(712 HK - HK$1.93) Comtec. Overweight. Positive Profit Alert Confirms Intact Margin Recovery Theme; Reiterate OW. Company Note 27 July 2010

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1 COMPANY BACKGROUND, which commenced its solar business in 2004, manufactures and sells monocrystalline wafers to a global customer base of solar cell manufacturers. The company is based in Nanhui District, Shanghai, with 741 employees at the end of It plans to expand its annual production capacity of wafers from 200MW at end-2009 to 600MW at end John ZHANG, the chairman, owns a 66.39% stake. Chi Man Wong, Sr Research Analyst , chi.man.wong@pjc.com Piper Jaffray Asia Securities Limited Wayne KW Fung, Research Analyst , wayne.kw.fung@pjc.com Piper Jaffray Asia Securities Limited Reason for Report: Change in Price Target Changes Previous Current Rating -- Overweight Price Tgt (HK$) FY10E Rev (Rmb m) 1, , FY11E Rev (Rmb m) 3, , FY10E EPS (Rmb) FY11E EPS (Rmb) Price (HK$): Week High (HK$): Week Low (HK$): Month Price Target (HK$): 2.85 (8.2x FY11E EPS) Shares Out (mil): 1,031.7 Market Cap. (HK$m): 1,991.2 Market Cap. (US$m): Free Float Market Cap (US$m): 71.0 Div (ann Rmb): 0.01 Avg Daily Vol (000): 2692 Book Value/Share (HK$) : 1.2 Net cash per share (HK$) : 0.2 Est LT EPS Growth : 26% P/E to LT EPS Growth (FY10): 0.3x Est Next Rep Date : Aug 2010 Fiscal Year End: Dec 2009 for Book Value/share and Net Cash/share Auditor: Deloitte Rev (Rmb m) FY09A FY10E FY11E H A E 1,311.00E H A E 1,714.00E FY A 1,413.00E 3,025.00E EPS (Rmb) FY09A FY10E FY11E H1 0.01A 0.06E 0.14E H2 0.02A 0.15E 0.17E FY 0.03A 0.20E 0.30E Comtec Overweight (712 HK - HK$1.93) Positive Profit Alert Confirms Intact Margin Recovery Theme; Reiterate OW CONCLUSION: Comtec's positive profit alert reaffirmed our view that margin recovery remains a key investment theme of the company. We raise our FY10E/11E EPS by 15%/5% after lifting gross margin assumptions by 4.1ppt/0.6ppt, mainly on cost reduction and resilient wafer price trends. At 5.5x FY11E P/E, Comtec's valuation is still attractive in our view. The share price should see a positive catalyst if major solar plays could offer more visibility for 2011 during their 2Q earnings calls. Our PT is raised from HK$2.30 to HK$2.85, based on 8.2x FY11E P/E multiple (30% discount to global peers). Reiterate Overweight. Implied 2Q10E earnings jumped at least 83% QoQ. Comtec announced that its 1H10E earnings will surge by >1,200% YoY to >Rmb57.6mil. This implies >Rmb37mil in 2Q10E earnings, an increase of at least 83% QoQ. In our view, the shipment volume should not be a surprise given Comtec's clear production plan (we have estimated 41MW of shipment in 2Q10E). Instead, we believe the strong earnings were mainly a result of a stronger-than-expected gross margin expansion in 2Q10E (which we estimate at ~27% vs 17.2% in 1Q10), driven by 1) resilient wafer price and 2) faster-than-expected non-silicon cost reduction. Resilient wafer price and flat polysilicon cost reaffirm our positive stance on tight wafer supply situation. We believe Comtec's wafer ASP and polysilicon cost movement in 2Q10E should be quite similar to the industry trend. The strong 2Q10E results have generally confirmed our view that Comtec, as a pure wafer maker, has been in a sweet spot. Based on the positive profit alert, we estimate its ASP was up 5% QoQ to US$0.84/watt and the polysilicon cost was flat (QoQ) at US$55/kg in 2Q10E. Non-silicon cost reduction could be much faster than what we expected. Given the transparent wafer price and polysilicon cost, we believe the surprise on margin recovery should come mainly from non-silicon cost reduction. The potential faster-than-expected cost reduction road map prompted us to lower our 1H10E unit cost assumption for non-silicon materials by 9% to US$0.31/watt. We understand that Comtec is on track to reduce its non-silicon cost and aims to reduce the cost to US$0.27/watt by end Overall, we now forecast a net profit of Rmb59.5mil for 1H10E, up 39% from our previous estimates (more on page 2). INVESTMENT RECOMMENDATION: We reiterate our Overweight rating on Comtec. Trading at 5.5x FY11E P/E (53% discount to global peers), the current valuation is still undemanding in our view. We raise our PT from HK$2.30 to HK$2.85 based on 8.2x FY11E P/E (30% discount to global peers). Our benchmark P/E is raised from 7x to 8.2x to reflect the latest peer valuation. RISKS TO ACHIEVEMENT OF TARGET PRICE: (1) Cyclical industry; (2) high earnings sensitivity; (3) production ramp risk; (4) Piper Jaffray does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decisions. This report should be read in conjunction with important disclosure information, including an attestation under Regulation Analyst certification, found on pages 7-9 of this report or at the following site: This research report has been prepared in whole or part by non-us research analysts who may be associated persons of Piper Jaffray & Co. These research analysts are not registered/qualified as research analysts with FINRA, but instead have satisfied the registration/qualification requirements or other research-related standards of a non-us jurisdiction that have been recognized for these purposes by FINRA. Page 1 of 9

2 concentrated customer base; (5) policy risks; and (6) limited equipment suppliers. We raise our FY10E/FY11E earnings projections by 15%/5%. Our upward revision on earnings forecasts is largely due to our downward revision of 2010E/2011E non-silicon unit cost assumptions by 5.5%/3.6% (despite a cut on 2010E sales volume by 14% on potentially slower capacity ramp-up progress, probably a two-month delay). We expect to see Comtec's strong execution in reducing non-silicon cost, which continues to be a key factor in buffering any potential wafer price drops. On the other hand, while we continue to expect a further decline of polysilicon cost in the medium term, we have slightly revised up our 2010E/2011E polysilicon cost assumptions by 1%/2% to US$55/US$51 per kg in view of a potentially slower polysilicon price decline. According to industry sources, the supply of high-quality polysilicon has started to become tight due to the strong downstream demand. Re-rating expected to continue on two catalysts. Comtec's share price has surged 33% since early June, much better than Hang Seng Index's 7% gain in the same period. Despite the strong share price performance, we expect further re-rating potential driven by two catalysts: 1) Industry sources indicate that demand for solar cells has been very strong despite the FiT cut in Germany (the largest solar power-consuming country in the world, in terms of newly installed capacity). As such, major solar plays may offer a better visibility for 1Q11E during 2Q10 earnings call; and 2) Potential positive newsflow related to China's renewable energy sector, before the government discusses the draft of its 12th Five-Year Plan in October. Exhibit 1: Peer Comparison Price# Market cap PE PB EV/EBITDA Ticker Company (Local currency) (US$ mil) 2009A 2010E 2011E 2009A 2010E 2009A 2010E 2011E Wafer-focused manufacturers LDK US Equity LDK SOLAR CO-ADR n/a n/a n/a SOL US Equity RENESOLA LTD-ADR n/a n/a n/a n/a n/a n/a PVCS LN Equity PV CRYSTALOX n/a H Equity SOLARGIGA ENERGY n/a n/a TT Equity GREEN ENERGY TEC n/a 27.4 n/a n/a 5483 TT Equity SINO-AMERICAN n/a AVERAGE H Equity COMTEC SOLAR Integrated/Cell/Module manufacturers STP US Equity SUNTECH POWER-ADR , n/a YGE US Equity YINGLI GREEN-ADR , n/a TSL US Equity TRINA SOLAR-ADR , n/a JASO US Equity JA SOLAR -ADR , n/a CSUN US Equity CHINA SUNERGY-ADR n/a SOLF US Equity SOLARFUN POW-ADR n/a CSIQ US Equity CANADIAN SOLAR FSLR US Equity FIRST SOLAR INC , REC NO Equity RENEWABLE ENERGY ,079 n/a SWV GR Equity SOLARWORLD AG , n/a PS4 GR Equity PHOENIX SOLAR AG QCE GR Equity Q-CELLS SE n/a n/a n/a n/a TT Equity MOTECH , TT Equity NEO SOLAR POWER n/a 12.7 n/a 2.8 n/a 17.9 n/a n/a 3514 TT Equity GINTECH ENERGY n/a 2.3 n/a 14.5 n/a n/a AVERAGE Polysilicon manufacturers WFR US Equity MEMC ELEC MATER ,656 n/a KS Equity OCI CO LTD 284, , WCH GR Equity WACKER CHEMIE AG , n/a H Equity GCL ENERGY HLDGS ,506 n/a AVERAGE Solar equipments manufacturers AMAT US Equity APPLIED MATERIAL , R8R GR Equity ROTH & RAU AG n/a MBTN SW Equity MEYER BURGER TEC OERL SW Equity OC OERLIKON CORP n/a n/a n/a SOLR US Equity GT SOLAR INTERNA AVERAGE #Note: As of July 26, 2010 for China- and Hong Kong-listed companies. As of July 23, 2010 for U.S.- and European-listed companies. Sources: Bloomberg, Piper Jaffray Asia Securities Page 2 of 9

3 Exhibit 2: Comtec's Operating Statistics 2008A 2009A 2010E 2011E Capacity (MW) Wafers Ingots Sales volume (MW) Wafer MW Sold Ingot (MW) Total MW Sold (including ingot) y/y change 128.4% 84.2% 216.2% 146.5% Wafer price RMB /Watt USD /Watt y/y change -2.6% -65.1% -7.7% -12.9% Unit cost Total wafer cost (Rmb /Watt) (USD /Watt) Non silicon unit cost (Rmb /Watt) (USD /Watt) Silicon cost (Rmb /Watt) (USD /Watt) Poly silicon cost (USD/kg) Sources: Company, Piper Jaffray Asia Securities estimates Page 3 of 9

4 Exhibit 3: Earnings Sensitivity (annualized) 2010E net profit sensitivity (Rmb 000) 209, , , , , , , , , , ,786 Poly-silicon cost 55 98, , , , ,174 (US$/kg) 57 74, , , , , , , , , , E net profit sensitivity (Rmb 000) 315, , , , , , , , , , ,408 Poly-silicon cost 51 76, , , , ,002 (US$/kg) 54 21, , , , , (32,708) 86, , , , E gross margin sensitivity 22.8% % 23.0% 26.9% 30.3% 33.5% % 20.9% 24.8% 28.4% 31.6% Poly-silicon cost % 18.8% 22.8% 26.5% 29.8% (US$/kg) % 16.6% 20.8% 24.5% 28.0% % 14.5% 18.8% 22.6% 26.1% 22.8% % 22.6% 26.4% 29.9% 33.1% % 20.7% 24.6% 28.2% 31.5% Non-silicon cost % 18.8% 22.8% 26.5% 29.8% (US$/Watt) % 16.9% 21.0% 24.7% 28.2% % 14.9% 19.2% 23.0% 26.5% 2011E gross margin sensitivity 17.7% % 18.0% 22.1% 25.8% 29.1% % 15.7% 19.9% 23.7% 27.1% Poly-silicon cost % 13.4% 17.7% 21.6% 25.2% (US$/kg) % 11.1% 15.5% 19.5% 23.2% % 8.8% 13.3% 17.4% 21.2% 17.7% % 17.4% 21.5% 25.3% 28.7% % 15.4% 19.6% 23.4% 26.9% Non-silicon cost % 13.4% 17.7% 21.6% 25.2% (US$/Watt) % 11.3% 15.8% 19.8% 23.4% % 9.3% 13.8% 17.9% 21.7% Source: Piper Jaffray Asia Securities estimates Page 4 of 9

5 Comtec Solar Systems Income Statement (Rmb'000, except for per share amount) 1H09A 2H09A 1H10E 2H10E 1H11E 2H11E 2007A 2008A 2009A 2010E 2011E Revenue 184, , , ,098 1,310,659 1,713, , , ,876 1,413,466 3,024,504 Solar wafers 169, , , ,098 1,310,659 1,713, , , ,725 1,413,466 3,024,504 Semiconductor 14,733 6, ,512 36,637 21, COGS (165,653) (286,107) (348,883) (742,121) (1,070,521) (1,418,896) (190,166) (530,802) (451,760) (1,091,004) (2,489,418) Gross profit 18,600 36,516 97, , , , , ,301 55, , ,086 Other op. income 3, , ,155 11,769 41,485 3,292 3,000 3,000 Other expenses (1,468) (1,942) (80,285) (3,410) - - Distribution & selling expenses (1,155) (1,066) (2,232) (3,422) (5,243) (6,855) (635) (1,401) (2,221) (5,654) (12,098) Adm. & general expenses (9,417) (8,768) (17,855) (33,030) (52,426) (56,456) (11,181) (23,888) (18,185) (50,885) (108,882) Operating Profit 9,592 25,000 78, , , , , ,212 34, , ,106 Net Interest income/(expenses) (3,341) (2,181) (6,567) (6,597) (14,500) (18,395) (477) (3,307) (5,522) (13,164) (32,895) Other gain/(losses) 129 2, ,774 2,660 2, Profit before taxation 6,380 24,950 71, , , , , ,565 31, , ,211 Taxation (1,950) (4,439) (12,184) (33,853) (28,698) (40,460) (14,797) (35,086) (6,389) (46,037) (69,158) Net Income 4,430 20,511 59, , , , , ,479 24, , ,053 Exceptional items (1,468) (1,942) (80,285) (3,410) - - Recurring Net Income 5,898 22,453 59, , , , , ,764 28, , ,053 EPS (Rmb) Recurring EPS (Rmb) DPS (Rmb) Core EBIT 11,060 26,942 78, , , , , ,497 38, , ,106 Core EBITDA 21,938 39,005 95, , , , , ,332 60, , ,850 Wafer volume (MW, including ingot) Wafer ASP (Rmb/W) Ingot ASP (Rmb/W) Growth Rates: Revenue -44% -25% 142% 200% 194% 77% 158% 118% -33% 179% 114% Core EBIT -94% -64% 607% 608% 134% 23% 115% 56% -85% 608% 55% Core EBITDA -88% -55% 337% 462% 121% 23% 116% 61% -77% 417% 53% Recurring Net Income -96% -67% 909% 569% 136% 16% 131% 44% -87% 640% 50% Margins and Ratios: Gross margin 10.1% 11.3% 21.8% 23.3% 18.3% 17.2% 45.5% 30.4% 10.9% 22.8% 17.7% EBIT margin 6.0% 8.4% 17.5% 19.7% 14.0% 13.6% 45.5% 32.5% 7.5% 19.0% 13.8% EBITDA margin 11.9% 12.1% 21.5% 22.7% 16.2% 15.7% 47.9% 35.2% 12.0% 22.3% 15.9% Net margin 2.4% 6.4% 13.3% 15.5% 10.7% 10.2% 42.2% 17.3% 4.9% 14.8% 10.4% Recurring Net margin 3.2% 7.0% 13.3% 15.5% 10.7% 10.2% 42.2% 27.8% 5.6% 14.8% 10.4% Sources: Company data, Piper Jaffray Asia Securities Limited estimates Date: July 26, 2010 Current disclosure information for this company is located at Page 5 of 9

6 Comtec Solar Systems Balance Sheet (Rmb'000, except for per share amount) Statement of Cash Flow 2007A 2008A 2009A 2010E 2011E 2007A 2008A 2009A 2010E 2011E Cash and cash equivalents 150, , , , ,942 Profit before tax 162, ,565 31, , ,211 Trade receivables 43,903 92, , , ,693 Depreciation & Amortization 8,325 20,835 22,941 46,349 63,744 Inventories 33,647 33, , , ,586 Change in working capital (420) (363,544) (130,723) (163,123) (173,648) Others current assets 78,546 52,330 69,231 69,231 69,231 Others 1,671 22,031 7,224 (32,873) (36,263) Total current assets 306, , , ,578 1,321,452 Net operating cash flow 171,724 (154,113) (69,228) 106, ,044 Property, plant and equipment 219, , , ,233 1,247,489 Capex (118,383) (72,200) (172,319) (410,000) (520,000) Advances to suppliers 81, , , , ,810 Others 331 (8,210) 1,147 3,807 2,773 Others 8,747 45,013 56,332 56,332 56,332 Net investing cash flow (118,052) (80,410) (171,172) (406,193) (517,227) Total non-current assets 309, , ,724 1,031,375 1,487,631 Change in debt 18, ,000 6, , ,056 Total assets 615, ,261 1,410,675 1,897,953 2,809,083 Capital Contribution 2, , Payment of transaction costs of new shares issuance - (4,802) (37,780) - - Trade and other payables 97, , , , ,563 Dividends paid (2,407) - - (7,532) (31,458) Bank borrowings 20, , , , ,596 Proceeds from issue of new shares , Customers' deposits received 148, Others 2,646 (6,056) (8,152) (16,970) (35,668) Others current liabilities 36,698 5, Net financing cash flow 20, , , , ,930 Total current liabilities 302, , , ,363 1,257,898 Increase / Decrease in cash 74,318 15, ,147 (164,043) (8,254) Bank borrowings Net cash (debt) (34,558) 25, ,238 (71,345) (417,654) Others 164,646 3,251 3,774 3,774 3,774 Total non-current liabilities 164,646 3,251 3,774 3,774 3,774 Finance Ratios Total liabilities 467, , , ,137 1,261, A 2008A 2009A 2010E 2011E Share capital P/E (x) Preferred share capital EPS growth (%) n/a 43.7 (86.6) Reserves 148, ,667 1,060,715 1,262,906 1,546,501 PEG (x) n/a 0.19 (0.71) Shareholders' equity 148, ,917 1,061,625 1,263,816 1,547,411 Yield (%) n/a ,093,911 EV/EBITDA (x) n/a n/a BVPS (Rmb) P/B (x) n/a n/a Revenue growth (%) Gross margin (%) Net profit margin (%) Recurring net margin (%) Days receivables Days payables Days inventories Current ratio (x) Quick ratio (x) Asset/Equity (x) Net debt/equity (%) 23 Net cash Net cash 6 27 Sources: Company data, Piper Jaffray Asia Securities Limited estimates Date: July 26, 2010 Current disclosure information for this company is located at ROA (%) ROE (%) Page 6 of 9

7 Important Research Disclosures Rating and Price Target History for: as of /18/10 I:OW:HK$ Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q Created by BlueMatrix Notes: The boxes on the Rating and Price Target History chart above indicate the date of the Research Note, the rating, and the price target. Each box represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the first Note written during the past three years. Legend: I: Initiating Coverage R: Resuming Coverage T: Transferring Coverage D: Discontinuing Coverage S: Suspending Coverage OW: Overweight N: Neutral UW: Underweight B: Buy (Piper Jaffray discontinued use of the B, N, and S ratings on June 30, 2009) N: Neutral S: Sell OP: Outperform (Piper Jaffray discontinued use of the OP, MP and UP ratings on November 15, 2007) MP: Market Perform UP: Underperform AL On/AL Off: Placed on/removed from the Alpha List maintained by Piper Jaffray (AL use discontinued March 2010) NA: Not Available UR: Under Review Distribution of Ratings/IB Services Piper Jaffray IB Serv./Past 12 Mos. Rating Count Percent Count Percent BUY [OW] HOLD [N] SELL [UW] Note: Distribution of Ratings/IB Services shows the number of companies currently in each rating category from which Piper Jaffray and its affiliates received compensation for investment banking services within the past 12 months. FINRA rules require disclosure of which ratings most closely correspond with "buy," "hold," and "sell" recommendations. Piper Jaffray ratings are not the equivalent of buy, hold or sell, but instead represent recommended relative weightings. Nevertheless, Overweight corresponds most closely with buy, Neutral with hold and Underweight with sell. See Stock Rating definitions below. Page 7 of 9

8 Important Research Disclosures Company Note Analyst Certification Chi Man Wong, Sr Research Analyst Analyst Certification Wayne KW Fung, Research Analyst The views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Research Disclosures Piper Jaffray has received compensation for investment banking services from or has had a client relationship with within the past 12 months. Within the past 12 months Piper Jaffray was a managing underwriter of a public offering of, or dealer manager of a tender offer for, the securities of or the securities of an affiliate. Within the past 3 years Piper Jaffray participated in a public offering of, or acted as a dealer manager for, securities. Piper Jaffray Asia Limited, an affiliate of Piper Jaffray Asia Securities Limited, is the retained compliance advisor or financial advisor to Comtec Solar Systems Group Limited. Affiliate Disclosures: This report has been prepared by Piper Jaffray & Co. and/or its affiliates Piper Jaffray Ltd. and Piper Jaffray Asia Securities Limited, all of which are subsidiaries of Piper Jaffray Companies (collectively Piper Jaffray). Piper Jaffray & Co. is regulated by FINRA, NYSE, and the United States Securities and Exchange Commission, and its headquarters is located at 800 Nicollet Mall, Minneapolis, MN Piper Jaffray Ltd. is registered in England, no , and its registered office is One South Place, London, EC2M 2RB. Piper Jaffray Ltd. is authorised and regulated by the UK Financial Services Authority ("FSA"), entered on the FSA's register, no and is a member of the London Stock Exchange. Piper Jaffray Asia Securities Limited is a licensed corporation regulated by the Securities and Futures Commission of Hong Kong ("SFC"), entered on the SFC's register, no. ABO154, and is an exchange participant of The Stock Exchange of Hong Kong Limited. Its headquarters is located at 39/F Tower 1 Lippo Centre, 89 Queensway, Hong Kong. Disclosures in this section and in the Other Important Information section referencing Piper Jaffray include all affiliated entities unless otherwise specified. Piper Jaffray research analysts receive compensation that is based, in part, on overall firm revenues, which include investment banking revenues. Rating Definitions Stock Ratings: Piper Jaffray ratings are indicators of expected total return (price appreciation plus dividend) within the next 12 months. At times analysts may specify a different investment horizon or may include additional investment time horizons for specific stocks. Stock performance is measured relative to the group of stocks covered by each analyst. Lists of the stocks covered by each are available at Stock ratings and/or stock coverage may be suspended from time to time in the event that there is no active analyst opinion or analyst coverage, but the opinion or coverage is expected to resume. Research reports and ratings should not be relied upon as individual investment advice. As always, an investor's decision to buy or sell a security must depend on individual circumstances, including existing holdings, time horizons and risk tolerance. Piper Jaffray sales and trading personnel may provide written or oral commentary, trade ideas, or other information about a particular stock to clients or internal trading desks reflecting different opinions than those expressed by the research analyst. In addition, Piper Jaffray technical research products are based on different methodologies and may contradict the opinions contained in fundamental research reports. Overweight (OW): Anticipated to outperform relative to the median of the group of stocks covered by the analyst. Neutral (N): Anticipated to perform in line relative to the median of the group of stocks covered by the analyst. Underweight (UW): Anticipated to underperform relative to the median of the group of stocks covered by the analyst. An industry outlook represents the analyst's view of the industry represented by the stocks in the analyst's coverage group. A Favorable industry outlook generally means that the analyst expects the fundamentals and/or valuations of the industry to improve over the investment time horizon. A Neutral industry outlook generally means that the analyst does not expect the fundamentals and/or valuations of the industry to either improve or deteriorate meaningfully from its current state. An Unfavorable industry outlook generally means that the analyst expects the fundamentals and/or valuations of the industry to deteriorate meaningfully over the investment time horizon. Page 8 of 9

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