

Our business depends on the competitiveness of hydroelectric power generation in relation to other forms of electric power generation. Fewer hydroelectric power projects may be built and less electricity from hydroelectric power sources may be sold if fossil fuel prices decline significantly or if other renewable energy sources become less expensive than hydroelectric power, either of which could have a material adverse effect on our results of operations, financial condition and growth prospects.

The demand for power projects that produce electricity from renewable energy sources such as water depends in part on the cost of generation from other sources of energy. The terms under which supplies of petroleum, coal, natural gas and other fossil fuels, as well as uranium, can be obtained are key factors in determining the economic interest of using these energy sources rather than renewable energy sources. The principal energy sources in competition with renewable energy sources are petroleum, coal, natural gas and nuclear energy. The high price levels for fossil fuels, in particular, petroleum and natural gas, can enhance the price competitiveness of electricity from renewable energy sources. A decline in the competitiveness of electricity from renewable energy sources in terms of cost of generation, technological progress in the exploitation of other energy sources, discovery of large new deposits of oil, gas or coal, or a decline in prices of those fuels, could weaken demand for electricity generated from renewable energy sources.

In the renewable energy sector, competition primarily exists with regard to factors such as bidding for available sites, performance of sites in generation, quality of technologies used, price of power produced and scope and quality of services provided, including operation and maintenance services. A decline in the competitiveness of electricity generated from hydroelectric sources in terms of such factors could weaken demand for hydroelectric power. Should hydroelectric power production become uncompetitive with other forms of renewable energy production, or if fossil fuel production becomes more cost competitive, the construction of hydroelectric power projects may slow, thus reducing our pool of potential acquisition targets and limiting our ability to grow our operations.

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Certain of our operating subsidiaries are parties to loan agreements that provide for lender rights that may adversely affect our ability to operate our business and restrict our ability to pay dividends and we could be materially adversely affected if our lenders accelerate our debt due to our current or future failures to comply with our loan agreements.

Pursuant to loan agreements to which certain of our operating subsidiaries are a party, our lenders have rights that include the following: (i) restricting the borrower during the term of the loan from undertaking any shareholding change or restructuring without obtaining prior approval of the lender; (ii) restricting the borrower from undertaking investment, asset transfer or pledging or mortgaging its assets without obtaining prior approval of the lender; (iii) restricting the borrower from paying dividends until the loan is fully repaid; and (iv) placing the borrower’s power generation revenues into escrow until the loan is repaid. These restrictions may prevent us from disposing of or restructuring the ownership of our hydroelectric power projects, and limit the funds available to pay dividends to our shareholders.

Planning, construction, acquisition and operation of our hydroelectric power projects require us to obtain and maintain a significant number of permits and approvals from PRC government agencies, some of which we have not obtained or were not transferred to us upon project acquisition. Failure to obtain these permits and approvals could result in significant fines and our loss of the right to develop or operate those assets, which would materially and adversely affect our future growth plans and results of operations.

The planning, construction, acquisition and operation of small hydroelectric power projects in China requires permits and approvals to be obtained and maintained under different regulatory schemes administered by a wide range of PRC government agencies. Many of the completed projects we have acquired have not historically obtained or have failed to maintain all of those permits required for their operation, and in some cases permits that were obtained have not been transferred to us following our acquisition of the plant. Furthermore, the development rights we have obtained or may obtain are, in most cases, for projects that have not yet received planning and other permits. We believe we have applied for the grant, transfer or renewal, as applicable, of all permits and approvals required to develop and operate our hydroelectric power projects. However, our applications with respect to one or more projects may be rejected and we may be fined for failure to timely obtain permits and approvals for any of those projects. Failure to obtain missing permits and approvals may in certain cases result in significant fines or the government authorities requiring us to cease operation of our hydroelectric power projects, or unwind the acquisition of the project, any of which would materially and adversely affect our future growth plans and results of operations. Failure to obtain permits and approvals for our development projects may result in our inability to complete and operate the project, or our being subject to penalties and fines upon completion of the project, either of which could materially and adversely affect our future growth and results of operations.

Our operations in China are extensively regulated by the PRC government and our costs associated with compliance with such regulations are substantial. Our results of operations and future growth prospects may be materially and adversely affected by future changes in government regulations and policies.

All of our hydroelectric power projects in China are subject to extensive regulation by the PRC governmental authorities, including central governmental authorities such as the Ministry of Commerce, the State Administration for Industry and Commerce, the National Development and Reform Commission, the State Electricity Regulatory Commission, the State Administration of Taxation, the Ministry of Environmental Protection, the Ministry of Communications and Transportation, the Ministry of Water Resources, the Ministry of Land and Resources and the Ministry of Housing and Urban- Rural Development, as well as their provincial and local counterparts. Government regulations address virtually all aspects of our operations, including, among others, the following:

·                  planning and construction of new power projects;

·                  the granting of power generation, dispatch and supply permits;

·                  the amount and timing of power generation;

·                  the setting of on-grid tariffs paid to power producers and power tariffs paid by consumers of electricity;

·                  power grid control and power dispatch, including the setting of preferential policies for the dispatch of renewable energy generated power;

·                  allocation of water resources and control of water flows;

·                  environmental protection and safety standards;

·                  acquisitions by foreign investors; and

·                  taxes, in particular Enterprise Income Tax and Value Added Tax.

Our costs of compliance with, and reliance on, this regulatory system are significant to our business. An increase in the cost of compliance could increase our operating costs and expenses and materially and adversely affect our results of operations. Moreover, policy movements against renewable energy power producers could limit our opportunities for growth and materially and adversely affect our revenues.

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The transfer of state-owned assets in China is subject to approval by authorities in charge of state-owned assets administration and supervision and involves a public bidding process. Any failure by us or prior owners of our projects to comply with PRC laws and regulations in respect of the transfer of state-owned assets may result in the imposition of fines or forfeiture of our projects.

We currently have a portfolio of 25 operating hydroelectric power projects. Some of our projects were previously state-owned assets. Under PRC law, the transfer of state-owned assets is subject to strict procedures and approvals. We believe we have complied with all requisite procedures in acquiring state-owned assets, namely our Shapulong hydroelectric power project. However, if a previous transferor of state-owned assets failed to comply with relevant PRC law, the transfer of the state-owned assets may be reversed by the government or fines may be levied. In such circumstances, we will have a legal right to recover our investment in the assets, but we may not be able to recover from the relevant parties, which could result in a loss of power generation plants, loss of revenues and a significant increase in operating costs.

Under PRC law, we are also required to bid for the acquisition of state-owned assets that we wish to acquire. We typically negotiate the terms of the sale with the state-owned seller prior to the bidding process, however, we may not be successful in the bid and may fail to obtain the project as a result. To the extent we seek in the future to acquire state-owned assets, we will need to follow this process, and may not be successful in obtaining the target business. To the extent we are unsuccessful in our bids for these state-owned interests, our future growth and the ability to control our existing projects may be materially and adversely affected.

Certain of our acquisitions have not obtained approval from the local counterparts of the National Development and Reform Commission, which could result in our being required to subsequently obtain the approval, losing preferential tax treatments and other preferential government support, or being ordered to cease operation of the subject hydroelectric power project.

In accordance with relevant PRC laws and regulations, acquisitions involving foreign investment require approval from the National Development and Reform Commission, or its local counterparts. Certain of our acquisitions of hydroelectric power projects have not procured approvals from the local counterparts of the National Development and Reform Commission, despite having obtained approvals from relevant local counterparts of the Ministry of Commerce. We have in some instances approached the local counterparts of the National Development and Reform Commission to apply for these approvals, but have been told by the government agency that it is not necessary for our projects to obtain these approvals. Failure to obtain any of the approvals may have a material adverse effect on our business operations, including our being required to subsequently obtain the approval, losing preferential tax treatments and other preferential government support, or being ordered to cease operation of the subject hydroelectric power project.

We have not obtained formal title certificates to some of the properties we occupy, which may subject us to lawsuits or other actions being taken against us and may result in our loss of the right to operate on these properties and increased operating expenses.

We have not obtained formal title certificates in respect of the land that we use at the Zhougongyuan, Binglangjiang II, Jinlong, Jintang, Jinwei, Jinjiu, and Dongguan hydroelectric power projects with a total area of approximately 2,499,278 m2. We are in the process of completing the legal procedures for obtaining the relevant title certificates for the parcels of land and buildings involved and registering them in the name of our operating companies. However, we may not be able to obtain all of the formal title certificates. While we are indemnified by certain predecessors of our operating companies for any losses or expenses that we may suffer from these title defects, our rights as owner or occupier of these properties and buildings may be adversely affected as a result of the absence of formal title certificates and we may be subject to lawsuits or other actions taken against us and may lose the right to continue to operate on these properties.

In addition, certain of the land use rights currently held by us were obtained by way of allocation by the PRC government without charge. These parcels of land at the Wuliting, Shapulong, Banzhu, Wangkeng, Liyuan, Ruiyang, Yingchuan, Xiaopengzu, Mangxian, Husahe Cascade III, Husahe Cascade IV, and Qianling sites are used as workshops, dams and reservoirs, and have a total area of approximately 10,807,730 m2. The PRC central or local governments may in the future require us to re-obtain such land use rights by way of grant by the government or require us to pay site use fees. In the event that we are required to obtain the land use rights by way of grant, we will be obligated to enter into state-owned land use rights grant contracts with the competent land administration authorities and pay relevant taxes and fees, including but not limited to land premiums in accordance with relevant PRC laws and regulations. These taxes and fees for obtaining land use rights may be significant and if we are required to pay these amounts our operating expenses could be significantly increased.

Furthermore, part of the land occupied by Jinwei hydroelectric project is leased allocated land. In accordance with relevant PRC laws and regulations, the lease of allocated land shall obtain approval from the competent land and resources authority. We have not procured such approval so far. Jinwei hydroelectric project is also leasing certain land from the local peasants which is collectively-owned. In accordance with relevant PRC laws and regulations, collectively-owned land shall not be leased for industrial use purpose such as hydropower generation. The total area for the aforesaid leased allocated land and collectively-owned land is approximately 435,300 m2. In the event that we are required to cease such lease and/or any penalties are imposed on us, our business operations and financial condition could be materially and adversely affected.

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Certain of our existing hydroelectric power projects have not passed the completion acceptance procedure, which could result in the imposition of fines or the closure of non-permitted hydroelectric power projects.

In accordance with relevant PRC laws and regulations, hydroelectric power projects are required to pass a completion acceptance procedure. Currently, only sixteen of our twenty-five projects have passed the completion acceptance procedure and two projects, namely, Husahe Cascade IV and Mangxian projects, cannot verify whether they have passed completion acceptance due to the loss of files caused by flood in 2004. The remaining seven of our existing hydroelectric power projects have not passed the completion acceptance procedure and they may not successfully pass the completion acceptance procedure in the future. We expect two will complete the procedure by the end of 2014. As for the remaining five projects in Fujian Province, we have been informed by relevant governmental authorities that Fujian Province has temporarily suspended the completion acceptance procedure for small hydroelectric projects and the time for resumption is uncertain. Failure by any of our existing projects to pass completion acceptance procedure could result in the government imposing fines or ordering us to shut down such hydroelectric power projects.

Our directors and officers may in the future become affiliated with entities engaged in business activities similar to those conducted by us and, accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented, which could limit the business growth opportunities for our company.

Our directors and officers may become affiliated with entities engaged in business activities similar to those conducted by us. Additionally, our directors and officers may become aware of business opportunities which may be appropriate for presentation to us as well as to the other entities with which they are or may be affiliated. Due to these existing affiliations, they may have fiduciary obligations or contractual obligations to present potential business opportunities to those entities prior to presenting them to us. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. The loss of these business opportunities could limit the growth of our company.

If a poll is not demanded at our shareholder meetings, voting will be by a show of hands and shares will not be proportionately represented. Shareholder resolutions may be passed without the presence of the majority of our shareholders in person or by proxy.

Voting at any of our shareholder meetings is by a show of hands unless a poll is demanded. A poll may be demanded by the chairman of the meeting or by any three shareholders present in person or by proxy or by any shareholder(s) holding 1/10 of the total voting rights of shareholders present at the meeting or by any shareholder(s) present in person or by proxy holding shares conferring the right to vote at such meeting, being shares on which an aggregate sum has been paid up equal to not less than 1/10 of the total sum paid up on all such shares conferring such right. If a poll is demanded, each shareholder present in person or by proxy will have one vote for each ordinary share registered in his name. If a poll is not demanded, voting will be by show of hands and each shareholder present in person or by proxy will have one vote regardless of the number of shares registered in his name. In the absence of a poll, shares will therefore not be proportionately represented. In addition, the quorum required for our shareholder meetings consists of shareholders who hold at least one-third in nominal value of our ordinary shares being present at a meeting in person or by proxy. Therefore, subject to the requisite majorities, shareholder resolutions may be passed at our shareholder meetings without the presence of the majority of our shareholders in person or by proxy.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.

We are subject to reporting obligations under the U.S. securities laws. Under the current SEC regulations, we are required to include a management report on internal control over financial reporting in our annual report, which contains management’s assessment of the effectiveness of our internal control over financial reporting for the year ended December 31, 2013. However, the management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act that permits us, a non-accelerated filer, to provide only management’s report in this annual report. Our management has concluded that our internal control over financial reporting was effective as of December 31, 2013. See “Item 15. Control and Procedures.” However, if we fail to maintain effective internal control over financial reporting in the future, our management may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. Moreover, effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important to help us to manage our company effectively and prevent fraud. As a result, our failure to maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our ADSs. Furthermore, we have incurred and expect to continue to incur considerable costs and devote significant management time and efforts and other resources to comply with Section 404 of the Sarbanes-Oxley Act.

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Compliance with rules and requirements applicable to public companies is costly and complex and any failure by us to comply with these requirements on an ongoing basis could negatively affect investor confidence in us and cause the market price of our securities to decline.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules adopted by the SEC and the NYSE, have required changes in the corporate governance practices of public companies. We expect these rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. Complying with these rules and requirements may be especially difficult and costly for us because we may have difficulty locating sufficient personnel in China with experience and expertise relating to U.S. GAAP and U.S. public-company reporting requirements and such personnel may command high salaries. If we cannot attract or retain sufficient personnel to ensure compliance with these rules and regulations, we may need to rely more on outside legal, accounting and financial experts, which may be very costly. Any failure by us to comply with these requirements on an ongoing basis could expose us to increased risk of fraud and subject us to potential delisting from the NYSE, regulatory investigations and civil or criminal sanctions. In addition, we will incur additional costs associated with our public company reporting requirements.

Risks Relating to Doing Business in China

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

Our operating businesses are based in China and all of our power sales are made in China. As such, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many aspects, including:

·                  the level of government involvement;

·                  the level of development;

·                  the growth rate;

·                  the level and control of capital investment;

·                  the control of foreign exchange; and

·                  the allocation of resources.

While the Chinese economy has grown significantly in the past decades, the growth has been uneven geographically, among various sectors of the economy and during different periods. We cannot assure you that the Chinese economy will continue to grow or to do so at the pace that has prevailed in recent years, or that if there is growth, such growth will be steady and uniform. In addition, if there is a slowdown, such slowdown could have a negative effect on our business. It is uncertain whether various macroeconomic measures and monetary policies adopted by the PRC government will be effective in sustaining the fast growth rate of the Chinese economy. In addition, such measures, even if they benefit the overall Chinese economy in the long term, may have a negative effect on us. For example, our financial condition and results of operations may be materially and adversely affected by government control over capital investments, and our ability to access bank financing has been and likely will continue to be adversely affected by changes in the PRC’s monetary policy.

Although the Chinese economy has been transitioning from a planned economy to a more market-oriented economy, a substantial portion of the productive assets in China is still owned by the PRC government. The continued control of these assets and other aspects of the national economy by China government could materially and adversely affect our business. The PRC government also exercises significant control over Chinese economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of investments and expenditures in China, which in turn could lead to a reduction in demand for electricity and consequently have a material adverse effect on our businesses.

Interpretation of PRC laws and regulations involves uncertainty.

We are incorporated in Cayman Islands and are subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned companies. All of our operating businesses are located within China and are governed by PRC laws and regulations. The PRC legal system is based on written statutes, and prior court decisions can only be used as a reference. Since 1979, the PRC government has promulgated laws and regulations in relation to economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, due to the fact that these laws and regulations have not been fully developed, and because of the limited volume of published cases and the non-binding nature of prior court decisions, interpretations of PRC laws and regulations are not always uniform and involves a relatively high degree of uncertainty. Laws may be changed without being immediately published or may be amended with retroactive effect. Depending on the government agency or how an application or case is presented to such agency, we may receive less favorable interpretations of laws and regulations than certain of our competitors. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

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The Antimonopoly Law may subject our future acquisitions to increased scrutiny, which could affect our ability to consummate acquisitions on terms favorable to us or at all.

The Antimonopoly Law of China became effective on August 1, 2008. The law was enacted in part to guard against and cease monopolistic activities, and to safeguard and promote orderly market competition. In accordance with the law, monopolistic acts shall include monopolistic agreements among business operators, abuse of dominant market positions by business operators and concentration of business operators that eliminates or restricts competition or might be eliminating or restricting competition.

On August 3, 2008, the State Council promulgated the Regulations on the Thresholds for Reporting of Concentration of Business Operators, or the Reporting Threshold Regulations, which provide specific thresholds for reporting of concentration of business operators. Under the Antimonopoly Law and the Reporting Threshold Regulations, the parties to an acquisition must report to the Ministry of Commerce in advance if in the preceding accounting year the turnover in the aggregate achieved by all the parties to the transaction exceeds RMB10.0 billion ($1.5 billion) worldwide or RMB2.0 billion ($0.3 billion) within China, and the turnover achieved by at least two of them respectively exceeds RMB400.0 million ($58.6 million) within China. However, the Ministry of Commerce has the right to initiate investigation of a transaction not reaching the above-mentioned reporting thresholds if the Ministry of Commerce has evidence that the transaction has or may have the effect of excluding or restricting competition. The antitrust scrutiny procedures and requirements set forth in the Antimonopoly Law and the Reporting Threshold Regulations grant the government extensive authority of evaluation and control over the terms of acquisitions in China by foreign investors, and their implementation involves significant uncertainties and risks. To the extent our future acquisitions meet the threshold requirements set forth in the law and the Reporting Threshold Regulations, or are deemed by the Ministry of Commerce to meet the thresholds, we will be subject to antimonopoly review. The consummation of our future acquisitions could therefore be much more time-consuming and complex, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or prevent the consummation of such acquisitions, and prevent us from attaining our business objectives.

On February 3, 2011, General Office of the PRC State Council issued the Circular of the General Office of the State Council on the Establishment of Security Review System Regarding Mergers and Acquisitions in China by Foreign Investors with effect in March, according to which, the acquisitions by foreign investors of domestic Chinese companies active in the certain sectors shall be subject to security review, including military enterprises, key agricultural products, key energy and resources, key infrastructure, key transportation services, key technologies and key equipment manufacturing activities that raise national security concerns, where the foreign investor might acquire actual control of the target Chinese company through the acquisition. This newly-issued regulation is unclear in certain aspects including the definition of key sectors which are expected to be further specified and therefore how it will be interpreted and implemented in practice remains to be seen. In case our future acquisitions fall within the security review scope, the consummation of such acquisitions could therefore be much more time-consuming and complex, and any required approval processes may delay or prevent the consummation of such acquisitions, and prevent us from attaining our business objectives.

The discontinuation or revocation of the preferential tax treatments and government incentives available to us could decrease our net income and materially and adversely affect our financial condition and results of operations.

On March 16, 2007, the new PRC Enterprise Income Tax law, or EIT Law, was enacted, which became effective on January 1, 2008 and replaced the previous two separate tax legal regimes for foreign invested enterprises, or FIEs, and Chinese domestic companies. The EIT Law adopts a uniform tax rate of 25% for all enterprises, including FIEs, and revokes many of the previous tax exemption, reduction and preferential treatments which were applicable to FIEs. However, any enterprises that were established before the promulgation of the EIT Law that are entitled to preferential tax treatments for a fixed period will continue to be entitled to such preferential tax treatments until the expiration of such period. If the fixed period has not commenced because of losses, it shall be deemed to commence on January 1, 2008. In addition, under the pre-2008 tax regulations, enterprises established in the Western region of the PRC and engaged in encouraged industries (e.g., hydroelectric power activities) are entitled to a preferential tax rate of 15% from 2001 to 2010 and a two-year tax exemption followed by three-year 50% tax rate reduction starting from the first year of operation (for domestic enterprises) or first profit-making year (for foreign-invested enterprises). The treatment of preferential tax rate of 15% has been renewed in 2011 and extended to the period from 2011 to 2020. In addition, enterprises established before December 31, 2010 that entitled to the tax term holiday may continue to enjoy such tax holiday until its expiration. Many our PRC subsidiaries are currently enjoyed various preferential tax treatments including reduced tax rate and/or term tax holidays. See “Item 5. Operating and Financial Review and Prospects - A. Operating Results - Taxation”.

Preferential tax treatments and incentives granted to us by PRC governmental authorities are subject to review and may be adjusted or revoked at any time in the future. The discontinuation or revocation of any preferential tax treatments and incentive currently available to us will cause our effective tax rate to increase, which will decrease our net income and materially and adversely affect our financial condition and results of operations.

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Our company may be classified as a “resident enterprise” for PRC enterprise income tax purposes under the PRC EIT Law. Such classification could result in unfavorable tax consequences to us and our non-PRC shareholders and ADS holders, including subject to PRC taxation on our worldwide income.

Under the PRC EIT Law, an enterprise established outside of China with its “de facto management body” in China is considered a “resident enterprise,” meaning that it can be treated the same as a Chinese enterprise for enterprise income tax purposes, which will be subject to a uniform 25% enterprise income tax rate on its worldwide income and tax reporting obligations. In addition, the Notice on Certain Issues regarding the Recognition of Resident Enterprises for Offshore-registered Enterprises Controlled by Chinese Enterprises on the Basis of a De Facto Management Body, or Circular 82, issued by the State Administration of Taxation, or the SAT, on April 22, 2009 regarding the standards used to classify certain Chinese-controlled enterprises established outside of China as “resident PRC source income, subject to PRC withholding tax currently at a rate of 10%, when paid to non-PRC enterprise shareholders. Circular 82 also subjects such “resident enterprises” to various reporting requirements with the PRC tax authorities. Under the implementation regulations to the PRC EIT Law, a “de facto management body” is defined as a body that exercises “substantial and overall management and control over the manufacturing and business operations, personnel, and human resources, finances and properties of an enterprise. In addition, Circular 82 details that certain Chinese-controlled enterprises will be classified as “resident enterprises” if the following are located or resident in China: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights. On July 27, 2011, the SAT issued Administrative Measures of Enterprise Income Tax of Chinese-controlled Offshore Incorporated Resident Enterprises (Trial), or Bulletin 45, which became effective on September 1, 2011, to provide further guidance on the implementation of Circular 82. Bulletin 45 clarifies certain issues related to determining PRC resident enterprise status, post-determination administration and which competent tax authorities are responsible for determining offshore incorporated PRC resident enterprise status. Bulletin 45 specifies that when provided with a copy of a Chinese tax resident determination certificate issued by the competent tax authorities from an offshore incorporated PRC resident enterprise, the payer should not withhold 10% income tax when paying Chinese-sourced dividends, interest and royalties to the offshore incorporated PRC resident enterprise.

Currently, a substantial majority of the members of our management team are located in China. However, Circular 82 or Bulletin 45 only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign corporations like us. In the absence of detailed implementing regulations or other guidance determining that offshore companies controlled by PRC individuals or foreign corporations like us are PRC resident enterprises, we do not currently consider our company or any of our overseas subsidiaries to be PRC resident enterprises. However, the SAT may take the view that the determining criteria set forth in Circular 82 and Bulletin 45 reflects the general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. It is also possible that additional implementing regulations or guidance may be issued determining that our Cayman Islands holding company is a “resident enterprise” for PRC enterprise income tax purposes. Any determination by the PRC tax authorities that our Cayman Islands holding company is a “resident enterprise” for PRC enterprise income tax purposes would result in a number of unfavorable PRC tax consequences. First, we would be subject to enterprise income tax at a rate of 25% on our worldwide income as well as PRC enterprise income tax reporting obligations. This would mean that income such as interest on offering proceeds and other income from sources other than China would be subject to PRC enterprise income tax at a rate of 25%, in comparison to no taxation in the Cayman Islands. Second, although under the PRC EIT Law and its implementing rules and Bulletin 45, dividends paid by a PRC tax resident enterprise to an offshore incorporated PRC tax resident enterprise controlled by PRC enterprise or enterprise group would qualify as “tax-exempt income,” we cannot guarantee that dividends paid to us by our PRC subsidiary will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities and tax authorities have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes but not controlled by PRC enterprise or enterprise group like us. Finally, a 10% withholding tax will be imposed on dividends we pay to our non-PRC enterprise shareholders and gains derived by our non-PRC enterprise shareholders from transferring our ADSs or ordinary shares. It is also unclear whether our non-PRC shareholders would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise.

We rely principally on dividends and other distributions, if any, on equity paid by our operating businesses in China, and limitations on their ability to pay dividends to us could have a material adverse effect on our business and results of operations.

We are a holding company and we rely principally on dividends and other distributions, if any, on equity paid by our operating businesses in China for our cash and financing 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. We currently expect to permanently reinvest the earnings of our operating businesses in China and have no plan to cause our operating businesses to make a dividend distribution to us.

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As entities established in China, our operating businesses are subject to certain limitations with respect to dividend payments. PRC regulations currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. For each of our operating businesses that is a Sino-foreign joint venture enterprise, it may not distribute its after-tax profits to us if it has not already made contributions to its reserve fund, enterprise development fund and employee bonus and welfare fund at percentages that are decided by its board of directors. For each of our operating businesses that is a wholly foreign-owned enterprise, it may not distribute its after-tax profits to us if it has not already made contributions to its employee bonus and welfare fund at a percentage that is decided by its board of directors and to its reserve fund at a rate of no less than 10% of its net profit. A wholly foreign-owned enterprise is required to continue making contributions to its reserve fund until such fund reaches 50% of its registered capital. For each of our operating businesses that is a PRC domestic company, it may not distribute its after-tax profits to us if it has not already made contributions to its statutory reserve fund at a rate of no less than 10% of its net profit. A PRC domestic company is required to continue making contributions to its statutory reserve fund until such fund reaches 50% of its registered capital. These reserve funds may not be distributed as cash dividends. The total amount of our restricted net assets was RMB3,483.9 million ($503.9 million) as of December 31, 2013, which exceeded our stockholders’ equity balance of $402.4 million as of that date. In addition, if our operating businesses in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. Limitations on the ability of our operating businesses in China to pay dividends to us could 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. Accordingly, if for any of the above or other reasons, we do not receive dividends from our operating businesses in China, our liquidity, financial condition and ability to make dividend distributions to our shareholders will be materially and adversely affected.

Fluctuations in the value of RMB will affect the amount of our non-RMB debt service in RMB terms and affect the value of, and dividends payable on, our ADSs in foreign currency terms.

Our financial statements are expressed in U.S. dollars. However, a majority of our revenues and expenses are denominated in RMB. We do not believe that we currently have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies or any other derivative financial instruments. However, the value of our ADSs will be affected by the foreign exchange rate between U.S. dollars and RMB because the primary value of our business is effectively denominated in RMB, while the ADSs are traded in U.S. dollars.

The value of RMB against the U.S. dollar and other currencies depends, to a large extent, on China’s domestic and international economic, financial and political developments and government policies, as well as the currency’s supply and demand in the local and international markets. The People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange rate and achieve certain exchange rate targets, and through such intervention kept the U.S. dollar-RMB exchange rate relatively stable for almost two years from July 2008. On June 20, 2010, the People’s Bank of China announced that the PRC government would further reform the RMB exchange rate regime and increase the flexibility of the exchange rate. Since that time, the RMB has gradually appreciated against the U.S. dollar. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuation of the RMB against the U.S. dollar. Fluctuation of the value of RMB will affect the amount of our non-RMB debt service in RMB terms since we have to convert RMB into non-RMB currencies to service our foreign debt.

As we may rely on dividends paid to us by our PRC subsidiaries, any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of any dividends payable on our ADSs in foreign currency terms. For example, to the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our shares or ADSs or for 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. Furthermore, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations.

We incurred foreign exchange loss of $851,000 and $41,000 in 2011 and 2013, respectively, and generated a foreign exchange gain of $28,000 in 2012. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur foreign exchange losses in the future. In addition, our foreign exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

Restrictions on currency exchange may limit our ability to receive dividends from our operating businesses in China and their ability to obtain overseas financing.

Our operating businesses in China may convert a portion of RMB held by them into foreign currencies to meet its foreign currency obligations, including, among others, payments of dividends declared, if any, in respect of our ordinary shares. Under China’s existing foreign exchange regulations, our operating businesses in China are able to pay dividends in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, we cannot assure you that China government will not take measures in the future to restrict access to foreign currencies for current account transactions, including payment of dividends.

Foreign exchange transactions for capital account items, such as direct equity investments, loans and repatriation of investments, by our operating businesses in China continue to be subject to significant foreign exchange controls and require the approval of PRC governmental authorities, including SAFE. In particular, if our operating businesses in China borrow foreign currency-denominated loans from us or other foreign lenders, these loans must be registered with the local offices of SAFE. These limitations could affect their ability to obtain additional equity or debt funding that is denominated in foreign currencies.

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Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by 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 SEC, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States 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.

Inspection 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 auditor quality. The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedure. As a result, investors may be deprived of the benefits of PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

We may be adversely affected by the proceedings instituted recently by the SEC against five PRC-based accounting firms, including our independent registered public accounting firm.

In December 2012, the SEC instituted proceedings under Rule 102(e)(1)(iii) of the SEC’s Rules of Practice against five 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’ work papers related to their audits of certain PRC-based companies that are publicly traded in the United States. Rule 102(e)(1)(iii) grants the SEC the authority to deny to any person, temporarily or permanently, the ability to practice before the SEC who is found by the SEC, after notice and opportunity for a hearing, to have willfully violated any such laws or rules and regulations. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of the five firms from practicing before the SEC for a period of six months. The decision is neither final nor legally effective unless and until reviewed and approved by the SEC. On February 12, 2014, four of these PRC-based accounting firms appealed to the SEC against this decision. Accordingly, the sanction will not become effective until after a full appeal process is concluded and a final decision is issued by the SEC. The accounting firms can also further appeal the final decision of the SEC through the federal appellate courts. We are not involved in the proceedings brought by the SEC against the accounting firms. However, our independent registered public accounting firm is one of the four accounting firms subject to the six month suspension from practicing before the SEC in the initial administrative law decision. We may therefore be adversely affected by the outcome of the proceedings, along with other U.S.-listed companies audited by these accounting firms.

PRC regulation of direct investment and loans by offshore holding companies to PRC entities may delay or limit our ability to make additional capital contributions or loans to our PRC operating businesses.

Any capital contributions or loans that we, as an offshore company, make to our PRC operating businesses are subject to PRC regulations. For example, any of our loans to our PRC operating businesses cannot exceed the difference between the total amount of investment our PRC operating businesses are approved to make under relevant PRC laws and their respective registered capital, and must be registered with the local branch of SAFE as a procedural matter. In addition, our capital contributions to our PRC operating businesses must be approved by the National Development and Reform Commission and the Ministry of Commerce or their local counterpart and registered with the State Administration for Industry and Commerce or its local counterpart. We cannot assure you that we will be able to obtain these approvals on a timely basis, or at all. If we fail to obtain such approvals, our ability to make equity contributions or provide loans to our PRC operating businesses or to fund their operations may be negatively affected, which could adversely affect their liquidity and their ability to fund their working capital and expansion projects and meet their obligations and commitments.

Furthermore, SAFE promulgated a new circular in August 2008 with respect to the administration of conversion of foreign exchange capital contribution of foreign invested enterprises into RMB. Pursuant to this new circular, RMB converted from foreign exchange capital contribution can only be used for the activities within the approved business scope of such foreign invested enterprise and cannot be used for domestic equity investment or acquisition unless otherwise allowed by PRC laws or regulations. As a result, we may not be able to increase the capital contribution of our operating subsidiaries and subsequently convert such capital contribution into RMB for equity investment or acquisition in China. In addition, SAFE strengthened its oversight of the flow and use of RMB funds converted from the foreign currency-denominated capital of a foreign-invested enterprise. The use of such RMB may not be changed without approval from SAFE, and may not be used to repay RMB loans if the proceeds of such loans have not yet been used for purposes within the foreign-invested enterprise’s approved business scope.

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We may be subject to fines and legal sanctions imposed by SAFE or other Chinese government authorities if we or our domestic employees or directors fail to comply with the PRC regulations relating to employee stock incentive plans adopted by companies for domestic employees.

On December 25, 2006, the People’s Bank of China issued the Administration Measures on Individual Foreign Exchange Control, or the PBOC Regulation. On January 5, 2007, the SAFE issued the Implementation Rules for the PBOC Regulation. Both of these regulations became effective on February 1, 2007. According to these regulations, all foreign exchange matters relating to employee stock holding plans, share option plans or similar plans of overseas-listed companies with domestic employees’ participation require approval from the SAFE or its local branch. In February 2012, the SAFE promulgated the Notice on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas-Listed Company, or the Stock Option Rule, which terminated the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company issued by the SAFE on March 28, 2007. Under the Stock Option Rule, domestic employees who participate in any stock incentive plan, including employee stock holding plans, share option plans or similar plans in an overseas-listed company, are required to register with the relevant local SAFE branch and complete certain other procedures through a PRC agent. Under the Stock Option Rule: (i) domestic employees include PRC citizens (inclusive of Hong Kong, Macau and Taiwan nationals) and foreign nationals who have continuously resided in China for at least a year, and (ii) a PRC agent may be a domestic company participating in the stock incentive plan or a domestic institution that is qualified to engage in asset custodian business and has been duly designated by a domestic company. We are an overseas-listed company and as a result we and our domestic employees who have been granted share options or shares under our 2008 Share Incentive Plan are subject to the Stock Option Rule. We are preparing the filing with the relevant local SAFE branch and undertaking certain other procedures according to the Stock Option Rule. Failure to comply with these regulations may subject us to fines or other legal sanctions imposed by the SAFE or other Chinese government authorities. In addition, the Ministry of Finance and the State Administration of Taxation has issued certain circulars concerning employee share options. Pursuant to these circulars, our employees working in China who exercise share options will be subject to PRC individual income tax. Our PRC subsidiaries have an obligation to file documents related to employee share options with the relevant tax authorities and withhold individual income taxes resulting from the exercise of their share 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 relevant PRC government authorities. See “Item 4. Information on the Company - Regulation — Regulations on Employee Share Options.”

Risks Relating to Our Securities

There can be no assurance that the agreement and plan of merger entered into with various parties on January 13, 2014 and the going private transaction contemplated thereby will be approved by our shareholders or successfully consummated. Potential uncertainty involving the going private transaction may adversely affect our business and the market price of our ADSs.

On September 4, 2013, our board of directors received a proposal letter from NewQuest Capital Partners, through its affiliated entity, CPI Ballpark Investments Ltd, and on behalf of its affiliates and the funds managed by it (collectively, “NewQuest”) to acquire all of the Company’s outstanding ordinary shares, including ordinary shares represented by the Company’s American depositary shares or “ADSs” (each representing three ordinary shares of the Company), not currently owned by NewQuest, in a going private transaction for US$1.17 per ordinary share and US$3.51 per ADS, as the case may be, in cash, subject to certain conditions. Following receipt of the proposal, our board of directors formed a special committee of independent directors to consider the proposal as well as any alternative proposals. On January 13, 2014, we entered into a definitive agreement and plan of merger (“Merger Agreement”) with various parties pursuant to which CPT Wyndham Holdings Ltd. (“Parent”) will acquire our company for US$1.17 per ordinary share and US$3.51 per ADS, as the case may be, through the merger of its wholly owned acquisition subsidiary, CPT Wyndham Sub Ltd., with and into our company, with our company continuing as the surviving corporation and a wholly owned subsidiary of Parent (the “Merger”). The per ADS merger consideration to be paid in the Merger represents a 57.4% premium over the closing price of US$2.23 per ADS as quoted by the NYSE on September 3, 2013, and a 60.5% premium over the volume-weighted average trading price of our ADSs during the 30 trading days prior to, and including, September 3, 2013, the last trading day prior to our announcement on September 4, 2013 that it had received the non-binding proposal from NewQuest.

The Merger is subject to customary closing conditions as well as the approval by an affirmative vote of holders of the Company’s ordinary shares representing at least two-thirds of the ordinary shares present and voting in person or by proxy as a single class at an extraordinary general meeting of our shareholders which will be convened to consider the approval of the Merger Agreement and the Merger. The Merger, whether or not consummated, presents a risk of diverting management focus, employee attention and resources from other strategic opportunities and from operational matters. In addition, we are subject to various restrictions under the Merger Agreement on the conduct of our business prior to the completion of the Merger, which may delay or prevent us from undertaking business opportunities that may arise pending completion of the Merger.

We filed a going private transaction statement on Schedule 13E-3 on February 7, 2014 and further revised it on March 20, 2014, both of which attach as an exhibit a preliminary proxy statement that, subject to completion, will be used in connection with the extraordinary general meeting of our shareholders. Please refer to the preliminary proxy statement for more information about the Merger including the effects of the Merger on our company and the effects on our company if the Merger is not completed.

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The trading prices of our ADSs and warrants are likely to be volatile, which could result in substantial losses to investors.

The trading prices of our ADSs and warrants have been and are likely to continue to be volatile and fluctuate widely in response to factors beyond our control. In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class action litigation against that company. If we were involved in a class action suit, it could divert the attention of senior management, and, if adversely determined, could have a material adverse effect on our results of operations and financial condition.

The performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States may affect the volatility in the price of and trading volumes for our ADSs and warrants. The trading performances of these PRC-based companies’ securities at the time of or after their offerings may affect the overall investor sentiment towards PRC-based companies listed in the United States and consequently may impact the trading performance of our ADSs and warrants. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting or other practices at other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless whether we have engaged in such practices. Furthermore, short sellers and other funds may take a short position or positions in our ADSs and warrants for the specific purpose of driving down market price for our ADSs and warrants. Short sellers may also publish articles or other allegations in conjunction with such attacks. Even when there is no truth to their claims and we rebut their allegations, such attacks can have a material impact on the market price of our ADSs and warrants and divert management resources and attention. These broad market and industry factors may significantly affect the market price and volatility of our ADSs and warrants, regardless of our actual operating performance.

In addition to market and industry factors, the price and trading volume of our ADSs and warrants may be highly volatile for specific business reasons. Factors such as variations in our financial results, announcements of new business initiatives by us or by our competitors, recruitment or departure of key personnel, changes in the estimates of our financial results or changes in the recommendations of any securities analysts electing to follow our securities or the securities of our competitors could cause the market price for our ADSs and warrants to change substantially. Any of these factors may result in large and sudden changes in the trading volume and price for our ADSs and warrants.

If we do not meet the NYSE continued listing requirements, our ADSs may be delisted.

On June 27, 2012, we were notified by the NYSE that we were not in compliance with the NYSE’s continued listing standard that requires that the average closing price of our ADS not fall below $1.00 per ADS for any consecutive 30-trading-day period. We can regain compliance at any time during the six-month cure period if our ADS have a closing share price of at least $1.00 on the last trading day of any calendar month during the period and also have an average closing share price of at least $1.00 over the 30 trading-day period ending on the last trading day of that month or on the last day of the cure period. On October 8, 2012, the NYSE notified us that we had regained compliance with the NYSE’s continued listing standard that requires that the average closing price of our ADS not fall below $1.00 per ADS for any consecutive 30-trading-day period. There is no assurance that the average closing price of our ADSs will not drop below $1.00 per ADS over a consecutive 30-trading-day period again or we will be always in compliance with other NYSE continued listing requirements. The delisting of our ADSs may significantly affect the ability of investors to trade our shares and negatively affect the value and liquidity of our ADSs. The delisting may have other negative results, including the potential loss of confidence by employees and the loss of investor interest in our ADSs and damaging our reputation and standing with lenders, suppliers and customers.

The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.

Sales of substantial amounts of our ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our future ability to raise capital through offerings of our ADSs.

Currently there are 162,126,002 ordinary shares outstanding. In addition, there are outstanding options to purchase an aggregate of 2,788,672 ordinary shares, including options to purchase an aggregate of 2,788,672 ordinary shares immediately exercisable as of the date of this annual report.

All of the ADSs sold in our initial public offering are freely tradable without restriction or further registration under the U.S. Securities Act of 1933, or the Securities Act, unless held by our “affiliates” as that term is defined in Rule 144 under the Securities Act. Subject to applicable restrictions and limitations under Rule 144 of the Securities Act of 1933, all of our shares outstanding prior to our initial public offering are eligible for sale in the public market. In addition, the ordinary shares subject to options and warrants for the purchase of our ordinary shares will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements and Rules 144 and 701 under the Securities Act of 1933. If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our ADSs could decline.

Future issuances of ordinary shares or ADSs may depress the trading price of our ADSs.

Any future issuance of equity securities could dilute the interests of our existing shareholders and could substantially decrease the trading price of our ADSs. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy (including in connection with acquisitions and other transactions), to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons.

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Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

If we offer holders of our shares any rights to subscribe for additional shares or any other rights, the depositary may make these rights available to you if it is lawful and reasonably practicable. However, the depositary may allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them. In addition, U.S. securities laws may restrict the sale, deposit, cancellation and transfer of the ADSs issued after exercise of rights. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to holders of ADSs, or are registered under the provisions of the Securities Act. We can give no assurance that we can establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, you may be unable to participate in our rights offerings and may experience dilution of your holdings as a result.

A significant percentage of our outstanding ordinary shares are held by a small number of our existing shareholders, and these shareholders may have significantly greater influence on us and our corporate actions by nature of the size of their shareholdings relative to our public shareholders.

CPI Ballpark Investments Ltd owns a significant portion of our voting shares. See “Item 6E. Share Ownership.” CPI Ballpark Investments Ltd is an affiliate within the meaning of the Securities Act, due to the size of their shareholdings in us. CPI Ballpark Investments Ltd currently has two board representatives on our seven director board. Accordingly, the shareholder has had, and may continue to have, significant influence in determining the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. We cannot assure you that we will not issue additional ordinary shares or securities convertible into ordinary shares to each of these or other shareholders. In the event that these shareholders increase their shareholdings in us, they may be in an even stronger position to exert influence over us.

As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the New York corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with the New York Stock Exchange corporate governance listing standards.

As a Cayman Islands company listed on the New York Stock Exchange, we are subject to the NYSE corporate governance listing standards. However, NYSE rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the NYSE corporate governance listing standards. We have in the past decided to follow Cayman Islands corporate governance practices instead of the NYSE listing standards. See “Item 16G. Corporate Governance.” As a result, our shareholders may be afforded less protection than they otherwise would under the NYSE corporate governance listing standards applicable to U.S. domestic issuers.

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

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

For example, our board of directors will have the authority, without further action by our shareholders, to issue new preferred shares in one or more tranches, which may have powers and rights, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, greater than the rights associated with our ordinary shares. These new preferred shares could thus be issued quickly, and could have terms calculated to delay or prevent a change in control or make removal of management more difficult. In addition, if our board of directors issues new preferred shares, the market price of our ADSs or warrants may fall and the voting and other rights of the holders of our ordinary shares may be adversely affected. In addition, our board of directors is divided into three classes and only one class of directors is up for re-election at each annual meeting of shareholders.

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

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

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Unlike many jurisdictions in the United States, Cayman Islands law does not specifically provide for shareholder appraisal rights on a merger or consolidation of a company where the shares of the company are listed on a recognized stock exchange or inter-dealer quotation system. This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation or to require that the offer or give you additional consideration if you believe the consideration offered is insufficient.

Shareholders of Cayman Islands exempted companies such as ourselves have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our Amended and Restated Articles of Association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

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

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

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

There are uncertainties as to whether Cayman Islands courts would:

·                  recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

·                  impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.

There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. China does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts, and therefore China courts have discretion not to enforce judgments of U.S. courts.

Your ability to protect your rights as shareholders through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law.

Cayman Islands companies may not have standing to initiate a derivative action in a federal court of the United States. As a result, your ability to protect your interests if you are harmed in a manner that would otherwise enable you to sue in a U.S. federal court may be limited.

The voting rights of holders of ADSs must be exercised in accordance with the terms of the deposit agreement, the ADRs, and the procedures established by the depositary. The process of voting through the depositary may involve delays that limit the time available to you to consider proposed shareholders’ actions and also may restrict your ability to subsequently revise your voting instructions.

Holders of our ADSs may only exercise their voting rights with respect to the underlying shares in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions from a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to vote the underlying shares in accordance with these instructions. Under our Amended and Restated Memorandum and Articles of Association and Cayman Islands law, the minimum notice period required for convening a general meeting is 21 days, provided that a general meeting may be called on short notice, subject to Cayman Islands law, if it is so agreed (i) in the case of an annual general meeting, by all the shareholders entitled to vote and attend such meeting, and (ii) in the case of any other meeting, by a majority number of shareholders having the right to attend and vote at such meeting.  When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your shares to allow you to cast your vote with respect to any specific matter at the meeting. In addition, the depositary and its agents may not be able to send voting instructions to you to give your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to send voting information to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares.

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Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your shares are not voted as you requested. In addition, ADS holders will not be able to call a shareholders’ meeting.

Except in limited circumstances, the depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests.

Under the deposit agreement for the ADSs, the depositary will give us a discretionary proxy to vote our shares underlying your ADSs at shareholders’ meetings if it does not receive your voting instructions, unless:

·                  we have failed to timely provide the depositary with our notice of meeting and related voting materials;

·                  we have instructed the depositary that we do not wish a discretionary proxy to be given;

·                  we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

·                  a matter to be voted on at the meeting would have a material adverse impact on shareholders.

The effect of this discretionary proxy is that we will be able to control the voting of the shares underlying your ADSs if you fail to instruct the depository in time, absent the situations described above, and it may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

You may not receive distributions on our shares or any value for them if it is illegal or impractical for us to make them available to you.

The depositary of our ADSs has agreed to pay you the cash dividends or other distributions it or the custodian for our ADSs receives on our shares or other deposited securities after deducting its fees and expenses.

You will receive these distributions in proportion to the number of our shares your ADSs represent. However, the depositary is not responsible if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration is required for such distribution. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, common shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of our ADSs, shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on our shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may have a material and adverse effect on the value of your ADSs.

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

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

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

Depending upon the value of our ADSs or ordinary shares and the nature of our assets and income over time, we could be classified as a PFIC for U.S. federal income tax purposes. We will be classified as a PFIC in any taxable year if either (a) the average quarterly value of our gross assets that produce passive income or are held for the production of passive income is at least 50% of the average quarterly value of our total gross assets or (b) 75% or more of our gross income for the taxable year is passive income. According to these technical rules, we would likely become a PFIC for a given taxable year if our market capitalization were to decrease significantly while we hold substantial cash and cash equivalents in that year.

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We believe we were not a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2013. Although we intend to conduct our business activities in a manner to reduce the risk of our classification as a PFIC in the future, there can no assurance that we will not be classified as a PFIC for 2014 or any future taxable year. If we are treated as a PFIC for any taxable year during which a U.S. investor holds our ADSs or ordinary shares, certain adverse U.S. federal income tax consequences would apply to the U.S. investor. For more information on the U.S. tax consequences to U.S. holders that would result from our classification as a PFIC, please see “Item 10.E. Taxation—U.S. Federal Income Taxation—Passive Foreign Investment Company.”

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

We were formed in July 2006 as an exempted company under the laws of the Cayman Islands to serve as a vehicle for the acquisition of hydroelectric assets in China. At the time of our formation we considered, but did not pursue, operating as a publicly traded special purpose acquisition company. We did not have any operating business until the completion of our first acquisition in April 2007. We have acquired and sold multiple operating assets since then and our principal capital expenditures and divestitures since January 1, 2011 including the following. Please note that U.S. dollar translations provided below are derived from our consolidated financial statements.

·                  in January 2011, we completed our purchase the remaining 10.0% equity interests in Pingnan County Wangkeng Hydroelectric Co., Ltd. for a purchase price of RMB 39.0 million ($5.9 million);

·                  in April 2011, we completed our purchase of Jinping Kanghong Hydroelectric Development Co., Ltd., which owns and operates Dazhaihe hydroelectric power project, a 15.0 MW project in Yunnan province for a purchase price of RMB59.0 million ($9.0 million);

·                  in December 2011, we entered into an Equity Purchase and Sale agreement to sell Pingnan County Yuanping Hydroelectric Co., Ltd., which owns and operates Yuanping hydroelectric power project, a 16.0 MW project located in Fujian province, for total consideration of $22.2 million, including the assumption of debt by a third-party buyer; and

·                  in October 2012, we entered into a Share Transfer Agreement to sell the Pingnan County Yuheng hydroelectric power project, a 30.0 MW project located in Fujian province, for total consideration of $44.3 million, including the assumption of debt by the buyer;

·                  in September 2013, our board of directors received a proposal letter from NewQuest to acquire all of our outstanding ordinary shares, including ordinary shares represented by our ADSs. Following receipt of the proposal, our board of directors formed a special committee of independent directors to consider the proposal as well as any alternative proposals. On January 13, 2014, we entered into a definitive Merger Agreement with various parties pursuant to which CPT Wyndham Holdings Ltd. (“Parent”) will acquire our company for US$1.17 per ordinary share and US$3.51 per ADS, as the case may be, through the merger of its wholly owned acquisition subsidiary, CPT Wyndham Sub Ltd., with and into our company, with our company continuing as the surviving corporation and a wholly owned subsidiary of Parent (the “Merger”). The Merger is subject to customary closing conditions as well as the approval by an affirmative vote of holders of the Company’s ordinary shares representing at least two-thirds of the ordinary shares present and voting in person or by proxy as a single class at an extraordinary general meeting of our shareholders which will be convened to consider the approval of the Merger Agreement and the Merger.

We conduct our business through our subsidiaries in China. For additional information on our organizational structure, see “Item 4.C. Information on the Company - Organizational Structure.”

Our registered office is located at the offices of Appleby Trust (Cayman) Ltd., Clifton House, 75 Fort Street, P.O. Box 1350, Grand Cayman, KY1-1108, Cayman Islands. Our executive offices are located at 901, Marco Polo Plaza Building, No.80 Anli Road, Chaoyang District, Beijing, PRC 100101 and our telephone number at such location is (86-10) 59636881. Our website is www.chinahydroelectric.com. The information contained on our website does not form part of this annual report.

In January 2010, we completed our initial public offering, and our ADSs and warrants started trading on the NYSE under the symbols “CHC” and “CHCWS”, respectively. Our warrants expired on January 25, 2014 without exercise. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., 400 Madison Avenue, 4th Floor, New York, NY 10017.

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B. Business overview

Overview

We are a developer, owner and operator of small hydroelectric power projects in China. We were formed in July 2006 to acquire existing small hydroelectric assets in China. Our primary business is to identify, evaluate, acquire, develop, construct and finance hydroelectric power projects in China.

Our revenues to date have derived from the sale of electricity generated by our small hydroelectric power projects to the southern power grid, and our costs of operations relate to the operation of our hydroelectric power projects, as well as the cost of financing our acquisition of these hydroelectric power projects and necessary capital contributions. The map below sets out the locations and installed capacities of our hydroelectric power projects in operation as at December 31, 2013.

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We wholly own twenty-two operating hydroelectric power projects and have a controlling interest in three additional operating hydroelectric power projects. Our operating hydroelectric power projects are located in four provinces in China: Zhejiang, Fujian, Yunnan and Sichuan. Revenues from continuing operations contributed by projects in Zhejiang, Fujian, Yunnan and Sichuan provinces were 46.5%, 27.2%, 25.3% and 1.0% in 2011, 48.7%, 34.8%, 15.8% and 0.7% in 2012, and 48.3%, 31.6%, 19.6% and 0.5% in 2013, respectively. See Item 5.A “Operating Results — Geographical Information” for details.

We acquired all of our existing hydroelectric power projects from other developers and operators beginning in 2007. We intend to continue our expansion by acquiring, operating and developing a diversified portfolio of additional small hydroelectric power projects in targeted locations in China. We believe our experience and capabilities gained in the acquisition, development and operation of small hydroelectric power project in China will enable us to take advantage of the opportunities present in the PRC hydropower market. Installed capacity at our projects were 517.8 MW, 517.8 MW and 517.8 MW at December 31, 2011, 2012 and 2013, respectively.

In December 2011, we entered into an Equity Purchase and Sale Agreement with a third-party buyer to sell Pingnan County Yuanping hydroelectric Co., Ltd., which owns and operates Yuanping hydroelectric power project, a 16.0 MW project located in Fujian province, for a total consideration of $22.2 million, including the assumption of debt by the buyer. The disposal date of Yuanping was March 2, 2012, which was the date we lost effective control over Yuanping. The sale transaction was completed on the same date. Its results of operations have been classified as discontinued operations for all periods presented.

In October 2012, we entered into a Share Transfer Agreement with a third-party buyer to sell Pingnan County Yuheng Hydroelectric Co., Ltd., which owns and operates Yuheng hydroelectric power project, a 30.0 MW project located in Fujian province, for a total consideration of $44.3 million, including the assumption of debt by the buyer. The disposal date of Yuheng was October 31, 2012, which was the date we lost effective control over Yuheng. The sale transaction was completed in April 2013.

Our Hydropower Assets

Overview

We categorize hydropower projects into the following four categories:

·                  completed projects refer to projects that are built and in operation;

·                  projects under construction refer to projects that are being built and are not yet in operation;

·                  approved projects refer to projects that have received the approvals, permits and licenses necessary for construction to commence; and

·                  greenfield projects refer to projects that lack one or more construction permits and have not begun construction.

We currently operate in four Chinese provinces: Zhejiang, Fujian, Sichuan and Yunnan. We focus on a number of diverse locations that are rich in hydroelectric power resources and either have relatively high tariffs or present a high likelihood of tariff increases. The provinces in which we currently operate reflect this strategy. All these provinces are rich in hydroelectric power resources. We believe Yunnan and Sichuan currently have some of the lowest tariff rates in China, and we believe there is a likelihood of tariff increases, while Zhejiang and Fujian already have some of the highest tariff rates in China. In order to rationalize overhead costs, we have acquired and plan to continue to acquire hydroelectric power assets that are clustered or located around good hydrological resources and where we might have the opportunity to acquire adjacent projects. Our six hydroelectric power projects in Zhejiang province are clustered together in the southern part of Zhejiang province, and our three hydroelectric power projects in Fujian are clustered together in the northern part of Fujian province, neighboring Zhejiang province. Our hydroelectric power projects located in Yunnan province, Sichuan province and Fujian province are all in areas of relatively high seismic risk as compared to other areas of China.

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Descriptions of the projects

Our hydroelectric power projects are of the following types:

A—Run-of-the-river diversion dam. The typical feature of this type of hydroelectric power project is that a water diversion structure (dam) spans a river and water is conveyed to a powerhouse via a water conveyance facility, which is a tunnel, pipeline, or a combination of the two. The rate of water flow to the powerhouse is equal to the natural rate of flow in the river.

B—Low head run-of-the-river. The typical feature of this type of hydroelectric power project is that a dam spans a river, a powerhouse with low head turbine generator(s) is incorporated into the diversion structure, and water flowing through the powerhouse is released back into the river at the dam. The rate of water flow to the powerhouse is equal to the natural rate of flow in the river.

C—Impoundment dam reservoir. The typical feature of this type of hydroelectric power project is that a water diversion structure (dam) spans a river and water is conveyed to a powerhouse via a water conveyance facility, which is a tunnel, pipeline, or a combination of the two. The rate of water flow to the powerhouse is not equal to the natural rate of flow in the river, as water is impounded or stored at the dam site in a reservoir. This storage provides flexibility in energy production so that it can be dispatched in line with demand.

D—Pumped storage (none presently owned). The essential feature of this type of hydroelectric power project is a powerhouse with reversible pump hydraulic turbine generators connected by a water conveyance facility to an upper and a lower reservoir. The water is transferred between the two reservoirs, pumped from the lower to the upper reservoir (consuming power) during off-peak periods of surplus grid power and released from the upper to the lower reservoir (producing power) during peak periods of grid deficit.

The table below sets forth technical and operating data of our hydroelectric power projects as of the dates indicated.