IPO Darkens China's Solarfun

Solarfun's revenue grew to 386 million renmimbi ($49.6 million) in the first nine months of 2006 from $11 million in the same period the year before. The cost of revenue grew to $34.3 million in the first nine months of 2006 from $9.77 million in the year-ago period. That pushed Solarfun's gross margin up to 31% from 13%.

The company's operating margin grew even more quickly, rising to 20% in the first nine months of 2006 from 6% a year earlier. But there's a fly in this sweet-smelling ointment: General and administrative expenses were $4.06 million in the 2006 period, a huge jump from the prior year's $347,000. The bulk of those increases had to do with a "compensation charge" that Solarfun gave to key investors before its IPO in the form of discounted stock.

Here's how the company explained it in its prospectus: "We recorded a share compensation charge of $1.3 million, which related to a sale of our ordinary shares to Linyang Electronics, a company controlled by our chairman and chief executive officer, at less than fair market value by other shareholders of our company and a share compensation charge of $1.55 million as a result of the issuance of series A convertible preference shares to Good Energies Investments."

In other words, Solarfun allotted its pre-IPO stock to its CEO and an outside investor, U.K.-based green fund Good Energies Investments, at a discount to its fair market value.